Key takeaways

• 2026 is expected to be a pivotal year for DeFi vaults, with significant growth anticipated.
• The infrastructure for DeFi vaults is now in place, setting the stage for rapid expansion.
• The growth of DeFi yield products will accelerate as more companies adopt vault strategies.
• Vaults serve as a layer on top of DeFi, allowing institutions to package and customize financial products.
• Liquidity and yield are fundamentally tied in DeFi, affecting user experience and product design.
• Aave is one of the original lending protocols in DeFi, operating on a pooled system model.
• Morpho introduces isolated markets and vaults to enhance flexibility in lending.
• The trend in DeFi will move towards more flexible, multi-protocol, and multi-chain solutions.
• The superpower of beta lies in its ability to offer multi-protocol, multi-chain vaults that provide simplicity and aggregation.
• The category of risk managers in the crypto space is growing rapidly, driven by interest from traditional asset managers.
• Protocols are increasingly trying to vertically integrate by developing their own vault infrastructure.
• Traditional asset managers are expected to enter the DeFi space by 2026, but they may struggle to compete effectively.
• DeFi vaults operate by taking a performance fee from the rewards earned, which is then allocated to the vault operator.
• The integration of DeFi into user-friendly fintech applications can simplify the user experience.
• DeFi’s success relies on integrating with traditional financial systems rather than existing as an independent alternative.

Guest intro

John Zettler is Director of Product, Earn at Kraken, where he leads the company’s yield business including staking, stablecoins, and DeFi strategies. Previously at Coinbase, he served as Staking Product Lead and cofounder of cbETH, a major liquid staking token on Ethereum that drove over $1 billion in gross annual recurring revenue.

The future of DeFi vaults

• 2026 will be a pivotal year for DeFi vaults, with significant growth expected.

  — John Zettler

• The infrastructure for DeFi vaults is now in place, setting the stage for rapid growth.

• All the tech is just kind of in place now… you’ve got a number of different fintechs who are all starving for yield in a rates declining environment.

  — John Zettler

• The growth of DeFi yield products will accelerate as more companies adopt vault strategies.

• It’s gonna snowball… everyone’s gonna follow suit right like defi yield will go everywhere all assets.

  — John Zettler

• Vaults serve as a layer on top of DeFi, allowing institutions to package and customize financial products.

• Vaults are a layer on top of that that allows institutions fintechs exchanges anyone with users or capital that wants to offer financial products to their customers to package up the best of defi layer on whatever compliance whatever risk controls offer whatever risk return profile they want as a yield product.

  — John Zettler

• The construction of a good vault product involves optimizing various user preferences and risks.

• I think that like the construction of a good vault product is in some sense optimizing over all of these different considerations.

  — John Zettler

• Liquidity and yield are fundamentally tied in DeFi.

• Liquidity and yield are fundamentally tied yeah right and to some extent the job of creating yield product is you have a user you wanna know what their preferences are over these things.

  — John Zettler

Lending protocols and innovations

• Aave is one of the original lending protocols in DeFi, operating on a pooled system model.

• Aave is like the og or one of the og lending protocols in defi right it’s basically decentralized it’s governed by a dao but the fundamental economic model is a pooled system where you lend your assets into it.

  — John Zettler

• Morpho introduces isolated markets and vaults to enhance flexibility in lending.

• Morpho is a set of isolated markets… but then morpho introduced vaults and vaults are necessary to in the system because when you have siloed markets it’s super fragmented super inefficient.

  — John Zettler

• The trend in DeFi will move towards more flexible, multi-protocol, and multi-chain solutions.

• I think this arrow only goes in one direction… institutions enterprises will want multichain will want multiprotocol they don’t wanna be locked into any single chain any single protocol.

  — John Zettler

• The superpower of beta lies in its ability to offer multi-protocol, multi-chain vaults that provide simplicity and aggregation.

• that’s really a superpower of beta and speaking from you know the kraken perspective and you know what i think is a shared perspective of a lot of fintechs that is ultimately i think what’s going to win the day multi protocol multi chain allowing you know that simplicity and and and and aggregation in the most the highest form.

  — John Zettler

• Aave pioneered lending and borrowing at scale, while Morpho introduced modular lending.

• if i try to summarize all of that is it that aave pioneer lend basically lending borrowing and you’ve got the big big open pools morpho introduced modular lending.

  — John Zettler

Risk management and asset diversity

• The category of risk managers in the crypto space is growing rapidly.

• this category you can call them risk managers curators whatever this category is growing rapidly almost as quickly as vault as a whole because you have the largest asset managers in the world already today are becoming interested in diversifying their offerings through these on chain products.

  — John Zettler

• Diversity in asset management is crucial, and no single entity can manage all assets effectively.

• there’s never gonna be one party that just manages all of the world’s assets… there is a diversity and plurality.

  — John Zettler

• Protocols are increasingly trying to vertically integrate by developing their own vault infrastructure.

• it’s already happening they’re trying right so gauntlet has their own vault infrastructure product interesting which is similar to veda’s in the market it’s in the market I don’t know if anyone is really using it but it’s out there.

