DeFi yields have plummeted to modest levels after two years of free money. Depositing money into a Yearn vault at 20% APY appears to be a thing of the past. Crypto yields are now competing with government bonds. Users have been compelled to go further out on the risk curve in order to make meaningful profits. This generally means being exposed to cross-chain bridges and opaque yield farms for an extended period of time, which is a formula for catastrophe. Principal-protected vaults are a new type of DeFi structured product that aims to give risk-averse investors a yield comparable to more aggressive methods.These vaults try to protect the user's original deposit by focusing risk into house money produced by the principal through safer yield routes. This is similar to a barbell approach, in which a strategy uses both ends of the risk/reward spectrum to increase returns.In theory, the potential for composability and the incapacity of this young market to price risk effectively should allow these products to thrive. But one crucial question remains: Are principal-protected goods a value addition or a zero-sum game?<h2>Principal-protected yield landscape</h2>These three projects are laying the foundation for principal-protected vaults: Vovo, Brahma, and Ribbon. While these projects provide a variety of attractive and long-term yield options, this article will concentrate on principal-protected stablecoin vaults.<h3>Vovo</h3>In Vovo mechanism, the user’s money is deposited into Curve Finance liquidity pools from Vovo principal-protected vaults. Weekly harvests of farming rewards are converted to USDC. The USDC is then used on GMX to open leverage trades. Every weekend, the trade is terminated, and any gains are added to the principal. There are four vaults that are available to users: ETH Up, ETH Down, BTC Up, and BTC Down.The four vault options provide a fun gamification element to the yield process, but they are probably not enough to sustain user interest over time. A couple of weeks of accurate guessing have little overall impact. Vovo vaults work best for expressing short- to medium-term, low-conviction market opinions.<img src="https://lh5.googleusercontent.com/GjUJfv8Ih_kjpX-7Q80R--doeF4Qxe7TssoQrQyk2FAaAiMdvyEimtrWQSjksA_zrnwi4sgv4mBSodDC-LpcT8m8RCmIjz_C4Qs9c7yuRlPuLEJWcyeDjXXAA11VI_cEfdSdsafbZs9VEQCFiJ1sII7CSFL3K3cPjsfIOOh0mNKl8u9uXyXyJ5Fla2zkVw" width="624" height="219">Source: Vovo<h3>Brahma</h3>Brahma, like Vovo, supplies liquidity on Curve using user funds. For higher yields, the LP tokens are staked on Convex. Weekly rewards are collected and utilized to make trades on Lyra and Perpetual Protocol.Harvested rewards were utilized to perform 8x levered trades on Perpetual Protocol each week over the 12 weeks of the Protected Moonshots v1 vault. Technical analysis with moving averages was used to determine trade direction. In contrast to Vovo, Brahma employs stop-loss and take-profit strategies with a view to smoothing returns.&nbsp;With its updated seeker algorithm, the Protected Moonshots v2 vault combines the integrations of Lyra and Perpetual Protocol. The seeker algorithm searches for and makes trades in accordance with a momentum strategy. If implied volatility is too expensive or there are no trade opportunities, the base yield is added to the principal. Furthermore, v2 includes systematic pool health tracking. This provides end users with transparency into the risks involved with the basic yield and enables Brahma to routinely adjust for the optimum pools.<img src="https://lh3.googleusercontent.com/hlmjHAydDZZ5L4BTD5YU2RGnQsTWuC-zaaGUgXt691JdFdg_C6Rm3vTCLeDoah3hCFvZvW0eoO7q9VbdjCHT7YvbXvk0MiJ6S1qCMypXFmnwjgWh2u2ioPyHnNi4QdXBJIhWR3BOJqlDcVwvMMhzTD1iH6k9iMaJj_B5frDMMTR8k4h-Q1k6jn1Evl0mbQ" width="624" height="269">Source: Brahma<h3>Ribbon</h3>Ribbon's R-Earn vault follows a similar strategy to Maple Finance. Vault funds are loaned to market makers (Wintermute and Folkvang Trading) over 28-day epochs at 9.75% APY. The vault sets aside a part of the weekly interest payments to provide a 4% APY basic rate. The remaining funds are utilized to buy weekly ATM knock-out barrier options.If the underlying asset surpasses or falls below a defined threshold, the knock-out option expires worthless. The vault provides a straddle-like "dual win" payout structure by acquiring both calls and puts, allowing depositors to profit from intra-week fluctuation up to 8%.