On-Chain Vaults: The Future of Banking?
The term “vault” often evokes images of security and strength. It’s a place where valuables are securely stored, often within a bank or similar institution. However, a new interpretation of the term is emerging in the world of blockchain and decentralized finance (DeFi) that could potentially reshape the future of traditional banking. This new concept is known as on-chain vaults.
What are On-Chain Vaults?
On-chain vaults are blockchain-based smart contracts that are designed to maximize yield according to predetermined strategies. They are essentially digital wallets that hold assets for users without taking ownership, much like a traditional bank vault. However, they also function as managed funds that aim to optimize returns by “rolling” tokens around the DeFi ecosystem to wherever they can earn the best yield given certain risk parameters.
The term “vault” evolved from the Latin word “volutus,” the past participle of volvere, which means “to roll, turn, revolve.” These vaults are essentially doing the same thing, only in a digital realm. By “rolling” tokens around the DeFi ecosystem, they aim to optimize returns.
These on-chain vaults are essentially a hybrid of stablecoin custody and active fund management. 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 around the clock. This exit flexibility provides users with greater choice and capital efficiency as they can usually redeem or switch between vaults in a matter of seconds. The amount deposited in vaults can also be verified on-chain at any time.
The Potential Impact on Banking
While the concept of on-chain vaults was born in the world of DeFi, it has the potential to shape the traditional banking of the future. Today’s banking model doesn’t fit into the concept of combining safekeeping and convenience with yield. However, as on-chain financial services continue to grow and as friction barriers such as compliance and reconciliation become increasingly automated, a new banking model could emerge.
Adopting on-chain vaults could help banks position themselves for greater participation in digital markets. It could provide them with a low-risk and low-cost way to retain users, build new types of lending books, distribute customer stablecoins amongst whitelisted decentralized lending protocols, and open the door to new generations of savers and investors.
The banking industry could leverage 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. In doing so, banks could prevent the continued loss of customers to neobanks, crypto platforms, and on-chain lenders.
Conclusion
On-chain vaults could be the key to banks gradually adapting to the on-chain world. They could offer new services that fall within the traditional banking framework while opening the door to new generations of savers and investors. By doing so, banks could seize the opportunity of rapidly growing stablecoin adoption and blockchain-based asset markets while furthering the convergence of traditional finance and the on-chain world.
It’s fitting that the centuries-old concept of bank “vaults” could be dragged into the digital age by embedding the service in new distribution platforms and combining it with productive yield and compelling convenience. This could potentially pave the way for the future of banking, where technology disrupts but industries can adapt, just as music producers embraced new listening formats and camera manufacturers retooled their factories.
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