From CoinDesk · By James Van Straten, AI Boost
Crypto vault deposits have grown from $4 billion at the start of last year to more than $10 billion, according to the Financial Times.
Vault curators select lending strategies, set risk limits and collect fees, performing a role similar to traditional fund managers.
U.S. and European regulators are examining oversight as hacks, illiquid collateral and automatic liquidations expose investors to potential losses.
Crypto lending vaults have attracted more than $10 billion in deposits, as investors seek returns on their digital assets, according to the Financial Times.
Deposits have risen from $4 billion at the start of last year, highlighting growing demand for strategies that put stablecoins and other tokens to work.
Vaults operate through smart contracts on decentralized finance platforms. Each has a “curator”, effectively an investment manager, who selects lending strategies, sets risk limits and collects fees. Returns typically range from 3% to 10%, although riskier strategies can generate as much as 20% or more.
The appeal comes with considerable risks. Loans can be backed by illiquid tokens, crypto-backed stablecoins or tokenized private credit, leaving depositors exposed if collateral loses value or becomes difficult to sell.
Automatic liquidations can intensify market declines, while hacks, coding errors and flawed pricing mechanisms create additional vulnerabilities. Publicly accessible smart contracts offer transparency, but investors may focus on headline yields without understanding the underlying exposure.
Fintech companies, digital asset treasury businesses and hedge funds are among the main depositors, according to the article.
Bitcoin backed lender Two Prime are among the firms entering the market. In September, it rolled out a bitcoin lending vault on Pareto targeting annual yields of 1.5% to 2% through institutional lending. The vault accepts wrapped bitcoin, requires a minimum deposit of 5 WBTC and has roughly $10 million of Two Prime’s capital committed to absorb initial losses.
Regulators are examining whether existing rules should apply. The U.S. Securities and Exchange Commission has raised questions about vaults holding securities, while European regulators have proposed oversight of intermediaries providing access to DeFi.