<h2>Total yield</h2>Ribbon, unlike Vovo and Brahma, guarantees a base return of 4%. Ribbon's yield enhancement approach only accounts for 60% of its underlying yield. Vovo and Brahma gamble with the entire yield earned, ensuring just the principal.<img src="https://cdn.builder.news/news/11ed5e6eb3ec31cba8e6023f659fee92.png" alt="" class="lykafe2">Because of the profitability of direct lending, R-Earn is by far the greatest option at a glance. Vovo appears to exploit Curve yields more effectively than Brahma. These data, however, can be deceiving because TVL changes can have a significant influence on vault performance. They also fail to take into consideration risk, return composition, and the value adds of yield-enhancement measures. Let's go a little deeper.<h2>Base yield</h2>The minimal risk of the base yield mechanism is a basic premise of principal-protected yield products. While no approach is ever totally risk-free, the R-Earn vault is very liberal with the phrase "principal protected." The vault obtains its yield from centralized market makers and bears credit risk. Maple Finance has a similar business strategy and was confronted with catastrophic uncertainty throughout the recent Three Arrows Capital insolvency crisis.Last month, Wintermute, one of R-Earn's major borrowers, was hacked for $160 million. Wintermute's capacity to repay the loan and interest remained fairly stable, and R-Earn money remained secure. Nonetheless, this circumstance highlights Ribbon's place on the risk curve in comparison to other products of its type. R-Earn vault depositors take on more risk than other principal-protected products in exchange for higher returns. The borrowing rate of 9.75% is more than three times the existing base yield for Vovo and Brahma. This provides for greater flexibility in vault architecture.<img src="https://lh3.googleusercontent.com/TgW1VAfYqY0Q3CTpv4yf7cB0mc0Pb2InAwCTwZhlMF5g5omyvk2qsVGkpoCelnqv5OS4UOmWbpVY4Cq78X-WjTfV178Dah6bEMnIIu7azNwfNjHXhRGXledR4OP8_f6j2rNJPkeG6Wd7qCG_9j1fH5PXQ-_YQBF6jREXKT-uB-IzTKSdI5V3waeJ1_P_dQ" width="624" height="299">Source: Delphi digitalWith the logical principal-protected concept, Brahma and Vovo stay more consistent with their brand. However, f or any stablecoin in their Curve pools, they continue to incur peg risk. Despite being a minor risk, it should be noted given the nature of the product. These products also depend on yield that is nearly completely made up of governance token rewards. The basic yield for each yield avenue is displayed in the above graph. After incentives are taken away, the dotted lines show the Curve pools' organic revenue. Increased CRV rewards support the returns from this safe but insufficient yield source. The base yield should ultimately come from a more sustainable technique but it is acceptable for the time being.<h2>Surplus yield</h2>The vault's base yield serves as a threshold rate that it must surpass in order to be worthwhile. It is expected that the principal-protected product that regularly generates meaningful excess returns will prevail.It makes sense to predict that excess return would eventually trend to zero given the vault structure of Vovo and the PvP nature of trading. What has the outcome been thus far?The larger crypto bear market appears to reveal itself solely through a higher upside of down vaults. Overall, it appears that the vaults functioned similarly. Because vault success is mostly determined by short-term price movements, it is critical to avoid overanalyzing these outcomes. However, we would prefer to see the vaults outperform the Curve yield in aggregate.<img src="https://cdn.builder.news/news/11ed5e6eb3ec3b0fa8e6023f659fee92.png" alt="" class="lykafe4">Vovo Vaults PerformanceThe sample period's generally negative price movement appears to have had minimal influence on liquidation rates and vault returns. A user that splits 50% of their cash between an up/down vault incurs a little loss when compared to the base yield. This implies that it is ultimately up to the user to earn extra profits through vault selection. While Vovo may not give an objective advantage to a passive, unsophisticated consumer, it does provide a uniquely configurable yield and a tool to express market views with minimum consequences.The architecture of Brahma's Protected Moonshots v1 vault was identical to that of Vovo. The moving average trading algorithm and the usage of stop-loss orders enabled Brahma to outperform Vovo. In 8 of 12 weeks (66%), the trading algorithm predicted the proper trade direction. Because of the stop-losses, the yield floor was half the base yield. Even in terrible weeks, the principal of the Protected Moonshots vault grows.The second version of Protected Moonshots included a more robust, discretionary seeking mechanism. When required, the algorithm will choose a more conservative compounding strategy over a riskier trade. This helps to alleviate the zero-sum PvP aspect of v1 and Vovo.