Introduction

After two years of free money, DeFi yields have fallen to unimpressive levels. The days of depositing stables into a Yearn vault for 20% APY seem long gone. Crypto yields are now struggling to compete with government bonds. Users have been forced to venture further out on the risk curve to generate worthwhile returns. This usually entails prolonged exposure to cross-chain bridges and obscure yield farms – a recipe for disaster.

Principal-protected vaults are an emerging niche of DeFi structured products that attempt to provide risk-averse investors with yield that compares to more aggressive strategies elsewhere.

These vaults attempt to guarantee the user’s initial deposit by concentrating risk into house money earned by the principal via safer yield avenues. This is akin to a barbell strategy, where a strategy utilizes both sides of the risk/reward spectrum (low and high risk/reward) in order to boost returns.

Theoretically, the potential for composability and the inability of this immature market to efficiently price risk should allow these products to flourish. But a key question remains: Are principal-protected products a value add, or another zero-sum gadget?

Principal-Protected Yield Overview

Vovo, Brahma, and Ribbon are three projects paving the way for principal-protected vaults. While these projects have other exciting and sustainable yield products, this report will focus on principal-protected stablecoin vaults.

A high level overview of each product can be seen above. Let’s take a look at how each vault works.

Vovo

Vovo principal-protected vaults deposit user funds into Curve Finance liquidity pools. Farming rewards are harvested weekly and converted to USDC. The USDC is used to open 15x leveraged trades on GMX. At the end of each week, the trade is