  — John Zettler

• Curators that focus on their expertise and utilize the best existing infrastructure will outperform those trying to vertically integrate.

• in my view they’ll be out competed by the curators that focus on their expertise and use the best infrastructure that exists.

  — John Zettler

• Building a successful vault platform requires significant attention to detail and economies of scale.

• the challenge is that building a successful vault platform is very different than these other things right it’s very different than building a successful lending product different than doing good curation there’s real economies of scale with doubling down on vault infrastructure because it’s so complicated.

  — John Zettler

Traditional finance’s entry into DeFi

• Traditional asset managers will enter the DeFi space by 2026, but they may struggle to compete effectively.

• Absolutely that’s like a very a prediction I’m very very confident in… the largest asset managers do have distribution right they have customer relationships they have assets that they can funnel into their products.

  — John Zettler

• DeFi vaults operate by taking a performance fee from the rewards earned, which is then allocated to the vault operator.

• The vaults themselves are built in such a way that they take a performance fee so percentage of the rewards that are earned on the vault basically gets set aside to the operator of the vault.

  — John Zettler

• The distribution partner in DeFi typically takes the majority of the fees generated from vaults.

• the distribution partner always takes the lion’s share right because they own the user… our goal is to serve everyone right.

  — John Zettler

• Building infrastructure for DeFi is a more viable strategy than competing directly with large fintechs.

• if you’re not doing that and you’re building infrastructure you need to be going to enterprise right meaning the fintechs that are moving on chain.

  — John Zettler

• The integration of DeFi into user-friendly fintech applications can simplify the user experience.

• the beauty i think of where this is going… is once you have that packaging that aggregation layer of vaults and then you have it plugged in into a traditional easy to use fintech with a slick native app you’re bringing it right to the user’s fingertips without them having to think about much.

  — John Zettler

The evolution of DeFi and fintech integration

• DeFi is increasingly becoming a backend service that simplifies user interactions.

• defi is increasingly becoming a backend we’re packaging it up through vault in a way that’s simple and easy to use.

  — John Zettler

• DeFi’s success relies on integrating with traditional financial systems rather than existing as an independent alternative.

• I think this is actually necessary and it was inevitable… that we would invent this entire independent financial system and just migrate everyone over… but that was always a pipe dream.

  — John Zettler

• DeFi has created tremendous value, evidenced by users earning competitive yields on their assets.

• You have kraken users… earning yield on inc ethereum across multiple protocols… they’re getting the best most competitive yields that exist.

  — John Zettler

• Coinbase’s approach emphasizes first-party products for a more integrated user experience.

• One of the things that Coinbase does really well is that they favor first party products to provide a more integrated experience more like the Apple model than like the Android model.

  — John Zettler

• Coinbase’s borrow product has seen significant usage with $1.9 billion in collateral and $1 billion in loans issued.

• If you look at their borrowed product there’s some dune dashboards… they’re up to I think $1,900,000,000 of collateral in the borrow product with about a billion of loans issued against that.

  — John Zettler

Multi-protocol and multi-chain strategies

• The multi-protocol, multi-chain approach allows for better risk-adjusted yields by sourcing the best opportunities across the ecosystem.

• One of the reasons why they’re going to stay better is because of this model of going multi protocol multi chain… fundamentally in long term this is a more advantaged approach it is a smarter better strategic approach because you’re going to long term have better risk adjusted yields when you have more diversity and opportunity.

  — John Zettler

• The implementation of yield products in DeFi is fundamentally different and more transparent than traditional platforms like BlockFi and Celsius.

• The implementation was totally wrong… when you gave your money to blockfi you’ve you had no idea where it was going… with this model… you can literally go to the blockchain and see your assets.

  — John Zettler

• The failures in CeFi have highlighted the importance of transparency in the industry.

• I think those set the industry back a long time but also it’s probably necessary because people now really value the important things like transparency.

  — John Zettler

• DeFi’s structure allows it to function effectively even during market downturns.

• All of DeFi went unscathed… because it just functioned and operated as it was supposed to; these were over collateralized loans, the collateral was there, the risks were managed.

  — John Zettler

• Kraken is developing a suite of on-chain DeFi-oriented products.

• I’m really happy with where this product landed but it’s just the first of many like there’s a whole suite of on chain defi oriented products coming our way.

  — John Zettler

Strategic directions for DeFi and crypto firms

• The collaboration and input from experienced individuals in the crypto space are crucial for product development at Kraken.

• There had been this view and there have been a lot Arjun had brought in a couple of these strong more on chain crypto native individuals that is also I would say like a superpower of kraken.

  — John Zettler

• Vaults will become a significant feature across various fintech platforms.

• I was at a holiday party and one of the largest asset managers in the world was there and they said to someone else who is at one of…

  — John Zettler

• Offering a range of risk options to users is essential for a positive user experience.

• if you want to give them all the options which is this open beta model of like get you know just serve anyone anyone everything you should serve them 15% you should serve them 50%.

  — John Zettler

• The traditional finance sector may struggle to compete with established crypto firms due to differences in distribution ownership.

