Vaults, Yields, and the Illusion of Safety: Part 1 - Real-World Benchmarks

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 is often deceptive. Beneath the surface, the vault has quietly become one of the most misunderstood yet strategically important fundamental elements in the entire ecosystem.

In the DeFi summer, the "vault" was simply a clever UI surrounding automated yield farming. Yearn packaged tedious and heavily human-intervention-intensive operations—such as switching between different yield farms and compounding governance tokens—into an almost magical experience. Simply deposit funds, and the strategy would do everything automatically. It was an internet-native abstraction, and it worked.

But 2025 is very different.

Tokenized government bonds have evolved from experiments in the tens of millions of dollars to nearly $9 billion in assets under management, with institutions such as BlackRock, Franklin Templeton, and Société Générale becoming active participants.

Excluding stablecoins, risk-weighted assets (RWA) have reached tens of billions of US dollars. The market capitalization of stablecoins themselves has exceeded $300 billion, and the maturity of issuers has significantly improved. The industry of risk curators and onchain allocators, which was virtually unknown a few years ago, is now managed by nearly 100 companies, holding over $20 billion in assets. The view that vaults are merely “yield machines” is outdated. Vaults are evolving into fund wrappers, serving as programmable simulation tools for money market funds, structured credit, and (increasingly) hedge fund strategies. Herein lies a dangerous misconception: Most vaults are marketed as yield-generating instruments. But economically speaking, they are **risky products**. The collapses of projects like Stream and Elixir clearly demonstrate this. When the industry treats structured lending as a product equivalent to the US dollar, the consequences are predictable: poor risk management, cascading decoupling, and systemic fragility of lending protocols. This article aims to reshape our 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. A Vault is essentially an investment portfolio with an API. Stripped of UI and marketing elements, the concept of a vault is quite simple: An investment portfolio building engine encapsulated within an API. Assets are deposited into the vault (stablecoins, Ethereum, risk-weighted assets). Strategies are executed (lending, collateralization, hedging, leverage, mining, selling volatility, underwriting credit). A programmable interface is used for deposits and withdrawals; sometimes with predictable liquidity, sometimes not. This is the entirety of the vault. If a traditional financial professional handed you a fund investment prospectus, 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 if extreme events occur? Cryptocurrencies completely skip this step. We are talking about the **annualized rate of return (APY)**, not the **risk level**. In the front end of decentralized finance (DeFi), five distinct strategies ultimately boil down to the same seemingly appealing card: The vault is the gateway to anything on the blockchain. What's missing is the most crucial element: What risks have I actually taken on? Contract risk? Counterparty risk? Basis risk? Leverage risk? Credit risk? Or all of the above? Ultimately, this lack of transparency comes at a price: retail investors may bear risks they don't understand or comprehend and suffer unexpected losses (potentially even attracting the attention of regulators); institutional investors will simply glance at it and abandon it, disappointed by the lack of professionalism and transparency standards. Furthermore, using yield as the sole competing benchmark has another devastating impact on risk management: protocols and risk managers take on increasingly more risk in order to compete with each other. This must change as cryptocurrencies enter the institutional era. 2. What are your actual returns? Real-World Benchmarks If we want to understand the returns of DeFi vaults, we need a benchmark: What returns have different types of risk yielded in the real world throughout history? For nearly a century, researchers have been collecting data on core financial asset classes. Aswath Damodaran maintains an authoritative data series on U.S. stocks, bonds, and short-term Treasury bills dating back to 1928, while the *Global Investment Returns Yearbook* tracks long-term returns in major countries since 1900.

In these data sets, the situation is surprisingly consistent:

• Stocks (S&P 500): Approximately 9.9%

• • The nominal yield is approximately 3.3% (the real yield after adjusting for inflation is 0-1%).

  Investment Returns:

Essentially, due to virtually no credit risk and extremely low term risk, investment returns are based solely on the time value of money.

Trade-offs:

Investment Returns：

• Credit Risk:The possibility of borrower default or loss (“junk bonds” are at higher risk);

• Maturity Risk:Sensitivity to interest rate changes;

• Liquidity Risk, especially in non-mainstream or low-rated bonds. Trade-offs: When interest rates rise, bond portfolios can perform significantly (cyclical sensitivity, such as the historic lows in bond yields in 2022); when inflation soars, real yields can be low or even negative; credit events (restructuring, default) can lead to permanent capital losses. The term "bond" encompasses a range of financial instruments with varying risks and returns: assessing the debtor's economic situation is the basis for determining the exact risk profile. 2.3 Stocks: Rewarded by Growth Volatility Definition: Holding shares in a company. Benefiting from earnings, innovation, and long-term economic growth.

  Historical Returnp>

  • US stocks (S&P 500 Index): Nominal return is approximately 9.9-10%, real return is approximately 6.5-7%.

