Yearn Vaults - How They Work
Every yVault follows the same lifecycle: deposit -> earn yield -> harvest -> compound. The magic is in the share price - your yvToken balance never changes, but the underlying value per token compounds upward with every harvest cycle. Use the simulator below to see how your deposit grows compared to holding the asset statically or farming manually.
yVault Compound Simulator
Adjust the deposit and watch the share price compound over time. Yearn's 2% management + 20% performance fee is already deducted in the projection.
yvUSDC Share Price After Period
started at 1.0000
Final Value (Vault)
$10,850
profit: $850
How compounding works:
Share price grows by ~8.5%/yr net of fees.
Harvests happen ~1-4 per month, each time the share price ticks up slightly.
Share price grows by ~8.5%/yr net of fees.
Harvests happen ~1-4 per month, each time the share price ticks up slightly.
Deposit Flow - Step by Step
1
Deposit the want token
You call
deposit(1000 USDC) on the yUSDC vault. The vault records your deposit internally and mints you 1000 yvUSDC at the current share price of 1.0.
2
Vault deploys capital into strategy
Yearn's keeper triggers a strategy allocation. The vault sends your 1000 USDC into a strategy contract - say, an Aave USDC supplier. You now hold 1000 yvUSDC representing a pro-rata claim on the vault's total assets.
3
Strategies generate yield
Over days/weeks, the strategy earns yield: aToken interest from Aave (compounded automatically), CRV farming rewards, or trading fees from Curve LP. All profit accrues to the strategy's internal balance.
4
Harvest - share price increases
Keeper calls
harvest(). The strategy converts all earned tokens (CRV, CVX, aTokens) to USDC, sends the profit to the vault, and the vault mints new yvUSDC shares proportional to the profit minus Yearn's 20% performance fee. The share price rises from 1.0 -> 1.01. Your 1000 yvUSDC is now worth 1010 USDC.
5
Withdraw - receive underlying + profits
You call
withdraw(yvUSDC). The vault burns your yvUSDC and sends you USDC at the current share price. If the share price is 1.15, your 1000 yvUSDCredeems for 1150 USDC. You receive the original 1000 USDC + 150 USDC of accumulated profit.
Strategy Harvest Cycles
? Harvest Event
Keeper calls
report(). Strategy realizes profits from all yield sources, converts to want token, and reports net gain to vault. Share price increases. Gas cost: $20-$150 depending on network congestion.
Loss Accounting
If a strategy loses money (depeg, IL, exploit), the keeper reports a loss. The vault's total assets shrink and share price drops. All depositors absorb the loss proportionally - this is the key risk of yVaults.
Strategy Rotation
When a higher-yielding strategy becomes available or a current strategy's APY drops, the keeper migrates capital. Capital is withdrawn from the old strategy, deployed to the new one. Depositors see this as normal share-price movement.
? yvToken Mechanics - Share Price Deep Dive
// Share price starts at 1.0
sharePrice = 1.0
// You deposit 10,000 USDC
// You receive: deposit / sharePrice = 10000 / 1.0 = 10000 yvUSDC
// After 6 months of 8.5% APY (2% mgmt + 20% perf deducted -> ~6.6% net)
// Approx 4 harvests share price compounds upward
sharePrice = 1.0 (1.0066)? ? 1.0266
// Your yvUSDC is now worth: 10000 1.0266 = $10,266
// Withdraw: vault.burn(yvUSDC) -> sends 10,266 USDC to you
yvUSDC
Stablecoin vaults
USDC/USDT/DAI/FRAX
yvETH
ETH max-collateral
stETH, rETH strategies
yvWBTC
wBTC leverage
LP + borrow strategies
yvCurve
LP strategy vaults
CRV/CVX auto-compound
? Risk Dimensions
TVL / Correlation Risk
A vault with $200M TVL in a Curve stablepool becomes a significant market participant. Large deposits/withdrawals can move the pool price and affect the vault's LP position value. Yearn's risk score tracks this via correlation metrics.
Strategy Risk Scoring
Yearn rates strategies 1-5. Score 1: simple Aave supply. Score 5: leveraged LP with multiple DeFi leg risk. Higher scores offer higher APY but larger drawdown potential. Check the vault's risk dashboard before depositing.
