Entering decentralized finance (DeFi) can feel like stepping into a whole new universe.

And within this vast space lies the city of Solana's blockchain.

You've heard that this city is where it's at for DeFi yield opportunities. True enough, everywhere you look, there are signs screaming “Earn here!” left and right. This city is booming with financial opportunities, with countless buildings representing lending protocols, each offering different yields and risks.

Yet amidst the excitement, it all seems confusing.

For both seasoned DeFi explorers and wide-eyed beginners alike, the complexities of DeFi can be intimidating and overwhelming—leaving our capital inefficient, illiquid, and/or at risk.

This is the problem that Meteora is solving with its Dynamic Vaults.

I. Introducing: Meteora’s Dynamic Vaults

With Meteora’s Dynamic Vaults—equipped with cutting-edge algorithms and real-time data from multiple DeFi protocols, it’s like having a blueprint to this new unfamiliar city.

Like a well-informed city guide, it leads you directly to the paths with the highest yields and the safest havens for your hard-earned tokens. The Dynamic Vaults is also updated on the ever-changing yields and risks across different DeFi protocols, making sure your funds are always in the right place at the right time.

Dynamic Vaults brings automation and strategy together to help you on your quest for getting the best yields.

I-A. How It Works

Ultimately, the Dynamic Vaults work because of its 3 main components:

VAULT - where funds are pooled per token
KEEPER (aka HERMES) - acts as the manager of the pooled funds
Software Development Kit (SDK) Module - enables the connection between the vaults and protocols

Now, let's walk through the flow of the Dynamic Vaults to gain a better understanding of its components and its functionalities.

Imagine yourself as a newcomer in a bustling new city, feeling lost and overwhelmed.

As we’ve established earlier, this is a common scenario in the complex world of DeFi. This is also one of the reasons why there's a huge capital inefficiency on DeFi today.

However, with Meteora's Dynamic Vaults, you can have peace of mind, as you are provided with a trusty vault right beside you. This is how you can utilize it:

1/ VAULT - where funds are pooled

FLOW 1 - Vault Deposits and Fund Pooling

As a user looking to put your idle funds to work, you decide to deposit your USDC into Meteora Dynamic Vaults by interacting with Meteora's interface and initiating the deposit process.

Meteora then adds the user's deposited USDC to a dynamically managed capital pool, also known as a Dynamic Vault. The Dynamic Vault pools together contributions from multiple users, creating a larger combined capital pool for optimized yield opportunities.

(A vault is a secured pool of all the funds deposited by users into Dynamic Vaults. Each vault inside the Dynamics Vaults represents a single token asset, meaning there’s one vault for all USDC deposits, one vault for all SOL deposits, and so on)

2/ KEEPER (aka HERMES) - automated fund manager

FLOW 2 - How it maximizes yield with Yield Optimization and Calculation

Simultaneously, the Keeper continuously monitors real-time data, including annual percentage yields (APYs), utilization rates, and liquidity in various lending pools. Based on these data, it devises a strategy that optimizes your deposits in the vault, aligned with the predefined risk management strategies.

It comes up with a strategy so any amount you deposit into the vault will

generate maximum yield,

provide maximum liquidity, and

maintain minimum risk exposure

It knows the different yields and risks per protocol by the minute and then handles any rebalancing needed by each minute.

Hermes then calculates the liquidity allocation across lending platforms that will generate the most optimal overall APY for the vault.

FLOW 3 - How it maximizes liquidity with Risk Mitigation

Alongside yield optimization, Hermes monitors the health and security of the lending protocols.

If a protocol's utilization rate or reserve levels reach predetermined thresholds, Hermes withdraws funds from the protocol to safeguard against risks.

So throughout the process, the user retains full liquidity access to their deposited tokens.

The user can withdraw their funds at any time, and Meteora ensures that there is enough liquidity available in the lending protocols to accommodate user withdrawals.

3/ SDK MODULE - enables the connection between vaults and protocols

FLOW 4- Liquidity Allocation and Rebalancing

To support composability, their SDK Module is designed so apps, protocols, and wallets can effortlessly integrate with the Dynamic Vaults. This means more vault-protocol connections can be enabled.

Now with the power of automation, the SDK Module that integrates the Dynamic Vaults with protocols will execute the Keeper's strategy. Through simple API calls, liquidity can be seamlessly deposited into or withdrawn from the vaults, offering a user-friendly experience.

Hermes then dynamically allocates the pooled capital across the selected lending protocols to maximize yield generation.

If market conditions or protocol performance changes, Hermes triggers rebalancing by moving capital between protocols to adapt to the most lucrative yet safest opportunities.

Truly, the Dynamic Vaults easily optimizes the potential of your idle capital. No amateurs when it comes to increasing capital efficiency with Dynamic Vaults.

FLOW 5 - Yield Distribution

As the lending protocols generate yield, Meteora distributes the earned interest back to the users, reflecting their proportional share of the Dynamic Vault.

