You deposit once. The vault then interacts with several protocols on your behalf, and you own every risk in that chain.
Dario FennDeFi & Markets Lead · DeFi protocols, yield, market structure and on-chain data
A yield vault pools deposits, issues a share token, and runs a strategy: supplying assets to an underlying protocol, harvesting rewards on a schedule, selling them for more of the deposit asset, and reinvesting. You gain automated compounding and shared gas costs, and you inherit the contract risk of the vault plus every protocol the strategy touches. Fees are usually a performance cut plus a harvest or management charge, taken from gross yield.
Doing yield manually means depositing into a protocol, returning every few days to claim rewards, swapping them back into the deposit asset, and redepositing — each step a transaction with gas. A vault does that for everyone at once, and the mechanics of how it does it determine both the return and the risk.
When you deposit, you receive a share representing a proportion of the vault. You do not receive more shares as yield accrues; instead, each share becomes redeemable for more of the underlying asset. The price per share only goes up in a working vault, and it is the cleanest measure of actual performance.
This matters for two reasons. Your realised return is the change in price per share between deposit and withdrawal, net of everything — a far more honest figure than any advertised rate. And in most jurisdictions a share token behaves differently for tax than a rebasing balance, because nothing is received until you redeem.
Four steps on a loop.
**Deploy.** Pooled deposits go into an underlying venue — supplied to a lending market, added to a liquidity pool, staked in a farm.
**Harvest.** Rewards are claimed on a schedule chosen to balance gas against compounding frequency. This is why vaults compound more often than an individual profitably can: one harvest transaction serves every depositor, so the per-user gas cost is divided by the number of participants.
**Convert.** Reward tokens are sold for the deposit asset. This step carries slippage on thin reward tokens and is where a poorly implemented vault leaks value.
**Reinvest.** The proceeds go back into the position, which is the compounding that turns an APR into an APY — the distinction covered in APR vs APY.
More sophisticated strategies add rebalancing between venues as rates change, or maintain a leveraged position that must be managed against liquidation.
Typically two. A performance fee on yield generated — Yearn's classic structure is 20% of performance plus a 2% management charge, though it varies by vault — or a harvest fee taken from each compounding event, which is Beefy's approach at around 4.5% of harvested rewards, with part going to whoever paid the gas to call it.
Both are deducted from gross yield, so any displayed APY should already be net. Verify that against the price per share over the last ninety days, which cannot be presented optimistically.
Withdrawal fees exist on some vaults and are usually a red flag unless they exist for a specific structural reason, such as protecting against deposit-and-harvest gaming.
The governance question is more important than the yield. Ask three things.
Can the strategy be changed after you deposit, and by whom? Most vaults allow it, which means you are trusting an ongoing decision-maker rather than a fixed contract.
Is there a timelock on changes? A timelock gives depositors the ability to leave before a new strategy takes effect. Without one, the venue your funds sit in can change between blocks.
Is there an emergency withdrawal path, and who can trigger it? A well-designed vault can pull funds out of a failing underlying protocol quickly; that same power, in the wrong hands, is a way to move funds somewhere else.
Stacked, and worth enumerating. The vault contract itself. The strategy contract. Every underlying protocol the strategy uses. The oracles those protocols rely on. The liquidity of the reward token at harvest time. And, if the strategy is leveraged, the liquidation mechanics of the lending market.
A vault earning three points more than a direct deposit while adding two protocols to the chain is not obviously a better trade — it is a different one, priced in convenience. That calculation is the core of the yield aggregator ratings, which weight strategy transparency and change control alongside historical performance.
The mitigations that work are structural: prefer vaults with a long unchanged track record over new ones with better numbers, prefer single-asset strategies over leveraged or LP ones for a first position, check what the strategy touches before depositing rather than after, and size any vault to the risk of its weakest underlying venue rather than to its advertised return.
Price per share over 90 days, which gives real net performance. The strategy description, which should name the venues. The fee schedule. Whether an audit covers the specific strategy contract or only the vault framework — the distinction explained in reading an audit. Total deposits and how concentrated they are. And when the strategy was last changed. A vault that answers all six clearly is telling you it expects to be examined, which is itself information.
Restaking multiplies yield by putting the same capital to work across several protocols at once — but it multiplies the ways that capital can be slashed, too. A close look at where the compounding risk actually sits.
Providing liquidity looks like free yield until you compare it against simply holding the two assets — the gap between those outcomes is impermanent loss, and it's bigger than most LPs realise.
The number on the dashboard is annualised from a recent window, before fees, and often paid in a token whose price is falling. Here is how to get to the real one.