In today’s newsletter, RockawayX’s Nassim Alexandre walks us through crypto vaults, what they are, how they work, and risk assessment.
Then Lucas Kozinski of Renzo Protocol answers questions about decentralized finance on Ask an Expert.
– Sara Morton
Understanding Vaults: What Happens Beyond Performance
Capital flowing into cryptocurrency vaults surpassed $6 billion last year, and projections indicate it could double by the end of 2026.
With that growth, a stark divide has emerged between vaults with solid engineering and controls and vaults that are essentially performance packages.
A crypto vault is a managed fund structure implemented on-chain. An investor deposits capital, receives a token representing his or her share, and a curator allocates that capital according to a defined mandate. The structure can be custodial or non-custodial, redemption terms depend on the liquidity of the underlying assets, and wallet rules are often hard-coded directly into smart contracts.
The central question around the vaults is exposure: what am I exposed to and can it be more than what I’m told? If you can explain where the performance comes from, who owns the assets, who can change the parameters, and what happens in a stress event, you will understand the product. If you can’t, the headline result is irrelevant.
There are three levels of risk worth understanding.
The first is smart contract risk: the risk that the underlying code will fail. When was the last audit? Has the code changed since then? Assignment controls are also located here. Adding new collateral to a well-designed vault should require a time lock that allows depositors to see the change and exit before it takes effect. Strategy changes should require approval from multiple firms.
The second is the risk of the underlying assets: the credit quality, structure and liquidity of whatever the vault actually holds.
The third underestimated risk is that of redemption: under what conditions can the capital be recovered and how quickly? Understand who handles liquidations in a downturn, what discretion they have, and whether the manager commits capital to support them. That distinction is most important at the exact times you’d like to leave.
The quality of a vault depends largely on the quality of its conservation. A curator selects which assets are eligible, sets parameters around them, and continually monitors the portfolio.
For example, most current real-world on-chain asset strategies are single-issuer, single-fee products. In contrast, a curated vault combines multiple vetted issuers under active management, providing diversified exposure without having to manage the credit risk of a single name yourself.
Then there is continuous monitoring. Default rates change, regulations change, and counterparty events occur. A curator who treats risk assessment as a one-off exercise is not managing risk.
What sets crypto vaults apart from a traditional fund is transparency; Investors don’t have to take the curator’s word for it. Every assignment, position, and parameter change happens on-chain and is verifiable in real time. For advisors familiar with private credit, the underlying collateral may be recognizable. What requires attention is the structuring of the chain around it: whether you have genuine recourse, in what jurisdiction and against whom. That’s where the curator’s experience matters. A curator is the risk manager behind a vault. They decide which assets are eligible, establish the rules within which the capital operates, and actively manage the portfolio.
Selected vault strategies typically target between 9% and 15% annually, depending on mandate and assets. That range reflects the generation of risk-adjusted returns within defined constraints.
Vaults also allow for a more efficient way to access assets already assigned to you, with capabilities that traditional structures don’t offer. For family offices that manage liquidity across multiple positions, this is a practical operational improvement.
The key is composability. On-chain, a vault can allow you to borrow against a collateral position directly, without the documentation overhead of a traditional loan facility. For family offices that manage liquidity across multiple positions, this is a practical operational improvement.
Permitted vault structures are also noteworthy as they allow multiple family offices or trustees to deposit funds into a single managed mandate without mixing, each retaining separate legal ownership while sharing the same risk management infrastructure.
The vaults that survive this scrutiny will be those where the curator’s engineering, mandate, and judgment are built to hold up under pressure.
– Nassim Alexandre, Vault Partner, RockawayX
ask an expert
Q: With “yield stacking” and many layers of decentralized finance (DeFi) protocols, what is needed to mitigate risk in vaults?
The first thing is to minimize complexity. Each additional protocol in the stack is another attack surface. So if you don’t need it, cut it. We will not deposit into protocols that have discretionary control over funds, meaning they can move capital wherever they want without user consent. We want transparency around what other protocols are doing with our capital, but privacy around our strategies so others can’t see any ownership.
Beyond that, it all comes down to transparency and timing. Users should always be able to see exactly where their funds are and what they are doing. And any parameter changes (rates, strategies, risk limits) must go through a time lock so that people have a window to review and react before something is triggered. Smart contract audits are also important, but they are a baseline, not a safety net. The architecture has to be solid even before the auditor shows up.
Q: At what point does the influx of institutional capital compress DeFi returns to the level of traditional risk-free rates and where will the next “alpha” be found?
It will eventually happen in the most liquid and simple strategies. But this is what traditional finance (TradFi) cannot replicate: composability. The underlying instruments may be identical (take the USCC carry trade as an example), but in DeFi you can plug that same position into a lending market, use it as collateral, provide liquidity to a DEX pool, and do all of that simultaneously. That is not possible in TradFi without significant infrastructure cost.
The alpha will not disappear. It will simply pass to whoever builds the most efficient capital pathways between strategies. People who figure out how to stack returns in composable layers while managing risk appropriately will consistently outperform. And that gap between DeFi and TradFi infrastructure costs alone keeps the spread wide for a long time.
Q: How will integrating real-world assets (RWA) into automated vaults change the correlation between cryptocurrency returns and global macroeconomic interest rate cycles?
Yes, cryptocurrency returns will become more correlated with the macro as RWAs come in. That’s the nature of bringing rate-sensitive assets onto the chain. But I think people underestimate the other side of that trade-off.
Before RWAs, cryptocurrency holders had a binary choice: hold the stables on-chain and earn native cryptocurrency returns, or withdraw everything and deposit at a brokerage. Now you can maintain on-chain stables and access the same strategies you would find on TradFi, without leaving the ecosystem. And, more importantly, you can layer them: borrow against your RWA position, deploy that capital in a lending market, LPs against pools that use these assets as collateral. The capital efficiency gained with that type of setup is simply not available in traditional finance. So yes, more macro correlation, but also more options on where to deploy capital, which should drive rates higher over time as liquidity deepens.
– Lucas Kozinski, co-founder of Renzo Protocol
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