• I’m a little less optimistic than you are that they will be able to compete with gauntlet or steakhouse or chaos because they own distribution but in a very different way than like robinhood owns distribution.

  — John Zettler

The convergence of crypto and traditional finance

• BlackRock does not own the distribution in the same way that firms like Charles Schwab do.

• Blackrock actually doesn’t really own the distribution I think black like charles schwab owns the distribution and you could buy the blackrock products through schwab.

  — John Zettler

• Crypto and traditional capital markets will eventually converge into a unified capital market.

• I think crypto and traditional capital on chain capital markets will eventually converge right and they’ll we’ll just call them capital markets one day.

  — John Zettler

• Token incentives have shifted from paying for liquidity to paying for distribution.

• Now token incentives are for paying for distribution right it’s a very different model.

  — John Zettler

• The best product will ultimately win in the long term, despite short-term strategies.

• My view is truly I know this is kind of a cliche but like the best product will win over the long term and everything else is short term.

  — John Zettler

• Token incentives play a crucial role in attracting users to different DeFi protocols.

• I think where some of the games get played are often in those token incentives… the borrow lend protocols will go to the risk managers and the curators and be like well come deploy with us and we’ll incentivize it with our own token.

  — John Zettler

Risks and challenges in DeFi

• Some DeFi products offer yields that include additional boosts from tokens, which may not align with user expectations.

• In the coinbase version right now the yields are at about three and a half percent but if you pop it open you can see that 75 basis points of that is coming directly from morpho as a extra boost that you’re getting in term in morpho token.

  — John Zettler

• Risk in decentralized finance can be categorized into three main buckets: bad debt risk, liquidity risk, and smart contract risk.

• I like to break the risk into three buckets so three buckets I have are you’ve got the risk of bad debt expense… liquidity risk and then smart contract risk.

  — John Zettler

• Liquidity risk refers to the ability to withdraw assets from a vault when desired, which can vary by protocol.

• Can I get my money back when I want it… some will like in different protocols will you can only withdraw from the vault if there is liquidity there ready for you at that time.

  — John Zettler

• Bad debt risk in DeFi arises from borrowers who may default on their loans, impacting the overall health of the lending protocol.

• If we go back to like you know earlier in the pod we were talking about the where does the yield come from… they’re maybe putting down a $100.

  — John Zettler

Market dynamics and user behavior

• The risk of bad debt arises when the value of collateral drops faster than loans can be filled, leading to potential losses for the protocol.

• to borrow out 50 if the $100 that they put down which is in the form of bitcoin or something drops precipitously and faster than the solvers can go out and fill the loan… then you could be in a situation where there ends up with what’s called bad debt where the collateral has sunk so fast that it is now lower than the total amount of loans that are outstanding.

  — John Zettler

• Diversifying over low-quality assets can be worse than concentrating assets in a secure protocol.

• if you diversify over garbage you’re in a worse position than if you put all your assets in one secure protocol.

  — John Zettler

• Different vaults in DeFi have varying infrastructure, trade-offs, and risks associated with their smart contracts.

• not all vaults are the same infrastructure they have different trade offs they have different permissions different ways they do calculations.

  — John Zettler

• Fear and uncertainty can lead to liquidity issues even in healthy markets.

• Sometimes it’s not just like the economic spread sometimes even fear and fud can cause these kinds of disturbances.

  — John Zettler

• Diversification is essential in DeFi to mitigate risks associated with market events.

• It’s definitely something I think about; it’s one reason why diversification makes sense.

  — John Zettler

The future of DeFi adoption

• DeFi total value locked (TVL) is likely to explode as it goes mainstream.

• I think it explodes… the question right is will there be enough borrow demand on the other side that the yields continue to stay high and competitive.

  — John Zettler

• The balance between borrowing demand and yield rates in DeFi functions like surge pricing.

• It’s constantly balancing these two things… it just kind of spurs the market like pulls from the market more borrowed products that are built on defi.

  — John Zettler

• The introduction of more users and diversified capital in DeFi will lead to less volatility.

• When the capital base becomes diversified and more sustainable… you have maybe less of this stuff that we see in defi now this volatility.

  — John Zettler

• 2026 will be a pivotal year for builders in the crypto space.

• I think 2026 is gonna be like a year for the builders… the speculators might need to sit this one out for a couple of years until we get back into those times.

  — John Zettler

• Vaults will be essential for regulated institutions to interact with DeFi.

• In the long run vaults will be the only way that institutions regulated institutions… can actually interact with defi because you can’t just throw capital into this permissionless… you need to be able to impose your risk control.

  — John Zettler

Kraken’s strategic direction

• DeFi is evolving to become more integrated with traditional fintech through hybridization.

• What we call inside of kraken is hybridization like defi and fintech are going to merge closer and closer and closer… defi is becoming more back end more api more of a tool that’s powering all these yields.

  — John Zettler

• Kraken is hybridizing its exchange to grow and offer new products.

• this is the big effort we’re hybridizing the exchange it’s one of the big ways kraken is growing things like x stocks bringing stocks on chain all these different products we’re doing.

  — John Zettler