Announcing Master Vault Strategy

What is Master Vault?

Master Vault is an ERC-4626 standard vault that allocates to other vaults. The vault aims to provide users with an automated allocation strategy that delivers returns beyond what you can get from lending protocols and stablecoins by taking on some volatility and duration risk.

The strategy edge comes from Trading Strategy's proprietary DeFi vault benchmark and indexing product. Currently, over 2,000 stablecoin vaults across 20 EVMs are listed on the dashboard, with their historical performance and risk characteristics. The vault strategy is not tied to a single protocol or ecosystem, enabling greater diversification of yield sources.

TradingStrategy.ai is currently tracking over 2,000+ stablecoin vaults across 20 blockchains. We monitor rolling returns, sharpe, technical risk, lockups, TVL and many other factors.

Strategy logic

The strategy automatically rebalances capital into the best available vaults and is not limited to lending vaults only.

1. A small cash-on-hand buffer is maintained for on-the-spot redemptions.
2. Both locked (redemption after a lockup period) and unlocked (instant redemption) positions are mixed
3. The vaults are selected from the vault index with a whitelisting process by the Trading Strategy proto-DAO, with a diversification across underlying activity and protocols
4. The strategy rebalances weekly to the best-performing vaults based on the sixty-day historical returns.

Master Vault initially takes 5% performance fee.

Trading universe

In the first beta version, Master Vault will deploy capital only on Arbitrum vaults. In the second phase, a cross-chain component is added to enable this type of vault strategies to deploy capital to vaults across many chains and protocols, including non-EVM chains, such as native Hyperliquid, GRVT, Lighter, and Orderly.

The trading universe opportunities consist of:

• Real-world asset lending
• Quant trading strategies
• Market making
• DeFi lending

This provides some variety in yield sources, and the strategy is not fully dependent on cryptocurrency market cycles or price correlations.

Beta version

For the first Arbitrum version, the following vaults are considered:

• D2 HYPE++
• Plutus plHEDGE: proprietary trading
• Lagoon
• IPOR
• gmUSDC
• gTrade: market making
• Ostium: market making

With these, the backtest results show approximately 13% annualised returns and a Sharpe of 3.6, with the caveat that vaults have existed for only a year or two and the backtesting history is somewhat limited.

We can see that the industry has slowed down since October, but it is still possible to capture low risk, relatively high, liquid yields. We see that a diversified, weighted vault strategy has low volatility and drawdown, despite the underlying allocation to vaults that exhibit volatility and drawdown.

Full trading universe

The first version of the strategy is limited to Arbitrum-only vaults, however this restriction will go away with a multichain solution in the future. For the full trading universe, we can consider any vault deployed across any EVM blockchain.

For a larger cross-chain trading universe, the backtest shows a diversified portfolio with annual returns of approximately 14% and a Sharpe of 4.5.

When we increase the tradeable asset universe (see more vaults), we can do a more diversified allocation. Here is a basket of 10 vaults backtested across Arbitrum, Base and Ethereum. Both Sharpe and returns go up when compared to an earlier Arbitrum-only backtest.

Risk management

Given the young age of the DeFi ecosystem, it has been troubled by issues such as hacks and extreme market volatility. Regardless of the quality of due diligence, these risks cannot be fully mitigated; some positions may eventually need to be written down to zero.

To minimise the impact of these adverse events, the trading positions are diversified across several vaults and protocols. Because the Master Vault strategy is automated, there is little downside to having a long list of small positions.

The goal is to have at least 20 positions in the vault yielding 10% annualised returns. With this yield, it is possible to afford to fully lose 1-2 positions a year and still have positive returns for a year. As of the writing of this, the Trading Strategy vault benchmark includes 50+ vaults yielding more than 10% annualised.

The following risk parameters are utilised in the first Master Vault:

• Maximum participation: limit the allocated position size to be a small 2.5% of the total target vault TVL, to avoid losses in the case of illiquidity events.
• Maximum concentration: maximum allocation of 10% of the total portfolio to a single vault or vault protocol, to limit the risk of protocol being compromised.
• Number of desired vault positions: aim to have at least 10+ open positions at a time.

Security

The Master Vault smart contract is based on the Lagoon Finance protocol. Lagoon Finance has undergone several audits and currently has a TVL of $100M+ across its ERC-7540 smart contracts. Additional integration contract "guard" is developed by Trading Strategy and will be separately audited.

An off-chain oracle is used to calculate position rebalances. Master Vault can only move capital across whitelisted vaults. Even if the off-chain oracle would get compromised, it's difficult for an attacker to exit with the capital.

Challenges

The main challenges with vaulted strategies currently are:

• Duration mismatch: The most profitable vaults come with the most complex trading strategies. To trade such a strategy, capital must be locked in trading positions. This means there are no instant withdrawals, and each vault has its own withdrawal window. For example, the withdrawal window for Ostium/gTrade vaults can be 3–12 days, depending on whether the vault is profitable.
• Bridging: Due to Ethereum's rollup-centric scaling roadmap, vaults and liquidity are fragmented across various layer-2 chains. Native bridging is slow (withdrawing takes multiple days). Centralised bridging solutions are expensive, often charging 0.5%–1% per transfer.
• Smart contract flows are unsupported by perp DEXes: The deposit/withdraw incompatibility of perpetual futures DEXes with smart contracts (Hyperliquid, Aster, others). Either the deposit or withdrawal operation needs a hot wallet private key.

In the beta version, manual intervention and multisignature solutions may be required to work around these challenges. We will document and highlight all of these when/if we need to utilise them.

We believe that all of these challenges can be properly addressed over time. Maturing perpetual futures exchanges will begin offering direct deposit support for smart contract-based vaults and wallets. Ethereum improvement proposals will enable more efficient cross-chain communication, eliminating the need for third-party bridges.

Next steps

Master Vault is now open for early whitelisted participants. If you would like an early access invite, please let us know by expressing your interest by email: vaults@tradingstrategy.ai

For any questions or comments, please join our Discord. In particular, we would like to hear from you if you would like your vaults included in this strategy or in our vault benchmark.