Vaults are a decentralised finance twist on lending. They run on public code instead of brokers, but each pool has a curator who behaves like a fund manager by picking the playbook, defining risk limits and taking a cut. Users connect a wallet, choose a strategy and start seeing interest almost right away.
Why the surge in deposits? Digital asset holders are trying to squeeze extra income from stablecoins by lending to traders. Per Blockworks, deposits have risen above $10bn, after starting last year at $4bn. Typical approaches involve lending or staking for 3 to 10 percent, while stretch-for-yield variants can top 20 percent.
Backers see vaults as paving the way to tokenise and trade legacy instruments - like stocks and investment funds - on blockchains. Steakhouse Financial is the largest curator, and co-founder Adrian Cachinero Vasiljevic said the biggest users today are fintechs with large stablecoin balances, digital asset treasury firms and hedge funds.
The pitch is control and transparency, but the trade off is speed and self help. Vaults give lenders more say over collateral than many DeFi alternatives, yet they also use rules that can liquidate positions quickly when conditions sour. That can magnify a sell off because portfolios are unwound in a hurry.
The 2022 failures of Voyager Digital, Celsius and Genesis still loom large, and critics see vaults funnelling money into one of the riskiest, unregulated corners of crypto where there is no market intermediary to protect investors and liquidations are automatic. Léopold Wenger, who serves as digital assets director at the research firm Kaiko, said, "It's very risky." He added that while everything is encoded for all to see, most investors ignore key metrics and simply chase yields: "One of the biggest paradoxes is everything is public because everything is encoded in the smart contract, [but] none of the investors read or understand the ratios, the liquidity rates, they just have a look at the [interest] rates."
Complex collateral adds to the fragility. A popular vault on Morpho lends the USDG stablecoin against a combination that includes a stablecoin backed by other crypto tokens rather than government currencies, plus another token tied to a portfolio of tokenised private credit.
Then there is operational risk. Coding flaws can be just as dangerous. A March breach at the decentralised protocol Resolv set off sharp declines across parts of crypto.
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Some vaults took the USR token as collateral, with its price fixed in code at $1, which meant those systems did not recognise that USR had actually fallen after the attack. Andrew O'Neill, S&P Global Ratings' digital assets analytical lead, said, "In a stress scenario, things can shift very quickly," adding that problems in decentralised finance can spread "much faster" than in traditional markets.
Regulators are asking whether this activity needs a rulebook. In July, the US Securities and Exchange Commission said it was examining how vaults might sit inside existing securities laws.
Across the Atlantic, the European Securities and Markets Authority proposed in September to regulate "gatekeepers," entities that facilitate transactions or "act as an intermediary" between clients and DeFi services, to curb consumer, operational and smart contract risks. ESMA told the Financial Times its proposals "are relevant to lending vaults" when crypto providers enable access to them.
That puts curators squarely in the spotlight. Jonathan Galea, partner at Cahill Gordon & Reindel, said those "who are constantly on a day-to-day basis fine-tuning the parameters and being there on a daily basis for the movement of assets" are "more likely" to be viewed like traditional fund managers and could face corresponding rules. For a sector that prefers minimal oversight, that is the headache: as Kaiko's Wenger put it, for curators the "biggest risk is tomorrow they have to become compliant."
In plain English: vaults have swelled past $10bn by offering higher yields on stablecoins, but the machinery that makes them work - fast liquidations, complex collateral and code risk - can turn a wobble into a wipeout. Add in $972mn lost to DeFi hacks in the first half and a March incident where price assumptions hid real losses, and the risk stack is not theoretical.
The bottom line: with the SEC probing how vaults fit under securities law and ESMA sketching rules for DeFi "gatekeepers," the operating environment could shift. If you are tracking crypto credit exposure in your portfolio, watch the trio of variables that matter here - yield, liquidation rules and regulatory trajectory - because changes in any one of them can move the others.
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