In today’s newsletter, Nassim Alexandre from RockawayX introduces us to crypto vaults, what they are, how they work and risk assessment.
Next, Renzo Protocol’s Lucas Kozinski answers questions about decentralized finance in Ask an Expert.
-Sarah Morton
Understanding Vaults: What Happens Beyond Yield
Capital flowing into crypto vaults exceeded $6 billion last year, and projections indicate it could double by the end of 2026.
With this growth, a clear divide has emerged between safes with robust engineering and controls and safes that are essentially yield wrappers.
A crypto vault is a managed fund structure deployed on-chain. An investor deposits capital, receives a token representing their share, and a custodian allocates that capital in accordance with a defined mandate. The structure can be custodial or non-custodial, redemption terms depend on the liquidity of the underlying assets, and portfolio rules are often coded directly into smart contracts.
The central question around safes is exposure: what am I exposed to and can it go further than what I’m told? If you can explain where the return comes from, who owns the assets, who can change the settings, and what happens in a crisis, you understand the product. If you can’t, returning the title 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? Allocation controls are also found here. Adding new safeguards to a well-designed vault should require time for depositors to see the change and exit before it takes effect. Policy changes should require multi-signature approval.
The second is the underlying risk of the 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 you recover your capital, and at what rate? Understand who manages liquidations during economic downturns, what discretion they have, and whether the manager commits capital to support them. This distinction matters most in the precise moments when you would like to leave.
The quality of a safe largely depends on the quality of its conservation. A curator selects eligible assets, sets parameters around them, and continuously monitors the portfolio.
For example, most on-chain real asset strategies today are single-issuer, single-rate products. In contrast, a curated vault combines multiple select issuers under active management, providing diversified exposure without managing the credit risk of a single name yourself.
Then there is continuous monitoring. Default rates evolve, regulations change, and counterparty events occur. A conservator who views risk assessment as a one-off exercise is not managing risk.
What differentiates crypto vaults from a traditional fund is transparency; investors don’t have to take the conservative’s word for it. Every allocation, position, and parameter change occurs on-chain and is verifiable in real time. For advisors familiar with private credit, the underlying collateral may be recognizable. What requires particular attention is the chain structure that surrounds it: whether you have a real remedy, in which jurisdiction and against whom. This is where the expertise of the curator is important. A custodian is the risk manager behind a safe. They decide which assets are eligible, set the rules under which capital operates, and actively manage the portfolio.
Curated vault strategies typically target 9-15% per year, depending on tenure and assets. This range reflects the generation of risk-adjusted returns within defined constraints.
Vaults also provide more efficient access to the assets you already assign them to, with features that traditional structures don’t offer. For family offices managing liquidity across multiple positions, this is a practical operational improvement.
The key is composability. On-chain, a vault can allow you to borrow directly against a collateral position, without the documentation costs of a traditional lending facility. For family offices managing 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 commingling, with each retaining separate legal ownership while sharing the same risk management infrastructure.
The safes that survive this scrutiny will be those where the engineering, warrant and judgment of the curator are built to withstand the pressure.
– Nassim Alexandre, safe partner, RockawayX
Ask an expert
Q: With yield-stacking and many layers of decentralized finance (DeFi) protocols, what is needed to mitigate risk in the vaults?
The first thing is to minimize complexity. Each additional protocol in the stack constitutes another attack surface. So if you don’t need it, cut it. We will not deposit into protocols that exercise discretionary control over funds, meaning they can move capital wherever they want without user consent. We want transparency about what other protocols are doing with our capital, but also privacy around our strategies so others can’t see anything proprietary.
Beyond that, it’s a question of transparency and time. Users should always be able to see exactly where their funds are and what they are doing. And any setting changes (fees, policies, risk limits) should be subject to a time limit so that users have a window to review and respond before anything goes live. Smart contract audits are also important, but they are a baseline, not a safety net. The architecture must be solid even before the auditor arrives.
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?
This will eventually happen in the most liquid and simple strategies. But here’s what traditional finance (TradFi) can’t replicate: composability. The underlying instruments may be identical – take the USCC carry trade as an example – but in DeFi you can connect that same position to a lending market, use it as collateral, provide liquidity to a DEX pool and do all of this simultaneously. This is not possible in TradFi without a significant infrastructure cost.
Alpha will not disappear. It will simply come down to whoever builds the most efficient capital paths between strategies. People who know how to compound returns across multiple composable layers while properly managing risk will consistently outperform. And this gap between DeFi and TradFi infrastructure costs alone keeps the gap going 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 and more macro correlated as RWAs enter. This is just the nature of on-chaining rate-sensitive assets. But I think people underestimate the other side of this trade-off.
Before RWAs, crypto holders had a binary choice: hold the stables on-chain and earn crypto-native yields, or withdraw everything and deposit at a brokerage. You can now hold on-chain stablecoins and access the same strategies you’ll find in TradFi, without leaving the ecosystem. And best of all, you can add them: borrow against your RWA position, deploy that capital into a lending market, LP against pools that use those assets as collateral. The capital efficiency you get from this type of setup is simply not available in traditional finance. So yes, more macro correlation – but also more choice about where to deploy capital, which should drive rates higher over time as liquidity deepens.
– Lucas Kozinski, co-founder, Renzo Protocol
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