Introduction To Composed Vaults: The Yield Mechanism Powering Improved Risk-Adjusted Crypto Returns
How composed vaults are reshaping DeFi by delivering diversified, rebalanced, and risk-managed yield portfolios.
In DeFi, the search for yield has always been dynamic, driven by market cycles, evolving strategies, and the fragmentation of infrastructure.
While DeFi unlocked access to yield, it left users and platforms with a fractured experience highlighted by siloed strategies, inconsistent risk profiles, and no standardized way to diversify or rebalance across them.
As a result, portfolios often become overexposed to a single yield stream, such as staking, lending, or a specific protocol, or spread too thin across uncoordinated strategies that are difficult to manage. For most individuals’ wallets, PayFi platforms, and DAOs, building a resilient, high-performance yield product has oftentimes required more resources than they can allocate.
Lorenzo Protocol’s composed vaults, which can serve as the foundational underlying yield mechanism for Onchain Traded Funds (OTFs) like sUSD1+ OTF, change that. By bundling multiple yield strategies into programmable portfolios, they provide a more sophisticated approach to on-chain yield: diversified, rebalanced, and abstracted into a clean integration layer. Whether managing bitcoin, stablecoins, or diversified treasury assets, composed vaults give businesses and individuals a simple way to either invest in or construct risk-adjusted yield products with minimal operational overhead.
Bart Hillerich
What Are Composed Vaults?
Like an investment bank, Lorenzo Protocol issues onchain fund products through yield vaults. While “simple vaults” receive capital and allocate it to one yield strategy, composed vaults aggregate multiple simple vaults to form a unified framework that allocates received capital to several strategies, such as bitcoin staking, stablecoin lending, arbitrage, or tokenized real-world assets.
Within the vault, yield strategies can remain static or dynamically rebalanced manually or by AI agents, algorithms, etc. Each strategy adheres to specified rules for deposits, withdrawals, and performance reporting, offering seamless UX for users and composability for developers.
Once formed as a complete package, composed vaults are the underlying yield mechanism of on-chain financial products that behave like managed portfolios, delivering diversified returns, consolidated reporting, and strategy management.
Use Cases for Composed Vaults
Composed vaults can serve as backend infrastructure for a wide range of financial applications:
Wallets and PayFi Apps
Wallets like Phantom and PayFi platforms, such as Infini, can integrate composed vaults to offer users diversified yield, built natively into their products. These vaults automatically allocate user deposits across yield strategies, abstracting away complexity.
RWA ProtocolsPlatforms like Plume and Centrifuge can incorporate composed vaults to wrap tokenized Treasuries or credit assets with crypto-native yield sources. For example, a tokenized T-bill vault could allocate a portion of collateral to ETH staking or delta-neutral trading.
DAOs and Treasury ManagersProjects with DAOs such as Aave, Lido, and Uniswap collectively hold billions in idle capital. Composed vaults offer an automated solution to deploy treasury assets into diversified yield strategies with governance-defined risk limits.
DeFAI Agents and Robo-AdvisorsAutomated agents, trading bots, and decentralized hedge funds can use composed vaults as infrastructure to manage client portfolios or liquidity. Vaults abstract strategy execution and compliance logic, letting agents focus on optimization, rebalancing, and interface design.
Why Composed Vaults Matter Now
DeFi yields have fluctuated dramatically over crypto market cycles. During the peak yield farming boom of 2021-2022, top yield farming protocols offered 100%+ APYs, with unsustainable standouts like Olympus DAO, Abracadabra, and Wonderland offering APYs in excess of 4,000%.
As demand fell, many protocols failed, wiping out retail portfolios and driving lending yields to single digits.
Beyond exposing broader systemic risks, the volatility highlighted a key portfolio vulnerability: overreliance on a single source of yield. A composed vault mitigates this by allocating across multiple strategies. When stablecoin lending compresses, exposure to ETH staking or real-world assets can preserve returns.
While DeFi yields have now largely stabilized with maturity, the yield environment remains fragmented, making yield source diversification a necessity.
How RWA and Stable Yield Sources Strengthen Vault Performance
As DeFi yield fell in 2023, users flew to get exposure to rising U.S. T-bill rates, causing tokenized treasuries to surge by 782% from $104 million in TVL to over $917 million at the end of the year.
Since then, broader RWA adoption has helped push the RWA category above $12 billion in TVL. This growth included institutional entrants like Franklin Templeton, BlackRock, OpenEden, and emerging stable-yield products like USDe.
Composed vaults allow these assets to be blended with DeFi-native yields, enabling new hybrid yield products; for example, portfolios that combine 40% in tokenized Treasuries, 30% in staking, and 30% in RWA-backed stablecoin lending.
This architecture supports better risk-adjusted returns across market cycles with higher predictability, making products that source yield from composed vaults, like Lorenzo’s OTFs, a more attractive investment option for institutional investors.
Unlocking the Next Phase of Yield Architecture
As the crypto economy matures, so must its approach to yield. Passive exposure to a single strategy—whether staking, lending, or real-world assets—is no longer sufficient in a market defined by volatility, innovation, and institutional scale.
Composed vaults offer a new blueprint for how yield can be accessed, managed, and embedded across Web3. By bundling multiple sources of return into programmable, diversified portfolios, they transform fragmented yield into products with clear performance, risk, and liquidity profiles.
Whether powering OTFs like sUSD1+ OTF, enhancing wallet UX, or optimizing DAO treasury deployments, composed vaults are the missing infrastructure for scalable, risk-adjusted yield in DeFi.
→ Explore what composed vaults can unlock for your platform at lorenzo-protocol.xyz
