Key Takeaways
- • More than $10bn is now deposited in crypto lending vaults, up from $4bn at the start of last year, according to data group Blockworks.
- • Vaults are DeFi lending products run by a "curator" who selects strategy, sets risk parameters and takes fees, typically offering 3-10% returns, with riskier strategies reaching 20% or more.
- • US and European regulators are examining whether vaults require supervision: the SEC said in July it was studying securities-law implications, and ESMA proposed in September regulating "gatekeepers" serving vault access.
- • Automatic liquidation mechanisms can accelerate market sell-offs, and $972mn was stolen from DeFi platforms in the first half of the year according to TRM Labs.
- • Fintechs holding large stablecoin balances, digital asset treasury companies and hedge funds are the main depositors, according to Steakhouse Financial co-founder Adrian Cachinero Vasiljevic.
Summary
The Financial Times reports that deposits into so-called crypto vaults have grown rapidly, exceeding $10bn from $4bn at the start of last year, according to data group Blockworks. Investors deposit stablecoins and other tokens into strategies that lend or stake assets to traders, earning near-instant interest. Each vault is managed by a curator who functions like a fund manager, choosing the strategy, setting risk parameters and charging fees. Typical returns are 3-10%, above other DeFi lending, while riskier strategies can offer 20% or more.
The FT notes that vaults sit in an unregulated segment of crypto, where investors lack an intermediary and positions can be automatically liquidated. Industry participants cite the 2022 collapses of Voyager Digital, Celsius and Genesis as a warning. Léopold Wenger, digital assets director at Kaiko, said investors focus on interest rates rather than the collateral ratios and liquidity that the public smart contracts expose. Andrew O'Neill of S&P Global Ratings warned that problems can spread faster in DeFi than in traditional markets during stress. Adrian Cachinero Vasiljevic of Steakhouse Financial, the largest vault curator, said fintechs, digital asset treasury companies and hedge funds are the main depositors.
Security and operational risks are also material. TRM Labs data cited by the FT shows $972mn stolen from DeFi platforms in the first half of the year. In March, a hack at the Resolv protocol caused some crypto prices to collapse; the USR token, used as collateral in some vaults with its price hard-coded at $1, was not repriced, leaving vaults unaware of the decline. Some popular Morpho vaults accept illiquid collateral, including a stablecoin backed by other crypto tokens and a token tracking tokenised private credit assets.
Regulators are moving toward oversight. The SEC said in July it was examining how vaults may fall under securities laws; former commissioner Hester Peirce wrote that some vaults may resemble unit investment trusts and that lending strategies carry federal securities implications. In September, ESMA proposed regulating gatekeepers that facilitate access to DeFi services, saying its proposals are relevant to lending vaults. Jonathan Galea of Cahill Gordon & Reindel said curators who actively adjust parameters daily are more likely to be treated like traditional fund managers. Kaiko's Wenger said the main challenge for curators is becoming compliant, a prospect the largely unregulated sector is expected to resist.
The FT notes that vaults sit in an unregulated segment of crypto, where investors lack an intermediary and positions can be automatically liquidated. Industry participants cite the 2022 collapses of Voyager Digital, Celsius and Genesis as a warning. Léopold Wenger, digital assets director at Kaiko, said investors focus on interest rates rather than the collateral ratios and liquidity that the public smart contracts expose. Andrew O'Neill of S&P Global Ratings warned that problems can spread faster in DeFi than in traditional markets during stress. Adrian Cachinero Vasiljevic of Steakhouse Financial, the largest vault curator, said fintechs, digital asset treasury companies and hedge funds are the main depositors.
Security and operational risks are also material. TRM Labs data cited by the FT shows $972mn stolen from DeFi platforms in the first half of the year. In March, a hack at the Resolv protocol caused some crypto prices to collapse; the USR token, used as collateral in some vaults with its price hard-coded at $1, was not repriced, leaving vaults unaware of the decline. Some popular Morpho vaults accept illiquid collateral, including a stablecoin backed by other crypto tokens and a token tracking tokenised private credit assets.
Regulators are moving toward oversight. The SEC said in July it was examining how vaults may fall under securities laws; former commissioner Hester Peirce wrote that some vaults may resemble unit investment trusts and that lending strategies carry federal securities implications. In September, ESMA proposed regulating gatekeepers that facilitate access to DeFi services, saying its proposals are relevant to lending vaults. Jonathan Galea of Cahill Gordon & Reindel said curators who actively adjust parameters daily are more likely to be treated like traditional fund managers. Kaiko's Wenger said the main challenge for curators is becoming compliant, a prospect the largely unregulated sector is expected to resist.
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