Smart Contract Risk
yVaults, strategies, and all external protocols Yearn interacts with are smart contracts. A bug in any leg - the vault, the strategy, or Aave/Curve/Lido - can result in permanent loss of funds. Yearn audits code but audits don't guarantee safety.
Shutdown / Withdrawal Risk
During emergency withdrawal, your funds are locked while strategies unwind. Unwinding LP positions in a depegged pool or illiquid market can result in worse execution than normal. Withdrawing before a crisis is always the safest option.
Fee Structure
Yearn charges two layers of fees. The management fee is 2% per year of deposits, calculated daily on the vault's total assets and paid in want tokens (not minted shares). The performance fee is 20% of profits above the high-water mark - the peak share price the vault has ever reached. If a vault earns 10% in a year but the share price was already at 1.08 from a previous period, only the incremental profit above 1.08 is subject to the 20% cut. Depositors effectively pay 2% on their full balance + 20% on the profits above the high-water mark.
Shutdown Conditions
A vault enters shutdown when Yearn governance or the multisig calls emergency shutdown on a specific vault. New deposits are disabled. The keeper begins withdrawing capital from all strategies as fast as the downstream protocols allow - this can take hours for Aave positions or days for Curve LP positions if the pool is illiquid. Once all funds are back in the vault contract, depositors can call withdraw() and receive their pro-rata share of the want token. During the unwind, withdrawal may be partial or delayed; it is not guaranteed to be instant or at the last known share price.
Frequently asked questions
- What does it mean that yVault tokens accrue value instead of paying out a token reward?
- Unlike staking rewards that arrive as a separate token (like ETH2x), Yearn vault yield is baked directly into the yvToken's share price. When you deposit 1000 USDC you get exactly 1000 yvUSDC. Six months later those 1000 yvUSDC are redeemable for 1100 USDC. The growth is invisible until you withdraw - no claimable reward token, no impermanent loss from reward token price swings. The vault handles compounding internally.
- How does the harvest cycle actually work on-chain?
- The keeper calls report() on the vault, which triggers a cascade: each active strategy realizes its current profit/loss in the strategy's underlying asset, swaps it to the vault's want token via a DEX (usually 1inch or Yearn's own swap router), then calls harvest() on the vault. The vault mints new shares representing the profit minus Yearn's 20% performance fee. This entire process costs gas (often $20-$100 on Ethereum) so Yearn batches harvests to happen when gas is cheap or when profits exceed a minimum threshold.
- What happens if a strategy permanently loses money?
- Yearn uses 'loss' accounting: when a keeper reports a loss, the vault's total assets decrease and the share price falls - all depositors absorb the loss proportionally, like a bank run on a fractional reserve. Historically Yearn has used treasury funds to cover major losses and restore share prices, but this is a governance decision, not a protocol guarantee. Depositing into a yVault is not the same as holding the underlying - you have smart-contract risk and strategy risk on top of market risk.
- How does Yearn compare to manual yield farming?
- A manual farmer might achieve 8% APY on USDC through Aave + Curve + CRV bribes, but needs to manually harvest (paying gas each time), manually compound, manually rotate between strategies as APYs change, and manage multiple positions across different protocols. A Yearn vault does all of this automatically, but takes 2% management + 20% performance fees. The break-even point depends on how much capital you have and how much your time is worth - for most users Yearn's automation premium is worth it above $5,000-$10,000 deposited.
- What is the vault shutdown process?
- A vault can be retired in two ways. Emergency shutdown - triggered by Yearn's multisig or governance - halts deposits and begins an orderly unwind of all strategy positions back to the vault contract. Depositors can then call withdraw() and receive their pro-rata share of whatever assets remain (in the want token). Vault migration - the smoother path - launches a new vault version, migrates all capital automatically, and users are airdropped shares in the new vault. Shutdown is rare but depositors should understand the risk.
- Why does the share price sometimes drop on a 'harvest'?
- A harvest is not always profitable - it can also report a loss. If a strategy's DEX LP position took impermanent loss, a lending market depegged, or a farming reward token collapsed in value, the harvest reports a negative number. This decreases the vault's total assets and the share price falls for all depositors. Yearn's dashboard shows per-strategy gains/losses so depositors can monitor this.