The on-chain vaults sector is a high-conviction investment theme, with analysts predicting 2026 will be "the year of the vault" as platforms like Kraken integrate them to offer simple DeFi yields. This growth is driven by the "DeFi Mullet" thesis, where established fintech companies use DeFi as a backend infrastructure layer. To gain exposure to this trend, consider investing in the foundational "borrow-lend" protocols like Aave (AAVE) that generate the underlying yield for these vaults. Another key protocol to watch is Morpho (MORPHO), a more modular lending platform that is also being heavily integrated into new vault strategies. When evaluating any yield product, always verify if the return is paid in a stablecoin like USDC or subsidized by more volatile protocol tokens.

Investment Theme: On-chain Vaults

• On-chain vaults are presented as a major growth area in Decentralized Finance (DeFi). They are described as a technology layer that sits on top of core DeFi protocols (like lending platforms) to package complex strategies into simple, yield-generating products for users.
• The host initially predicted the vault market would grow from $6 billion to $15 billion in TVL (Total Value Locked). The guests were significantly more bullish, suggesting that number was too low and that 2026 will be "the year of the vault."
• The primary driver of this growth is the "DeFi Mullet" thesis: "FinTech in the front, DeFi in the back." This means established companies like exchanges and fintech apps will use vaults to offer DeFi yields to their massive user bases through simple, familiar interfaces.
• The yield for these vaults primarily comes from lending activity on-chain. Borrowers, often seeking leverage, pay interest to borrow stablecoins like USDC, and this interest is passed on to the vault depositors.

Takeaways

• High Growth Sector: The on-chain vault ecosystem is identified as a key theme for significant growth in the crypto space. Investors should pay attention to platforms and infrastructure providers in this area.
• DeFi as a Backend: The future of DeFi may be as an infrastructure layer powering traditional financial applications, rather than a standalone consumer-facing system. The most successful applications may be those that seamlessly integrate DeFi's power into existing, easy-to-use platforms.
• Source of Yield: The yields are generated from real economic activity (on-chain borrowing and lending), which is a more sustainable model than the opaque strategies used by failed platforms like Celsius and BlockFi.

Company: Kraken (Private)

• Kraken is launching a new product, Kraken DeFi Earn, which utilizes on-chain vaults to provide users with access to DeFi yields directly within the Kraken platform.
• Their strategy is to be an aggregator, using a multi-protocol and multi-chain approach by partnering with infrastructure provider Veda. This is designed to source the best possible risk-adjusted yields from across the entire DeFi ecosystem, including protocols like Aave and Morpho.
• This approach is contrasted with Coinbase's strategy, which is described as more of a "first-party" or vertically integrated model, primarily using protocols and chains within its own ecosystem (Base, Morpho).
• The product is non-custodial, meaning Kraken does not take control of user funds. It uses an embedded wallet solution from Privy so that users maintain ultimate control over their assets on-chain.

Takeaways

• Strategic Shift: Kraken is making a significant push to integrate DeFi directly into its platform, aiming to capture the demand for on-chain yield. This could enhance its competitive position against other exchanges.
• User Experience Focus: By partnering with Veda and Privy, Kraken aims to solve a major pain point in DeFi: complexity. They are offering a simple, one-click experience to access diversified DeFi yields without users needing to manage their own wallets, bridge assets, or interact with multiple complex protocols.
• Superior Yield Potential: The podcast argues that Kraken's multi-protocol strategy is "fundamentally in long term, a more advantaged approach" because it can source yields from a wider variety of sources, potentially leading to more sustainable and higher returns than a closed ecosystem.

