We all know what a vault is: a protected storage facility, often at a bank or similar institution. The very word conjures images of
Those of us interested in architecture will also associate the term with soaring roofs that give the illusion of reach and infinity.
But few realize that the term evolved from the Latin word "volutus," the past participle of volvere, which means "to roll, turn, revolve." How did this come to mean secure storage? Well, arched roofs look like they're rolling over; they also offer stronger weight-bearing support for underground spaces which eventually took the name of their vaulted ceilings.
The etymology sheds light on a new emerging meaning: On-chain vaults are blockchain-based smart contracts that programmatically maximize yield according to predetermined strategies. In part, they are noncustodial digital wallets that hold assets for users without taking ownership (much like a bank vault); they are also managed funds that aim to optimize return by "rolling" tokens around the decentralized finance, or DeFi, ecosystem to wherever they can earn the best available yield given certain risk parameters.
While these were born in the world of decentralized finance and have been one of the sector's strongest engines of growth over the past year, stepping back we can see how they have the potential to shape the centralized banking of tomorrow.
Essentially, on-chain vaults are a cross between stablecoin custody and active fund management. Only, unlike traditional managed funds, on-chain vaults have minimal counterparty risk as the smart contracts interact directly with yield protocols, and the stablecoins are recoverable 24/7. This exit flexibility also gives users greater choice and capital efficiency in that they can usually redeem or switch between vaults in a matter of seconds. And the amount deposited in vaults can be verified on-chain at any time.
Here's a hypothetical (and simplified) example: I have $1 million of stablecoin USDC just sitting in my wallet,
What's more, I can choose from a range of vault options to reflect my risk preference. Vault managers — known as "curators" since they can't actually access the funds — design the allocation parameters, choosing which markets to include, how capital is distributed, fees, compliance requirements and risk management frameworks. Some limit distribution to low-risk strategies, such as lending protocols that only accept high-quality collateral with a low loan-to-value ratio. On
Or, I could accept higher risk to maximize my return and choose a vault that distributes among less liquid opportunities, generating 7% or more.
Of course, there are risks. Even for well-managed vaults, liquidity could become an issue in a market crash. Smart contracts can have bugs. Not all curators have the same level of transparency and reliability.
But, on the whole, vaults offer users the benefits of managed yield without many of the frictions and risks present in traditional funds. They
What does this have to do with banking?
To see how natural a fit the concept is, let me describe my ideal bank app: It would combine safekeeping and convenience with yield, letting me access my dollars on demand while earning me the highest return possible given my risk preferences.
As the Senate Banking Committee stands poised to mark up crypto market legislation within days, banks are focused on blocking crypto exchanges from offering rewards on stablecoins, which they fear could siphon deposits away from community banks.
Today, that does not fit into the banking business model. But tomorrow it could, as on-chain financial services continue to grow and as current friction barriers such as compliance and reconciliation become increasingly streamlined and automated.
Furthermore, the adoption of on-chain vaults could
And it could enable banks to build new types of lending books, distributing customer stablecoins amongst whitelisted decentralized lending protocols, tokenized private credit funds, direct on-chain collateralized loans or other yield opportunities.
Rather than watch the continued loss of customers to neobanks, crypto platforms and on-chain lenders, the banking industry could go on the offensive and march into territory currently occupied by asset managers, leveraging its regulatory deposit-taking moat as well as new technologies to offer a faster, lower-risk and higher-margin product than traditional money market funds or income ETFs.
Of course, on-chain vaults will not replace traditional lending, trade finance, corporate treasury management and other relationship-based services. But they could allow banks to gradually adapt to the on-chain world by offering new services that fall within the traditional banking framework while
In so doing, they would offer a reminder that, throughout history, technology disrupts but industries can adapt: Music producers embraced new listening formats, camera manufacturers retooled their factories. Or they can refuse to do so and become relics, such as typewriter factories or video rental stores.
Banking has the advantage of having embraced major technology-triggered adjustments many times before, most recently with the move to online and mobile services. It has the chance to do so again, seizing the opportunity of rapidly growing stablecoin adoption and blockchain-based asset markets while opening new on-ramps into crypto markets and
It feels fitting that one of the paths to this convergence potentially lies in dragging the centuries-old concept of bank "vaults" into the digital age by embedding the service in new distribution platforms and combining it with productive yield and compelling convenience.
