You’ve bought some cryptocurrency and now you hear people talking about some more advanced options. One of these might be a vault, so what exactly is it?
Introducing the vault
At its simplest level, a vault is exactly like it sounds like. It’s a secure means of locking your cryptocurrency away for a fixed period of time, so that no one can access it.
In cryptocurrency terms, a vault is basically a smart contract. A piece of code where you send your crypto, token, or NFT to a particular address and the smart contract holds it. This is often done for a pre-determined time as well.
Once that time is up you can take your crypto back into your normal wallet, or you can add it to the vault again for another fixed period.
Why use a vault?
So why would you use a vault? After all, without access to your crypto you can’t sell it and as it’s smart contract locked, you can’t get it out early.
Vaults are normally tied to a staking process for crypto holders. This is a method of investing your crypto where, in exchange for locking your coins away for a fixed period. While the coins are locked away, you get interest paid to you, or access to additional services.
For example, some sites require you to stake a certain amount of crypto in their vault to access certain features. Like being able to invest in ICO‘s or to use their platform services.
These can be very lucrative, particularly if compared to fiat investments. Return rates of 5% + p/a paid out monthly are not uncommon for these sites. To use a specific blockchain network, such as for mining coins or for other services, you might have to stake some coins first as a security.
What to think about before choosing a vault
The key with vaults, like with all crypto, is that they should be trustless. The code should handle everything with no human interference or manual censorship.
You should also be able to independently verify the code the vault uses to ensure it does what you think it does.
Vaults are not without risk. By using them you are handing your crypto to someone else. So, if you haven’t verified what the vault does you have no way of knowing even if they will give your crypto back afterwards.
Similarly, if a vault has not been properly checked before going online there is the risk of hacks and breeches. This might led to your crypto being taken, leaving you with little chance of seeing any return from it.
The space is growing
As the crypto space evolves more reputable services using vaults are coming online. This means more established user bases, improved security and code auditing in place. But there are still questionable ones out there, with poorly developed code or designed to steal your crypto.
Any vault service you use has to be measured on its own merits.
Who are the team behind it, are they reputable, has the code been audited and so on. Used wisely, they can be a major means to help you achieve financial freedom.
- DeFi Vaults