Author: Omer Goldberg
Translation: Block unicorn
The vault is one of the concepts in the cryptocurrency space that everyone thinks they understand, mainly because it seems simple and straightforward. However, simplicity can often be deceptive. Beneath the surface, vaults have quietly become one of the most misunderstood yet strategically significant foundational elements in the entire ecosystem.
During the DeFi summer, "vaults" were merely a clever UI around automated yield farming. Yearn packaged cumbersome operations that required significant manual intervention—such as switching between different yield farms and managing compounding governance tokens—into an almost magical experience. Just deposit funds, and the strategy automatically does all the work. It is an internet-native abstract concept, and it works.
But 2025 is a completely different story.
Tokenized government bonds have evolved from experiments worth tens of millions of dollars to nearly $9 billion in assets under management, with institutions like BlackRock, Franklin Templeton, and Société Générale becoming active participants.
The scale of risk-weighted assets (RWA), excluding stablecoins, has reached tens of billions of dollars.
The market capitalization of stablecoins has surpassed $300 billion, and the maturity of issuers has significantly improved.
The industry of Risk Curators and Onchain Allocators, which was almost ignored a few years ago, is now managed by nearly a hundred companies overseeing over $20 billion in assets.
The view that vaults are merely "yield machines" is outdated. Vaults are evolving into fund wrappers, serving as programmable simulators for money market funds, structured credit, and (increasingly) hedge fund strategies.
And there is a dangerous misunderstanding here:
Most vaults are marketed as yield tools. But economically, they are risk products.
The collapse of projects like Stream and Elixir clearly illustrates this point. When the industry treats structured credit as equivalent to dollar products, the consequences are predictable: poor risk management, chain decoupling, and systemic vulnerabilities in lending protocols.
This article aims to reshape the understanding of vaults: what they truly represent, how they map to real-world asset classes, and why "low-risk DeFi" is not a fleeting phenomenon but the next frontier in global financial inclusion.
1. Vaults are essentially portfolio construction engines with APIs
Strip away the UI and marketing elements, and the concept of a vault is actually quite simple:
A portfolio construction engine encapsulated in an API.
Assets are deposited into the vault (stablecoins, Ethereum, risk-weighted assets).
Strategies run (lending, collateralization, hedging, leverage, mining, selling volatility, underwriting credit).
Programmable interfaces for deposits and withdrawals; sometimes with predictable liquidity, sometimes not.
That’s all there is to a vault.
If a traditional finance professional handed you a fund investment proposal, you would immediately ask:
Is this cash? Credit? Equity? Or some other rare asset?
What are the liquidity characteristics—daily, weekly, or quarterly?
What happens to my principal in the event of an extreme event?
Cryptocurrency completely skips this step. We talk about annual percentage yields (APY) rather than risk levels.
At the front end of decentralized finance (DeFi), five distinctly different strategies ultimately boil down to the same seemingly attractive card:
Vaults are the gateway to anything on-chain.
What is missing is the most critical part: what risks am I actually taking on?
Contract risk? Counterparty risk? Basis risk? Leverage risk? Credit risk? Or all of the above?
Ultimately, this opacity comes at a cost: retail users may take on risks they do not understand or comprehend, leading to unexpected losses (which may even attract the attention of regulators); institutional investors will walk away after a glance, disappointed by the lack of professionalism and transparency standards.
Moreover, using yield as the sole competitive benchmark has had another devastating impact on risk management: protocols and risk managers have taken on increasingly more risk to compete with one another.
As cryptocurrency enters an institutional era, this situation must change.
2. What are you actually earning? Real-world benchmarks
If we want to understand the yields of DeFi vaults, we need a benchmark:
Historically, what kind of returns have different types of risks in the real world generated?
For nearly a century, researchers have been collecting data on core financial asset classes.
Aswath Damodaran maintains an authoritative dataset tracing back to 1928 for U.S. stocks, bonds, and short-term government securities, while the Global Investment Returns Yearbook tracks long-term returns in major countries since 1900.
