Key takeaways

• 2026 is projected to be a pivotal year for DeFi vaults, with significant growth expected.
• The infrastructure for DeFi vaults is now in place, setting the stage for rapid growth.
• 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 financial products with compliance and risk controls.
• The construction of a good vault product involves optimizing for user preferences regarding liquidity and yield while considering various risks.
• Liquidity and yield are fundamentally tied in DeFi, and user preferences play a crucial role in determining the best yield opportunities.
• The yield from lending protocols comes from on-chain borrowers who utilize stablecoins like USDC as collateral to borrow more crypto.
• Aave is primarily a direct lending protocol, while Morpho relies more on vaults for its lending activities.
• 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.
• Aave pioneered lending and borrowing at scale, while Morpho introduced modular lending.
• The category of risk managers in the crypto space is growing rapidly, paralleling the growth of vaults.
• Diversity in asset management is essential, as no single entity can manage all assets effectively.
• Protocols are increasingly trying to vertically integrate by developing their own vault infrastructure.

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 drove over $1 billion in gross annual recurring revenue while supporting millions of customers, and he was a cofounder of cbETH, a major liquid staking token on Ethereum. Before his work in crypto yield products, Zettler founded one of the first NFT marketplaces for digital art and the first combined crypto and stock trading platform for US investors.

Why DeFi vaults are set to explode in 2026

• “2026 will be a pivotal year for DeFi vaults, with significant growth expected.” – John Zettler
• “I think in terms of caliber of companies that are offering defi yield products through vaults… it’s gonna be an absurd year 2026 is gonna be the year of the vault.” – 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 financial products with compliance and risk controls.
• “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

Understanding the role of vaults in DeFi

• The construction of a good vault product involves optimizing for user preferences regarding liquidity and yield while considering various 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, and user preferences play a crucial role in determining the best yield opportunities.
• “Liquidity and yield are fundamentally tied… you have a user you wanna know what their preferences are over these things.” – John Zettler
• The yield from lending protocols comes from on-chain borrowers who utilize stablecoins like USDC as collateral to borrow more crypto.
• “Ultimately, you know, kind of going back to it where does the yield come from it comes from on chain borrowers people who want to pull out typically usdc or other stablecoins for any purposes.” – John Zettler
• Aave is primarily a direct lending protocol, while Morpho relies more on vaults for its lending activities.
• “I would say for aave most of it is direct probably… morfo is mostly vaults.” – John Zettler

The evolution of DeFi lending protocols

• Morpho introduces isolated markets and vaults to enhance flexibility in lending.
• “Morpho is a set of isolated markets… but then morpher 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 vaults in DeFi

• The category of risk managers in the crypto space is growing rapidly, paralleling the growth of vaults.
• “this category you can call them risk managers curators whatever this category is growing rapidly almost as quickly as vaults 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 essential, as 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” – John Zettler
• Building a successful vault platform is much more complex than creating other financial products.
• “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” – John Zettler
• Successful vault platforms require economies of scale and meticulous attention to detail.
• “there’s real economies of scale with doubling down on vault infrastructure because it’s so complicated it requires a lot of attention to detail” – John Zettler

Traditional finance’s entry into DeFi

• Traditional asset managers will likely enter the DeFi space by 2026.
• “Absolutely that’s like a very a prediction I’m very very confident in.” – John Zettler
• There is a power law distribution among curators and risk managers in DeFi.
• “You tend to see power laws in this category with everything in finance right you have curators who have managed billions of dollars at scale and they know what they’re doing right and they have institutional relationships.” – 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 more viable than competing directly with large exchanges and 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

DeFi’s integration with fintech

• 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
• 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 hinges on its integration with traditional financial systems rather than existing as a standalone alternative.
• “I think this is actually necessary and it was inevitable… there was a pipe dream 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 by allowing users to earn competitive yields on their assets seamlessly.
• “You have kraken users… earning yield on inc ethereum across multiple protocols… they’re getting the best most competitive yields that exist.” – John Zettler

Kraken’s strategic direction in DeFi

• Kraken’s approach to yield generation is fundamentally more advantageous due to its multi-protocol, multi-chain model.
• “the yields are substantially better and one of the reasons why they’re gonna stay better is because of this model of going multi protocol multi chain… fundamentally in long term this is a more advantaged approach.” – John Zettler
• The implementation of yield products by BlockFi and Celsius was fundamentally flawed compared to decentralized finance (DeFi) models.
• “the implementation was totally wrong and it’s night and day… you had no idea where it was going… they did crazy shit with those assets.” – John Zettler
• DeFi offers transparency and control over assets that traditional platforms lack.
• “you know where your assets are at all times it’s all on chain… 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 long time but also it’s probably necessary because people now really value the important things like transparency.” – John Zettler
• DeFi’s structure allows for orderly liquidations and risk management, which protects users.
• “All of DeFi went unscathed… because it just functioned and operated as it was supposed to… the collateral was there, the risks were managed and when those liquidations happen they happen in an orderly way.” – John Zettler

The future of DeFi and traditional finance convergence

• 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 various DeFi protocols.
• “I think where some of the games get played are often in those token incentives… it’s like 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
• Some DeFi products offer yields that include significant boosts from token incentives.
• “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 management in DeFi

• 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 I think that’s number one… liquidity risk and then smart contract risk.” – John Zettler
• Cybersecurity risk is present but is less of a concern for well-established protocols.
• “I don’t think that’s that big of a deal but it is something like you know that that risk is very much there.” – John Zettler
• Liquidity risk refers to the ability to withdraw assets from a vault when needed, which varies 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
• 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.
• “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 trade-offs in terms of infrastructure and risk exposure.
• “not all vaults are the same infrastructure they have different trade offs they have different permissions different ways they do calculations.” – John Zettler

Market dynamics and user behavior in DeFi

• 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
• DeFi total value locked (TVL) is likely to explode as it goes mainstream this year.
• “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 borrow demand and yield rates in DeFi operates 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 influx of new users and capital in DeFi will lead to more sustainable market dynamics.
• “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

The role of vaults in institutional DeFi interaction

• 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
• 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 integrate new DeFi 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