Company: Veda (Private)

• Veda is the underlying infrastructure provider for Kraken's new vault product. They are positioned as a "technology platform" or "SaaS company" for DeFi.
• Veda's key innovation is providing a framework for multi-protocol and multi-chain vaults. This means a single Veda vault can allocate capital to various DeFi protocols (Aave, Morpho, Pendle) across different blockchains to optimize yield.
• Their business model is to provide the core vault infrastructure to distributors (like Kraken, Robinhood, etc.), who then offer the final product to end-users. Veda takes a small portion of the performance fee generated by the vaults.
• The guest from Veda stated that their infrastructure is already battle-tested, having managed up to $6 billion in TVL at its peak.

Takeaways

• Key Infrastructure Player: Veda represents a critical "picks and shovels" play on the growth of on-chain vaults. While not directly investable for the public (it's a private company with no token), its success is a strong indicator of the "DeFi as a backend" trend.
• The Aggregation Layer is Crucial: The discussion highlights that as DeFi becomes more fragmented with many protocols and chains, an aggregation layer like Veda becomes essential for institutions and users to efficiently access the best opportunities.
• Competitive Advantage: Veda's ability to create vaults that allocate to other vaults (e.g., a Veda vault allocating to multiple Morpho vaults) demonstrates a powerful level of abstraction and flexibility that single-protocol solutions lack.

Protocols: Aave (AAVE) & Morpho (MORPHO)

• These are mentioned as two of the foundational "borrow-lend" protocols that generate the underlying yield for many vaults.
• Aave (AAVE): Described as an "OG" protocol with large, pooled liquidity. It is simple and battle-tested but offers less flexibility in terms of risk management (e.g., you cannot choose which collateral you lend against).
• Morpho (MORPHO): Introduced a more "modular" approach with isolated lending markets (e.g., ETH/USDC). This offers more customization but creates fragmentation, which in turn creates the need for vaults to aggregate liquidity across these markets.
• It was noted that some yields on competing products (like Coinbase's) are subsidized with the MORPHO token, meaning the "real" USDC yield is lower than the advertised rate.

Takeaways

• Underlying Yield Source: The health, security, and borrowing demand on protocols like Aave and Morpho are fundamental to the entire vault ecosystem. The yields offered by vaults are directly dependent on the rates these protocols can command.
• Ecosystem Dynamics: The evolution from Aave's pooled model to Morpho's modular model illustrates the trend towards more specialized and customizable financial products in DeFi, which reinforces the need for aggregation layers (vaults).
• Check the Yield Source: When evaluating a yield product, it's important to understand if the yield is paid in the deposited asset (e.g., USDC on USDC) or if it's subsidized by protocol tokens (like MORPHO), which adds price volatility and complexity.

Investment Theme: Risk & Due Diligence

• The podcast strongly differentiates on-chain vaults from failed CeFi platforms like BlockFi and Celsius. The key difference is transparency and non-custodial control—with vaults, assets are verifiable on-chain, and the user retains ownership.
• However, vaults are not risk-free. The three main buckets of risk identified were:
  1. Smart Contract Risk: The risk of a hack or bug in the code of the vault itself or any of the underlying DeFi protocols it interacts with.
  2. Liquidity Risk: The risk of being unable to withdraw funds immediately if there isn't enough available capital in the pool at that moment.
  3. Bad Debt Risk: The risk that a rapid crash in collateral prices leads to under-collateralized loans within a lending protocol, causing losses for lenders (and thus, the vault).
• Risk Managers (also called Curators) like Chaos Labs, Centora, Gauntlet, and Steakhouse are crucial. These firms are responsible for designing and actively managing the vault's investment strategy to mitigate these risks.

Takeaways

• Not Risk-Free: While more transparent than CeFi, DeFi yield products carry their own unique risks. Investors should not treat them as equivalent to a traditional high-yield savings account.
• Reputation Matters: The security of a vault depends heavily on the quality of its infrastructure provider (e.g., Veda) and the expertise of its risk manager (e.g., Chaos Labs). Look for platforms that use battle-tested, reputable partners.
• The Suits Are Coming: The podcast predicts that traditional asset managers (BlackRock was mentioned) will enter the vault space to compete with crypto-native risk managers, validating the market's potential.