Vaults

Vaults are capital pools that store Base Assets and strategically optimize returns for users.

Overview

Satay's vault system is designed to allow users to deposit a base asset and receive shares in return. These shares represent their ownership in the vault, which generates yield by investing the deposited assets into various carefully selected strategies.

Users can withdraw their assets by redeeming their shares, and the vault ensures a smooth operation by managing fees, strategies, and withdrawals in a secure and efficient way.

Base Asset

The base asset refers to the main asset deposited into the vault. This is the asset that users provide, and it is what the vault uses for investing into different strategies. For example, a vault might use USDC as its base asset. All deposits, withdrawals, and profits are calculated in terms of this asset.

When users deposit the base asset, it is converted into the vault's shares asset based on the current vault exchange rate (free assets to total shares). This ensures that users have a proportional claim on the vault's base assets.

Key Functions:

• Deposit: Users deposit their base asset, which increases their balance in the vault.

• Withdraw: Users can redeem their vault shares to get their base asset back.

Mathematically, the value of base assets a user can withdraw is proportional to the number of shares asset they hold. This relationship is:

withdrawable_assets = (vault_shares_owned / total_vault_shares) * total_vault_assets

Shares Asset

When users deposit base assets into the vault, they receive vault's shares asset. These shares represent a proportional claim on the total assets managed by the vault. The number of shares issued depends on the total value of assets in the vault at the time of the deposit.

The equation for converting deposits to shares is:

shares_issued = (deposit_amount / free_funds) * total_shares

The free funds refer to the total available funds in the vault that are not locked in strategies or marked as profits.

Fees

Fees are an integral part of the vault system. The vault charges various fees to cover management, protocol expenses, and performance-based incentives. These fees are typically deducted from the profits generated by the vault.

Types of Fees

1. Management Fee: This is a fee based on the total amount of debt (the total assets allocated to strategies). It is calculated based on a set percentage over time. It is typically calculated using the formula below:

management_fee = (debt * management_fee_bps * time_period) / (BPS_MAX * SECS_PER_YEAR)

1. Performance Fee: This fee is only charged when the strategies generate a profit. It is taken as a percentage of the profit. It is typically calculated using the formula below:

performance_fee = (profit * performance_fee_bps) / BPS_MAX

It is important to note that the total fees deducted can never exceed the profits realized. Before any profits are locked into the vault, the fees are subtracted, ensuring that only net gains are stored and distributed.

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Strategies

The vault works by allocating a portion of its base assets to different strategies, which are specialized investment Move modules that aim to generate yield. Each strategy operates independently and has its own debt (the assets allocated to it by the vault).

Relationship Between Vaults and Strategies

Vaults and strategies work together to optimize yield for users. The vault holds the base assets deposited by users, while the strategies actively deploy these assets across various DeFi protocols to generate returns.

Strategy Debt

The strategy debt represents the amount of the base asset (such as USDC) that the vault allocates to a strategy. Strategies use this debt to generate yield by interacting with DeFi protocols (e.g., lending, liquidity providing, staking).

The vault keeps track of how much of its total assets are assigned to strategies as debt. When debt is created, the total assets of the vault can be split into idle assets (assets still in the vault and not deployed) and debt (assets deployed to strategies).

Equation for total assets:

total_assets = total_idle + total_debt

This equation highlights the relationship between idle funds (not yet deployed) and debt (deployed in strategies). The total assets represent all of the vault’s holdings, whether deployed in strategies or not.

Locked Profits

As strategies generate yield, a portion of the profit might be locked in the vault for a fixed period. This feature ensures sustainability by withholding some of the profits for future use, protecting the vault from sudden asset shifts or market fluctuations. Locked profits are progressively released over time, ensuring a steady, long-term return for users.

This mechanism ensures that vaults remain sustainable and secure over time by avoiding excessive withdrawal of newly realized profits too quickly.

Adding Strategies

The protocol governance is responsible for adding strategies to a vault. A strategy must be compatible with the base asset of the vault — meaning the strategy should be able to handle the same type of asset the vault uses (e.g., if the vault holds USDC, the strategy should work with USDC).

Adding a strategy involves a careful review process to ensure it aligns with the vault's objectives and risk tolerance. The new strategy will then begin managing a portion of the vault's assets (i.e., debt) to generate yield.

When a strategy is added, the vault can allocate some of its idle assets to the new strategy. This expands the vault’s diversification across multiple strategies, potentially increasing the overall yield while reducing the risk tied to any single strategy.

Removing Strategies

When a strategy is no longer needed or becomes unprofitable, it can be removed from the vault with the protocol governance approval. However, there are two important conditions to consider:

1. No Outstanding Debt: If a strategy has no outstanding debt (i.e., all the base assets deployed to it have been returned), it can be easily removed.

2. Forcing Removal: If a strategy has outstanding debt, the vault may still remove it by force. In this case, the remaining debt needs to be cleared or written off. Forced removal typically happens when a strategy is no longer profitable or operational but still holds debt.

Force removal allows vaults to quickly cut ties with unprofitable or risky strategies, but it comes with the tradeoff of potentially incurring a loss. When this happens, the outstanding debt is cleared from the vault’s total debt.