In these datasets, the situation is surprisingly consistent:
Stocks (S&P 500 Index): approximately 9.9%
Small-cap stocks: approximately 11.7%
High-yield corporate bonds: approximately 7.8%
Investment-grade bonds: approximately 4.5%
Cash / short-term government bonds: approximately 3.3%
Real estate: approximately 4.2%
Gold: approximately 5%
During this period, the average inflation rate has been around 3%, so the real return is about 3 percentage points lower than expected. These numbers are not precise predictions for the future, but they roughly reflect trends that may occur in long-term economies.
Each type of return comes with a series of risks and trade-offs, which are borne by the respective holders.
2.1 Cash/Short-term Government Bonds: Rewarded for Waiting
Definition
In practice, it is the investment target closest to a "risk-free" benchmark in the financial system (short-term U.S. government bonds, money market funds).
Historical Returns
- Nominal yield of approximately 3.3% (real yield after inflation is 0-1%).
Investment Return: Essentially, due to the near absence of credit risk and very low term risk, investment returns are based solely on the time value of money.
Trade-offs: Inflation quietly erodes returns and purchasing power; after deducting fees and friction, long-term real returns approach zero.
Essentially, these investments are very suitable for holding cash rather than achieving wealth compounding growth.
2.2 Bonds: Rewarded for Lending Money
Definition
Debt issued by governments and corporations, with varying quality. You lend money in exchange for interest and principal repayment.
Historical Returns
Nominal yield of investment-grade bonds is approximately 4-4.6%;
Nominal yield of high-yield bonds ("junk bonds") is approximately 6-8%.
Investment Return:
Credit risk: the possibility of borrower default or impairment (higher risk for "junk bonds");
Term risk: sensitivity to interest rate changes;
Liquidity risk, especially in non-mainstream or low-rated bonds.
Trade-offs: When interest rates rise, the performance of bond portfolios may decline significantly (cyclical sensitivity, such as the historical lows in bond yields in 2022); when inflation surges, real yields may be very low or even negative; credit events (restructuring, default) can lead to permanent capital loss.
The term "bonds" encompasses a range of financial instruments with varying risks and returns: assessing the economic condition of the debtor is fundamental to determining the exact risk profile.
2.3 Stocks: Rewarded for Growth Volatility
Definition
Owning shares in a company. Benefiting from profits, innovation, and long-term economic growth.
Historical Returns
- U.S. stocks (S&P 500 Index): nominal yield of approximately 9.9-10%, real yield of approximately 6.5-7%.
Investment Return:
Business risk: the company may go bankrupt;
Earnings cycle: profits fluctuate with the economy, and dividends may contribute less to overall returns;
Volatility and drawdown: even in developed economies, large daily market value fluctuations are normal.
Trade-offs: Although global stocks generally outperform bonds and short-term government bonds in the long run, adjustments of 30% to 50% over several years are not uncommon (e.g., Japan's lost decade or Europe from 2000 to 2018), especially when considering inflation factors.
2.4 Real Estate: Income + Leverage + Local Risk
Definition
Income-generating real estate: residential, commercial, logistics, etc.
Historical Returns
- The long-term average nominal yield of the U.S. real estate index is approximately 4% to 4.5%, with a real yield of approximately 1% to 2%.
Investment Return:
Income risk and economic cycle: income depends on tenants' ability to pay rent on time, and rental income fluctuates with the economic cycle;
Local economic risk: exposure to risks in specific cities, regions, and industries;
Leverage and volatility risk: mortgages and debt financing amplify both gains and losses;
Liquidity risk: the trading speed and cost of real estate and many real estate-related instruments are slow and high, especially in times of stress.
Trade-offs:
You cannot "list" a property for sale immediately; selling or refinancing takes weeks/months, and even publicly traded real estate investment trusts (REITs) can experience significant declines under market pressure;
Declines in interest rates, credit, or local demand (e.g., reduced demand for office space due to remote work) can simultaneously affect income and valuations;
When interest rates rise or lenders tighten loans, the cost of rolling debt can be high;
Portfolios are often overly concentrated in specific regions or types of properties.
In reality, while real estate has historically been an effective hedge against inflation, it is a complex and illiquid field that cannot be traded or paid like cash equivalents.
2.5 Private Equity and Venture Capital: Illiquidity + Complexity Premium
Definition
Illiquid, long-term investments in private companies and projects, such as buyouts and growth equity investments; early-stage venture capital or distressed and special situation investments.