I-B. Benefits of Using Dynamic Vaults

Compared to directly participating in DeFi protocols as a liquidity provider:

Meteora's Dynamic Vaults go beyond just considering the APY per protocol. It also takes into account various parameters like integration and lending protocols assessment.
Manually monitoring protocol APYs and other metrics around the clock for the best opportunities is practically impossible. Dynamic Vaults automate this process, ensuring you don't miss out on great opportunities.
Keeping track of your deposited funds on a protocol manually is impossible. Dynamic Vaults handle this task for you, providing real-time monitoring and proactive risk management. DeFi protocols will always be susceptible to exploits, which can occur at any moment, disrupting the market within an instant. Dynamic Vaults protect your funds by swiftly responding to such unforeseen events and adjusting strategies accordingly.

II. Risk Mitigations

II-A. Design

As mentioned in Flow 3 - Risk Mitigation, alongside yield optimization, Hermes monitors the health and security of the lending protocols. Here are the risk assessments made by the Keeper program:
- Before liquidity allocation - All lending protocols are assessed beyond just its APYs. As indicated on the Dynamic Vaults whitepaper, protocols are assessed based on a set of criteria including the existence of audits, open-source code, insurance funds, main token pools, program multi-signature / verified & non-updatable status, as well as the length of integration with Meteora.
- Before each rebalancing - Hermes possesses the capability to reduce investment risks by continuously monitoring key risk parameters, primarily focusing on pool utilization. When these thresholds are approached or exceeded, automatic withdrawals are initiated.
Hermes is restricted from withdrawing funds from lending protocols to external wallets. The Keeper is solely permitted to make deposits following predefined strategies and is unable to claim tokens. So in the unlikely event of a hack, the hackers' influence would be limited to managing the flow of funds between the vaults and lending protocols; the principal funds remain secure within either of these locations.
Sandwich Attack Prevention Design - as documented on the Dynamic Vaults whitepaper, instead of distributing 100% of the yield generated by the lending platforms to the LPs immediately after rebalancing, the system will drip the yield to them across a pre-determined period of time. All earned profits from strategies are locked by default and will be subjected to a locked profit degradation rate where profit will be unlocked at a specified percentage per second. So in Flow 5 - Yield Distribution, the generated yield is actually released to the liquidity providers over a predefined period.
Audited by
- Quantstamp - 0 unresolved, 5 acknowledged, 17 resolved issues
- Halborn - 2 accepted risks (both low risk), 1 for future release, 1 acknowledged, 2 resolved issues
- Oak - 0 pending, 9 acknowledged, 17 resolved issues
Meteora, formerly known as Mercurial Finance, has undergone extensive beta testing on Mainnet, proving its resilience against real-world exploits. The team's hard work has yielded a valuable platform for Solana and the wider crypto space, highlighted by their Dynamic Vaults protocol.
The $MET governance token is designed to empower the community to govern various critical aspects, such as risk assessment parameters, allocations, fee structures, and more. Through this token, the community will have the authority to set or modify these criteria, ensuring a decentralized and participatory approach to decision-making.

II-B. Risk Mitigation in Action

How effective were the these risk mitigation designs? Let's look at these real-world exploits affecting Meteora's Dynamic Vaults:

1/ Mango Markets Exploit - On October 11 2022, a team comprising of trader named Avraham Eisenberg manipulated $MNGO token price to drain $115M worth of liquidity from Mango Protocol.

Impact: Since Meteora was still in the Beta testing phase and had imposed deposit limits, the impact was limited. Though 900,000 USDC was locked up in MANGO, these were eventually paid back by MANGO. Loss of funds was ultimately avoided due to Meteora’s proper lending protocol assessment in place.

2/ Solend.fi $USDH Exploit - On November 2, 2022, Solend was attacked by price manipulation of USDH (a stablecoin built by Hubble Protocol) and as a result, lost $1.26M of user deposits.

Impact: Hermes detected high utilization rates (>80%) in Stable and Coin98 pools, triggering an immediate withdrawal request. All UXD assets were safely withdrawn to our vaults before the pools were drained. This safety mechanism prevented user funds from being locked up in Solend, showing the effectiveness of the 80% utilization rate threshold as a trigger for full liquidity withdrawal.

III. 6 Steps to Start Maximizing Your Yield and Liquidity

1/ Go to app.meteora.ag/vaults

2/ Connect your Solana wallet

3/ Select a Vault based on the token you intend to deposit

4/ Enter the deposit amount

5/ Hit the 'Deposit' button and approve the transaction on your wallet

6/ When you see a 'success' pop-up notification, you're done! Congrats, you are now maximizing your yield and liquidity without the worry! Now go touch some grass 😌

IV. Closing Thoughts

In conclusion, Meteora's Dynamic Vaults have successfully addressed the genuine problems and challenges that users face in the complex world of decentralized finance (DeFi).

Not only have they addressed the challenges faced by individual users, but they have also extended their solutions to protocols, wallets, and DAO treasuries, making the platform an all-encompassing solution for optimized yield, liquidity access, and fund safety.

Additionally, the platform's resilience against real-world exploits is a testament to the team's dedication to security and risk mitigation. Meteora team has proven itself as reliable and trustworthy that prioritizes long-term value for its users and the broader DeFi ecosystem.

As the Solana DeFi space continues to evolve and grow, Meteora's Dynamic Vaults stand out as a valuable tool to elevate your Solana DeFi experience. So whether from the perspective of the user, protocol, or DAO, the Dynamic Vaults will offer maximum yield and liquidity without the worry.