A DeFi vault is a smart contract that holds pooled deposits and issues each depositor a share token recording their claim on the pool. The contract puts that capital to work in a defined way, and the share can later be redeemed for a proportion of whatever the pool is then worth.
A smart contract is a program deployed on a blockchain that can hold assets and execute its own rules without an intermediary, and the closest traditional analogue for a vault is an open-ended fund: you subscribe, you hold units, and the units are priced off the assets behind them. It comes with no fund administrator, no depositary and no prospectus. Where one sits inside a wider allocation process is covered in onchain asset management.
What is a DeFi vault, in plain terms?
A vault is a shared pot of one asset, plus an accounting rule that says how much of the pot each depositor owns. The dominant interface for them, ERC-4626, describes itself as a standard for "tokenized Vaults representing shares of a single underlying EIP-20 token", with a fixed set of functions: deposit and mint to get in, withdraw and redeem to get out, and totalAssets to report everything the vault currently manages. It is a wrapper convention, and it says nothing about what the money does.
What happens when you deposit?
The contract takes your asset, mints you shares, and from then on your share count stays fixed while the value behind each share moves. Share price is the vault's total assets divided by the shares outstanding. Interest or trading profit raises total assets, so each share becomes redeemable for more; a loss lowers it, and every holder takes the hit at the same time, in proportion.
Rounding always favours the pool. ERC-4626 requires vaults to round down when calculating shares issued or assets paid out, and to round up when calculating what a user must put in. The specification also warns that its preview functions are "manipulable by altering the on-chain conditions and are not always safe to be used as price oracles", a direct caution against treating a live share price as an independent valuation.
Where does the capital actually go, and who decides?
Capital goes into whatever venues the vault's code permits, chosen either once at deployment or continuously by a named role with discretion: in the fixed case the contract points at a single yield source and nobody can redirect it, while in the discretionary case a person or firm decides, and can change that decision later.
Morpho's vault documentation splits that discretion explicitly. A curator "configures adapters, caps, fees, and interest rate limits", setting both absolute caps, meaning a fixed asset amount, and relative caps expressed as a percentage of total assets, and an allocator then moves assets into those approved adapters. An owner sits above both and can replace the curator immediately, with no delay, while most curator actions are timelocked and a sentinel can revoke a pending proposal before it executes. Those role assignments tell you more about a vault than its stated strategy does.
What the word vault does not tell you
The word covers at least three unrelated structures, and it tells you nothing about what the capital does, who can move it, or whether you can get out. One is the pooled tokenized vault above. Another is the curator-managed pool routing across several venues. In the Maker protocol, a vault is instead a borrowing position: you "lock collateral into a specific Vault", "mint Dai against that collateral, creating outstanding debt", and keep it collateralized so it cannot be liquidated. That third meaning is a debt position rather than an investment in a pool, and the shared word hides the difference, so the structure has to be read from the contract rather than from the label.
The word also implies safekeeping. Most of these vaults do close to the opposite. Exit is a separate question. Redeeming shares requires the vault to unwind something, and where the underlying cannot settle instantly, ERC-7540 extends ERC-4626 with asynchronous requests that pass through Pending, Claimable and Claimed states rather than completing in a single transaction.
How does this apply to an institution?
The wrapper answers almost none of the questions an investment committee asks. Diligence happens a layer below it. Who holds the role that can change allocations, how long the timelock runs, what happens to the share price when a position cannot be valued, what the redemption path looks like when the underlying is illiquid: none of that is visible from the word vault.
A risk framework for onchain allocation covers that diligence, along with share classes and redemption terms. Two structures explain most of what the label hides: the curated vault, and the ERC-4626 interface that most vaults present.
Railnet builds vault infrastructure, standardizing execution, reporting and settlement across the venues a vault allocates to.
FAQ
What is a DeFi vault?
A smart contract that pools deposits of one asset and issues shares recording each depositor's proportional claim. The contract deploys the pooled capital into one or more yield sources, and a depositor redeems shares for a slice of whatever the pool is then worth.
How is a vault share priced?
Total assets divided by shares in issue. Your share count does not change after deposit. Gains raise the value behind each share, losses lower it, and all holders are affected proportionally at the same moment.
Can you always withdraw from a vault immediately?
Not always. Redemption requires the vault to unwind a position, so instant exit depends on the underlying being instantly liquid. Vaults holding assets that settle on a delay use asynchronous request flows, where a redemption sits pending until it becomes claimable.