Knowledge Points: Vaults

This is a the second article and a natural follow-up from our article on Farms/Pools. We wanted to write a small need-to-know article about Vaults (our specialty) 😉.

We love Farms. They are one of the most lucrative mechanisms in DeFi. They function to allow users liquidity on exchanges so they can purchase nearly any of the beautiful tokens you desire. They also reward users who provide that liquidity handsomely with high APR/APY on the liquidity they provide. These rewards can be claimed at nearly any time and this is where vaults come in.

With a Farm each time you claim these rewards, if you would like to compound your returns, you must take several steps. In a Farm you must:

1. Claim your Rewards.
2. Sell those rewards.
3. Trade 1/2 the reward to one token you are investing in.
4. Sell 1/2 of those tokens to the other token you are investing in.
5. Create an LP.
6. Invest that LP back into the Farm.

Not only can this be time consuming but it can be costly depending on the transaction fees associated with each of these steps. This is not required as some users opt to not compound returns and keep the native token or rewards provided.

This is where a Vault comes in. A Vault utilizes this liquidity that is provided to a decentralized exchange (DEX) and enables the user to remove every one of those steps with nearly no fees.

In the previous article we discussed creating a liquidity pair and providing liquidity. Once you provide a DEX liquidity you can instead store that LP in a Vault. This Vault will auto compound rewards utilizing the DEX Liquidity and remove the need for daily visits to take those multiple steps above to compound. This is both beneficial to the DEX and to the User.

There are basically two different mechanisms for how Vaults provide you returns. (there are more options that we are developing in V2 but these are the basics below).

1. Vaults provide you an auto compounding service that replace a large amount of your rewards from auto compounding as their own native token (usually around 30%).
2. Vaults provide you an auto compounding service that gives you the exact tokens that you invest and auto compound those. (Moon Vaults Strategy). This is the best mechanism for safety/security and the most stable mechanism for the user, in our opinion.

When you are done with a Vault and would like to extract your tokens you do the same as you would with a Farm or Pool (reminder that farms are combined tokens to provide liquidity and pools are single tokens) and you click to withdraw your funds. Once you do this you are able to go back to the DEX and remove you LP. Again, you can let the funds in the vault sit for as long as you want to allow it the opportunity to continue to grow.

So that’s basically it. Those are the extremely simplified details on Vaults. They are an auto compounding service for generally higher returns and less headache.

Good luck and Happy DeFi’ing (pretty sure that’s not a word…)

Moon Vault