There are three types of actors using permissionless vaults:
- Strategist manages liquidity in the Vaults by distributing it among different DeFi protocols. Typically Strategist would create a Strategy smart contract that transparently manages Vault liquidity. However, Strategy can also be an offline algorithm or manual liquidity management.
Vaults are smart contracts that put liquidity into different underlying protocols. The underlying protocol could be some well-known DeFi protocol like Uniswap, Sushiswap, Yearn, Compound, etc., or another Vault.
The tokens managed by Vault are fixed and immutable, i.e. Vault cannot start managing additional tokens or stop managing existing tokens. Each Vault can only put liquidity into one fixed underlying protocol.
Examples of the Vaults are:
- Vault that puts ETH and USDC into Uniswap V3
- Vault that puts WBTC, DAI and USDT into Aave
- Vault that puts ETH into Yearn
When the Liquidity provider deposits liquidity into the Vault, he received LP tokens back (or NFT token - that depends on a particular Vault). On withdrawal, the Liquidity provider burns the LP tokens and receives his liquidity and earned profits back.
The Strategy can only redistribute ERC-20 tokens between protocols. The tokens can leave the Vault only when the Liquidity provider withdraws it.
The Liquidity provider would use vault to earn profits generated by the strategy. Note that the Strategy generally bears some risks so the Liquidity provider may earn profits but can also incur losses depending on the Strategy behavior. The liquidity can be provided and withdrawn at any time.
The Strategist would earn performance fees from profits generated on the Vault liquidity. The term profits generally refer to the profits of the underlying protocol like fees generated by Uniswap V3 or yield generated by Aave. For example, profits don't capture any price movements in UniswapV3.