The Hot New Trend Is: Vaults
SNL
In case your hobbies don’t include frontier innovations in onchain financial products, I am here to share that the hot new trend is vaults. A vault, if you didn’t know, is essentially an onchain fund, a smart contract whereby you can deposit an asset and, in exchange, receive a token that represents your claim on that deposit. Each vault has a designated strategy that aims to produce a return with the deposited funds, deploying all types of financial tools and methods to achieve said return. Of course, along with this comes the exciting and unique risks of onchain finance, from hacks to anonymous counterparties to grey regulatory guidelines. Here I will aim to distill what these vaults are really about and where it’s all going.
It is worth sizing the market before going further. Morpho, one of the larger vault platforms, was carrying roughly $11.4 billion in deposits and about $7.3 billion in total value locked in late July. All of DeFi is around $74 billion. Set against the $23 trillion parked in global ETFs, that is a rounding error, and that is rather the point. The first U.S. ETF launched in 1993, and the structure needed roughly fifteen years to gather its first trillion dollars. Measured from the arrival of the vault standard in 2022, vaults are somewhere in year four.
A vault can be almost anything. There are vaults wherein you deposit BTC and the BTC is used to accumulate staking rewards from other strategies. There are vaults that pay a credit return for prime broker financing. There are vaults that take PayPal dollars and put them as collateral for BTC and ETH-backed lending facilities. The key insight is that a vault is not a specific strategy; it is a new type of onchain infrastructure.
Why would one want this new infrastructure? Given all the added risks of onchain finance – technical, regulatory, financial – why would someone engage in this line of investment given returns on most vaults sit in the single digits? The answer is threefold:
- Access – Vaults are effectively onchain funds that nearly anyone in the world can access. Depending on the vault, certain levels of AML/KYC access may be required. Often the liquidity and minimum investment size are far more favorable than those of a typical TradFi fund. And the aggregate size of the vaults often affords retail investors access to institutional strategies they could not invest in directly.
- Looping – While headline returns on vaults may look paltry, many vault tokens can be used as collateral for an additional loan that can then be reinvested into the strategy. As such, an 8% yield on a stable strategy can often be looped into something that returns a 20% or greater return. This, of course, adds risk and leverage to a strategy and can also end poorly.
- Capital Formation – The ease of forming and distributing a vault can often be far less than what’s required for a traditional fund. Depending on a firm’s goals and network, an onchain vault can allow for broader reach and administration of an investment fund without as much legal or administrative cost.
Those three are the investor’s reasons for utilizing a vault. There is a fourth that belongs to everyone else, and it may end up being the most consequential: distribution. The fastest growth in vaults is not coming from crypto natives hunting yield. It is coming from consumer apps quietly plugging vaults in behind their own interfaces. Coinbase has routed well over a billion dollars of crypto-backed loans through Morpho. Robinhood launched an Earn product in July that pushes user deposits into Morpho vaults. Kraken embedded vault strategies into its DeFi Earn product, and Gemini, Crypto.com, and Société Générale Forge have all built on the same rails. Almost none of those users know they are in a vault. That is exactly what it looks like when something stops being a product and becomes infrastructure.
If we can agree that vaults are more efficient versions of funds, with greater composability and lower cost, we might ask, where does this all lead? Before our eyes, these products are maturing from crypto-specific products to core financial infrastructure.
Morpho’s Midnight product offers an illustrative example. Morpho started as a traditional, collateralized lending onchain market. One could deposit assets and take out a loan against them. The rate fluctuated in real time based on supply and demand, and the term was always open. From an institutional perspective, this does not appear attractive. Larger firms need predictability in order to finance real work over meaningful amounts of time. The original product was largely for traders but could not service the needs of real companies actually seeking financing.
The company has since added Midnight, which allows for fixed-term and fixed-rate. This significantly broadens the addressable market to more use cases. The major gaps remaining stem from a lack of margin call notice and, potentially, a lack of qualified custodian. Most borrowers in traditional markets expect a margin call period in the case of a drawdown on collateral securing a loan. Further, many companies want tri-party custody on a loan so that the collateral stays within their control and is not pooled with others during the duration of an investment. Nevertheless, what we can see is that onchain markets are converging with traditional finance expectations.
The structure also raises a question that traditional funds answered a century ago: who is actually managing the money? Most large vaults are run by “curators” – firms like Gauntlet, Steakhouse, MEV Capital, Re7, and Block Analitica that set risk parameters, decide which markets to lend into, and take a performance fee. They are asset managers in everything but name and licensing. They sit no exams, file no ADVs, and in some cases do not disclose who they are. When Stream Finance collapsed in late 2025, and its xUSD token fell from a dollar to roughly a third of one, the curators who had chased that yield handed the loss to their depositors. Estimates of the damage ran to roughly $285 million across the ecosystem, including about $137 million of bad debt on Euler alone. The protocols worked precisely as designed. The judgment layer sitting on top of them did not.
Part of the answer is already built. ERC-4626, finalized in 2022, gives every compliant vault the same deposit, withdrawal, and share-accounting interface. That is precisely why a vault token can be dropped into a lending market as collateral without bespoke integration work, and it is the quiet reason the category compounds. What does not yet exist is standardization of the things an investor actually needs: disclosure of holdings, consistent reporting of realized losses, audited track records, and a shared vocabulary for risk. The plumbing is standardized, but the prospectus is not.
If this is the case, then we should expect a standardization of vault products, robust AML/KYC procedures as needed, and platforms that allow for the aggregation and trading of many vaults. This is less speculative than it sounds. In January of 2026, Intercontinental Exchange announced that the NYSE is building a venue for tokenized securities with 24/7 trading, instant settlement, and stablecoin-based funding, and it has since brought on Securitize as digital transfer agent. The incumbents are already laying rail. New competitors are emerging alongside them. Turtle Finance and Upshift offers two such examples. These platform aggregate and build their own vault strategies and curate best-in-class opportunities. This seems like a logical precursor to a fund of funds and/or exchange product that allows for more real-time trading, akin to ETFs on public markets.
If successful, one would expect a sort of Cambrian explosion of trading approaches, bridging from AI-driven trading to prediction markets to traditional project finance investment all appearing in vaults. We will also see sophisticated tranching of risk as is seen in traditional credit markets, with junior and senior pieces paid variable rates and insurance and reinsurance solutions supporting risk-taking.
The reduced barriers to entry and improved capital formation, while still preserving compliant investment approaches, will allow newer and more niche ideas to flourish without years of building track records and expensive formation costs. At the same time, this will produce lower-quality products, major mistakes, and painful losses. We have already had the preview. DeFi’s total value locked has fallen by nearly 40% this year, from about $115 billion in January to around $74 billion at the time of writing, and yet deposits at the largest vault platforms grew, and the institutional integrations kept arriving. That divergence is worth sitting with. The speculative layer and the infrastructure layer have begun to move independently, which is what maturation actually looks like. Increasingly, the individual will have fewer investment protections and be forced to more fully rely on their own judgment and research. Standardization and self-regulatory approaches would go a long way in avoiding much of this pain.
In short, ignore vaults at your own risk. Much like bitcoin or stablecoins, what appeared as a niche trick of the internet will evolve into a key piece of financial infrastructure, forcing incumbents to adapt and opening opportunities for new entrants to capture market share before anyone wakes up.