How do smart contract vaults work anyway?

Many smart contract projects, like MakerDAO and our project at www.itovault.com , rely on the concept of vaults to work.

Vaults are essentially smart contracts that hold value (often ETH), and then can put this ETH to work in backing something else. In the MakerDAO example, you would put $300 of ETH into a vault, and that vault would be able to issue $200 of DAI (pegged to the USD).

One way to think about vaults is trusted people. Imagine if instead of a vault, it was just a person you trusted that had $300 of ETH, and was willing to redeem your DAI at anytime for $1 worth of ETH. That’s approximately the right concept to think about vaults: a human who will follow fixed rules. Or rather, a robot who will followed fixed rules. Or even better, a program that will verfiably follow fixed rules!