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We all know what a safe is: a protected storage space, often in a bank or similar institution. The very word conjures up images of
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Those of us interested in architecture will also associate the term with soaring roofs that give the illusion of scope and infinity.
But few people realize that the term derives from the Latin word “voltus,” the past participle of volvere, meaning “to roll, turn, turn.” How did we get to secure storage? Well, the vaulted roofs seem to be tipping over; they also provide stronger support for underground spaces, which eventually took their name from their vaulted ceilings.
The etymology highlights a new emerging meaning: Chain vaults are blockchain-based smart contracts that maximize yield programmatically according to predetermined strategies. These are partly non-custodial digital wallets that hold assets for users without taking ownership of them (much like a bank vault); they are also managed funds that aim to maximize return by “rolling” tokens around the decentralized finance, or DeFi, ecosystem where they can achieve the best available return given certain risk parameters.
Although these were born in the world of decentralized finance and have been one of the most powerful growth engines in the sector over the past year, with hindsight we can see how they have the potential to shape the centralized banking of tomorrow.
Essentially, on-chain vaults are a cross between stable coin custody and active fund management. Only, unlike traditional managed funds, blockchain vaults have minimal counterparty risk because smart contracts interact directly with yield protocols and stablecoins are recoverable 24/7. This exit flexibility also provides users with greater choice and capital efficiency as they can typically swap or switch between vaults within seconds. And the amount deposited into the vaults can be verified on-chain at any time.
Here’s a hypothetical (and simplified) example: I have $1 million worth of USDC stablecoin in my wallet,
Additionally, I can choose from a range of safe options to reflect my risk preferences. Vault managers – called “custodians” because they cannot 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 safe that spreads across less liquid opportunities, yielding 7% or more.
Of course, there are risks. Even for well-managed vaults, liquidity could become an issue in the event of a stock market crash. Smart contracts can have bugs. Not all conservatives have the same level of transparency and reliability.
But overall, 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 the banking sector?
To see how natural the concept is, let me describe my ideal banking app: It would combine security and convenience with yield, allowing me to access my dollars on demand while earning me the highest yield possible given my risk preferences.
Today, this does not fit into the banking economic model. But that could be the case tomorrow, as on-chain financial services continue to grow and current friction barriers like compliance and reconciliation become increasingly streamlined and automated.
Additionally, the adoption of on-chain vaults could
And it could allow banks to create new types of lending wallets, distributing stablecoins to customers across whitelisted decentralized lending protocols, tokenized private credit funds, direct on-chain collateralized loans, or other yield opportunities.
Rather than witness the continued loss of customers to neobanks, crypto platforms, and blockchain lenders, the banking industry could go on the offensive and enter the territory currently occupied by asset managers, leveraging its deposit regulatory moat as well as new technologies to offer a faster, lower-risk, higher-margin product than traditional money market funds or income ETFs.
Of course, blockchain vaults will not replace traditional lending, trade finance, business cash management, and other relationship services. But they could allow banks to gradually adapt to the on-chain world by offering new services falling within the traditional banking framework while
In doing so, they would remind us that, throughout history, technology has disrupted but that industries can adapt: music producers have adopted new listening formats, camera manufacturers have re-equipped their factories. Or they may refuse to do so and become relics, like typewriter factories or video rental stores.
The banking sector has the advantage of having repeatedly experienced major technological adjustments, most recently with the shift to online and mobile services. It has the chance to do it again, seizing the opportunity from the growing adoption of stablecoin and blockchain-based asset markets while opening new on-ramps to crypto markets and
It seems fitting that one path to this convergence is potentially bringing the age-old concept of banking “vaults” into the digital age by integrating the service into new delivery platforms and combining it with productive efficiency and compelling convenience.