Historical Returns
Private Equity: Net Internal Rate of Return (IRR) around 15% over many years (but highly cyclical)
Venture Capital: Top quartile fund managers achieve returns of over 20-30%
However, the data shows significant volatility: once fees and survivor bias are considered, the median real return is much closer to single digits.
Investment Returns:
Long-term illiquidity: capital locked up for 7-12 years
Complexity: customized transactions, governance, and structures
Manager skill: significant differences between different managers and investment years
Information asymmetry: requires specialized channels and due diligence
Higher principal risk: venture capital is highly dependent on execution and economic cycles; there is a high risk of principal loss.
Trade-offs: Long-term capital lock-up; typically no secondary market. Additionally, despite the higher risks, many funds underperform the public markets after fees are deducted.
3. There’s No Such Thing as a Free Lunch: The Yield Ladder
When you compile all this historical data, a simple fact emerges:
No asset class in the real world can provide high returns without taking on high risks.
A practical way to interpret vault yields is to use a yield ladder model:
3-5% → Cash, government bonds, short-term government bonds, ultra-conservative credit
5-8% → Investment-grade bonds, conservative credit portfolios
8-12% → High-yield bonds, higher-risk credit, light equity strategies, some leveraged arbitrage
12-20%+ → Private equity, venture capital, hedge fund strategies, opportunistic credit, complex structured products
Over a century of market data shows that this yield ladder has demonstrated remarkable resilience through wars, hyperinflation, tech booms, and changes in interest rate systems.
Putting portfolios on-chain does not invalidate this. Therefore, whenever you see a DeFi vault, ask yourself two questions:
Do the advertised risks align with the advertised returns?
Where do the yields come from?
4. Conclusion: The Correct Mental Model for Vault Yields
Setting aside marketing and UI, the facts are actually simple:
Vaults are no longer "farms" for automatic compounding; they are portfolios with APIs;
Their yields are the price of the risks they underwrite;
Over a century of market data shows that reasonable yield ranges under specific risks have remained remarkably stable.
Nominal yields for cash-like instruments are only in the single digits, with real yields nearly zero.
Investment-grade credit yields are slightly higher due to term and default risks.
High-yield credit and stocks can yield high single digits or even teens.
Private equity, venture capital, and hedge fund strategies are historically the only investment options that can consistently provide median returns in the teens or higher, but they also come with the realities of illiquidity, opacity, and the risk of permanent loss.
Putting these portfolios on-chain does not change the relationship between risk and return. In today’s DeFi front end, five distinctly different risk levels may all be presented in the same friendly advertising format: "Deposit USDC, earn X% yield," yet it rarely shows whether you are taking on the risks of cash, investment-grade credit, junk credit, stocks, or hedge funds.
For individual users, this is already bad enough, as they may unknowingly invest in complex credit products or leveraged portfolios they do not understand.
But this also has systemic consequences: to maintain competitive yields, every product within a specific "category" tends to opt for the highest-risk configurations within that category. Safer configurations appear to "underperform" and are thus overlooked. Custodians and protocols that quietly take on more risk in credit, leverage, or basis will be rewarded until events like Stream or Elixir remind everyone of the actual risks they are taking.
Thus, the yield ladder is not just a teaching tool. It is the beginning of the risk language that the industry currently lacks. If we can consistently answer these two questions for every vault:
Which level of the ladder does this vault belong to?
What risks (contract risk, credit risk, term risk, liquidity risk, directional risk) will this yield expose me to?
Then we can assess performance by risk level rather than turning the entire ecosystem into a single, indiscriminate annual percentage yield (APY) competition.
In the subsequent parts of this series, we will apply this framework directly to crypto. First, we will map today’s major vaults and collapses onto the ladder to see what their yields truly tell us. Then we will zoom out to discuss what needs to change: labels, standards, curation practices, and system design.
In the follow-up articles of this series, we will apply this framework directly to the cryptocurrency space. First, we will map today’s major vaults and collapse cases onto this framework to see what their yields actually reflect. Then, we will step back and explore what needs improvement: labels, standards, curator practices, and system design.
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