Expanding On-Chain Vaults: From Automated Management to Fund Manager Roles

The on-chain vault market is growing, allowing users to deposit digital assets into smart contracts that allocate funds across various on-chain markets to generate returns.

The vault is essentially an "automated management safe" for digital assets. When users deposit their assets, the smart contract allocates them to lending markets, staking, or real-world asset (RWA) markets, returning the profits generated.

Recently, the market has evolved from simply automatically allocating funds based on pre-set rules to a model where a professional operator, known as a "curator," determines investment targets and fund allocation ratios while managing risks and liquidity. This creates functionalities similar to traditional asset management on the blockchain.

Curated Vaults with Professional Operators Reach 15 Trillion Won

Among on-chain vaults, the "Curated Vault" market, where professional curators manage investment targets, fund allocations, and risk limits, has attracted over $11 billion in funds.

According to the "State of DeFi Curation 2026" report released by the vault data platform vaults.fyi in August, the total funds in 856 vaults across 18 surveyed protocols amount to $11.29 billion (approximately 15.35 trillion won). A total of 131 curators manage these funds.

In simple terms, the on-chain asset management market has grown to a scale of 15 trillion won, where professional curators determine investment targets and risk limits instead of users directly choosing lending markets or investment targets.

The growth rate is also rapid. According to vaults.fyi, the total value locked (TVL) in curated vaults has increased by 39% over the past year. During the same period, the share of curated vaults in the supply-side DeFi TVL expanded from 5.24% to 12.51%.

One of the protocols with the largest share in this market is Morpho. According to vaults.fyi, Morpho-based curated vaults account for 46.2% of the total funds surveyed, which translates to approximately $5.22 billion.

Beyond Automated Deposits: Curators Manage Investments and Risks

The basic profit structure of the vault is similar to lending. When users deposit stablecoins, the vault supplies them to on-chain lending markets, and the interest paid by borrowers is distributed to depositors.

A recent change in the market is that human involvement in investment decisions has begun to increase.

In curated vaults, curators define the markets and assets available for investment and set investment limits for each market. The allocator, responsible for fund distribution, moves funds within this range while managing returns and liquidity.

If the collateral risk in a specific market increases, the investment limit may be lowered, or new allocations may be halted, moving funds to other markets. This is similar to how fund managers in traditional finance adjust investment targets and proportions while managing risks.

As vaults evolve into asset management services, centralized exchanges are also connecting users with on-chain markets.

Coinbase offers a USDC lending service with a maximum annual yield of 10.3%. This is a variable interest rate (APY) that changes based on market conditions and the chosen vault, rather than a fixed rate.

The USDC deposited by users is managed in the Morpho vault through Coinbase's blockchain Base. Steakhouse Financial manages the investment market and risk criteria.

Kraken also launched "DeFi Earn" in January this year. When users deposit supported assets, they are converted to USDC and allocated to on-chain vaults, which generate returns through third-party lending protocols like Aave.

When assets are deposited on the exchange screen, the vault connected to the exchange processes the on-chain investment process on behalf of the user. This allows users unfamiliar with on-chain finance to access vaults relatively easily.

However, there are costs and constraints associated with this. Kraken takes a 25% fee from the profits generated in DeFi Earn. Withdrawals are not always immediately available. If there are insufficient funds available for immediate withdrawal from the vault, it may take time for users to receive their assets back, even if they request a withdrawal.

Bitwise Also Joins as a Curator

Professional asset management firms are also entering the vault market.

Digital asset management firm Bitwise announced its entry into the Morpho-based vault curation business in January and launched the "Bitwise Premium RWA Vault" utilizing real-world assets on September 2.

As of the 10th, the deposit amount for this vault is $13.64 million (approximately 18.51 billion won). The target APY is 5-6% annually, with a management fee of 0.39% per year. At that time, the actual momentary APY was approximately 4.45%, and the APY over the last seven days was about 3.97%.

Bitwise selects the collateral and markets available for investment and adjusts the proportions and risk limits. However, the target return is not guaranteed, and the vault is not a traditional fund or investment product, so there is a possibility of principal loss.

On the 10th, Bok Jin-sol, head of Four Pillars Research, continues his presentation at the seminar "Digital Asset Financial Innovation Cases and Response Strategies" held at Post Tower in Yeouido, Seoul. Source: Park Jae-yeon/Digital Asset

Risks of Hacking, Bad Debts, and Withdrawal Delays

As the market expands, the importance of risk management is also increasing.

Bok Jin-sol, head of Four Pillars Research, explained at the seminar held on the 10th at Post Tower in Yeouido, Seoul, that "the main risks of on-chain vaults include smart contract errors, incorrect price information, collateral value decline, and liquidity shortages." He noted that "since a single vault is connected to multiple lending protocols, tokens, and price information systems, if a problem arises in one place, it can affect other areas."

Vaults are connected to various systems, including lending markets, collateral assets, oracles, and smart contracts, so problems in one area can lead to user losses. Smart contract errors, hacking, and oracle price errors can occur, and if the price of collateral assets falls faster than the liquidation speed, bad debts can arise where the collateral is disposed of without recovering the loan amount.

There are also risks of stablecoin price deviations or credit and counterparty risks of RWA collateral. If curators excessively allocate funds to risky markets or fail to secure sufficient liquidity, it can lead to losses or withdrawal delays.

Returns are also not fixed. If lending demand decreases, returns may also drop, and the more one invests in high-risk markets for higher returns, the greater the possibility of losses.

"Who Makes Investment Decisions?"... Regulatory Discussions Are Expanding

As vaults take on the role of practically allocating and managing user assets, discussions have begun in the U.S. regarding the potential application of securities laws and investment advisory regulations.

Hester Peirce, a commissioner of the U.S. Securities and Exchange Commission (SEC), stated in a statement on July 22 that financial activities conducted on the blockchain cannot escape the application of existing securities laws simply because they occur on the blockchain.

He pointed out that "if there is an entity that selects investment targets for profit generation or reallocates assets in a vault, federal securities laws may apply depending on the structure," and that "vaults holding or investing in securities may also be subject to investment company regulations."

There have also been proposals to categorize vaults based on the level of operator involvement.

Forward Industries submitted a statement to the SEC Digital Asset Task Force (TF) and the U.S. Commodity Futures Trading Commission (CFTC) Innovation Task Force on the 10th, suggesting that vaults be divided into three types: "Type I-Use" where users directly set up general software, "Type II-Follow" where users choose pre-defined strategies, and "Type III-Advised" where professional operators make discretionary investment decisions. The idea is to strengthen regulations as the discretion and involvement of operators increase.

Ultimately, as the on-chain vault market grows, it will become increasingly important not only to achieve high returns but also to clarify who makes investment decisions, manages risks, and who is responsible when losses occur.

As exchanges and professional asset management firms enter the market, vaults are expanding beyond simple DeFi products into a new asset management infrastructure, making transparency in operational structures, risk management, and regulatory standards key challenges for market growth.