  InvestmentReturn：

  • Business Risks:The company may go bankrupt;

  • Profit Cycle:Profits fluctuate with the economy, and the contribution of dividends to overall returns may decrease;

  • Volatility and Drawdowns:Even in developed economies, large daily market capitalization fluctuations are normal.

  Trade-offs: While global equities generally outperform bonds and short-term treasury bonds in the long run, corrections of 30% to 50% over several years are not unusual (e.g., Japan's lost decade, or Europe's from 2000 to 2018), especially after accounting for inflation.

  2.4 Real Estate: Income + Leverage + Local Risk

  Definition

  Real estate that generates income: residential, commercial, logistics, etc.

  • The long-term average nominal return of the US housing index is approximately 4% to 4.5%, and the real return is approximately 1% to 2%.

  InvestmentReturn：

  • Income Risk and Economic Cycle:Returns depend on tenants' ability to consistently pay rent on time, and rental income will decrease with fluctuations in the economic cycle;

  • Local Economic Risk:Risk exposure from investing in specific cities, regions, and industries;

  • Leverage and Volatility Risk:Mortgage loans and debt financing can amplify both gains and losses;

  • Historical Returns

    • Private Equity: Net Internal Rate of Return (IRR) around 15% in many years (but highly cyclical)

    • Venture Capital: Top quartile fund managers have returns of over 20-30%

    However, the data exhibits extreme volatility: once fees and survivorship bias are taken into account, the median real return will be closer to single digits. Investment Returns: [List-paddingleft-2] Long-term Liquidity Shortage: Funds Locked Up for 7-12 Years Complexity: Customized Deals, Governance, and Structure Managerial Skills: Significant Differences Between 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: Funds are locked up for long periods; there is usually no secondary market. Furthermore, despite the higher risk, many funds underperform the public market after fees. 3. There's no such thing as a free lunch: Yield Ladders When you put all this historical data together, a simple fact emerges: In the real world, no asset class can provide high returns without taking on high risk.

    

    A practical way to interpret the yield of a vault is to use the yieldladdermodel:

    • 3-5% → Cash, Treasury bonds, short-term government bonds, ultra-conservative credit. 5-8% → Investment-grade bonds, conservative credit portfolio. 8-12% → High-yield bonds, higher-risk credit, low-equity strategies, partially 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, technological booms, and changes in interest rate systems. Putting your portfolio on the blockchain doesn't invalidate it. Therefore, whenever you see a DeFi vault, ask yourself two questions: Does the advertised risk match the advertised returns? Where do the yields come from? 4. Conclusion: The Correct Mindset of Vault Returns Leaving aside marketing and UI, the facts are actually quite simple: Vaults are no longer "farms" of automatic compounding, but rather portfolios with an API; their returns are the price of the risk they insure; and market data over more than a century shows that, under specific risk levels, a reasonable range of returns has maintained remarkable stability. Cash-like instruments offer nominal yields in the single digits, with real yields near zero. Investment-grade credit yields are slightly higher due to maturity and default risk. High-yield credit and stocks can offer yields in the single digits or even the teens. Private equity, venture capital, and hedge fund strategies are historically the only investment options that have consistently provided median or higher yields in the teens, but they also come with the **real risks** of insufficient liquidity, lack of transparency, and permanent loss. Putting these portfolios on-chain does not change the risk-reward relationship. In today's DeFi front-end, five distinct risk levels may all be presented in the same friendly advertisement: "Deposit USDC, earn X% yield," without showing whether you are taking on the risk of cash, investment-grade credit, junk credit, stocks, or hedge funds. For individual users, this is bad enough, as they may unknowingly invest in complex credit products or leveraged portfolios they don't understand. But this also has systemic consequences: to maintain competitive yields, each product in a particular "category" will tend to select the riskiest allocation within that category. Safer allocations appear to "underperform" and are therefore overlooked. Custodians and agreements that quietly take on more risk in credit, leverage, or basis are rewarded until events like Stream or Elixir remind everyone what they've actually taken on. Therefore, the yield ladder is more than just a teaching tool. It's the beginning of a risk language currently missing from the industry. 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, maturity risk, liquidity risk, directional risk) will this yield expose me to? This allows us to assess performance by risk level, rather than turning the entire ecosystem into a single, indiscriminate race for annualized return (APY). Later in this series, we'll apply this framework directly to crypto. First, we'll map today's major vaults and crashes onto the ladder to see what their yields truly tell us. Then we'll broaden our perspective and discuss what needs to change: labeling, standards, curatorial practices, and system design. In subsequent articles of this series, we will apply this framework directly to the cryptocurrency space. First, we will map today's major vault and crash cases onto this framework to see what their returns actually reflect. Then, we will step outside the framework to explore areas for improvement: labeling, standards, curatorial practices, and system design.