Vault
A smart contract that accepts deposits and runs a defined strategy with them automatically, issuing shares that track each depositor's stake.
Yield vaults pool deposits, execute a strategy such as supplying a lending market and reinvesting rewards, and account for each depositor with a share whose redemption value rises as the strategy earns. Collateral vaults are a different use of the word, describing the contract that holds a borrower's collateral against tokens minted from it. Vaults typically charge a management or performance fee and are controlled by an administrative key or governance process that can change the strategy, pause deposits, or upgrade the code. Unlike a regulated fund, there is no manager with fiduciary duties, no prospectus, and no independent custodian, so a depositor's protection is the code and whatever the controlling parties choose to do.
In practice
An auto-compounding vault harvests reward tokens on a schedule, swaps them back into the deposited asset, and reinvests, saving each depositor from doing this individually.
The common misunderstanding
A vault is not a managed fund with legal obligations to depositors; it is code plus, in most cases, administrative keys able to change what the code does.
The figure this maps to
The dollar value of assets currently deposited in a protocol's or a chain's smart contracts.
Limits: TVL rises and falls with the price of the deposited assets even when nobody deposits or withdraws anything, so a large part of any move is a price index rather than a flow. Double counting is routine: a deposit that mints a receipt token which is then deposited elsewhere is counted in both places,…