<img src="https://cdn.builder.news/news/11ed5e6eb3ec4529a8e6023f659fee92.png" alt="" class="lykafe5">Although v1 beat v2 in the early months, projecting moving average trading performance is naive. The v2 vault architecture is more long-term sustainable, as indicated by its greater Sharpe Ratio when compared to the v1 time period. The Sharpe Ratio is a risk-adjusted return statistic that shows an investment's extra return per unit of risk. When purchasing options, the vault relinquishes the downside protection that was useful in v1. Buying options that expire OTM results in a week of lost yield, explaining the lower Sharpe Ratio.The Sharpe Ratio is the most significant parameter to consider when analyzing principal-protected yield products. The second is base yield multiplier.Ribbon's R-Earn vault went live in September and has worked admirably. The first period returned 0.78%, equating to a 10.1% APR (10.6% APY). The vault returned 1.34% in the first seven weeks, amounting to a 9.9% APR. In five of the seven weeks, the vault's knock-out barrier options expired in the money.This performance is consistent with the backtest's predictions. From January 21 to September 22, the R-Earn vault earned 17.23%, for an APY of 10.37%. This is a modest 1.02x multiplier over the basic return and provides a very minor improvement above the 9.75% APR borrow rate (10.2% APY).Principal-protected vaults may appear to be a minor upgrade over the status quo. Perhaps it is preferable to think about them from the perspective of a larger portfolio. During a protracted bull market, a 10% exposure to the Vovo ETH Down vault would reduce portfolio standard deviation significantly greater than a 10% allocation to stables. As DeFi grows, modern portfolio theory, diversification, and enhanced risk indicators are expected to become key narratives. Principal-protected products go in perfectly with this theme. Exposure to high-risk strategies that would otherwise be inappropriate for the majority of users is an overlooked feature of these services.ConclusionRibbon's R-Earn vault is the most advanced, with a full stack of remarkable, organic yield. When it comes to vault architecture, credit risk assumption, and yield reliance on centralized market makers, the R-Earn vault utilizes the phrase principal-protected fairly liberally.The most secure options are Vovo and Brahma, which provide a full stack of crypto native yield. Of the three protocols, Brahma produced the largest surplus yield.Vovo has the most dubious fee structure of the three. It is challenging to justify a management fee when evaluating the ease of the base yield approach and the manual nature of surplus yield. The value proposition of principal-protected vaults is derived from the surplus yield, therefore a performing fee is more sensible.Brahma's risk management, algorithmic trading bot, and track record are most similar to hedge fund experience, which would justify a 2 &amp; 20 fee structure.In the future, there is a lot of room for innovation and adaptability. Vovo offers other yield-enhancement tools that include GLP, and it is developing new vaults that connect with Primitive Finance and Squeeth. Brahma features principal-protected vaults where risk assets such as MATIC and ETH are stored. Ribbon has stated that it intends to create a comparable vault for ETH and BTC.For a long time, DeFi's calling card was double-digit yields that outperformed the S&amp;P. DeFi must reinvent itself to continue to flourish now that governance tokens have lost their shine and the desire for leverage has waned. Principal-protected protocols represent a promising sector that is only getting started.<div class="pr-block-special">Disclaimer: This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.</div>

DeFi yields have plummeted to modest levels after two years of free money. Depositing money into a Yearn vault at 20% APY appears to be a thing of the past.

DeFi Principal-protected Yield: The solution for risk-averse investors