Vaults Are the Next Asset Management Revolution

Transcript

I think they are ETFs 2.0. Vaults are just the next step in that. I think they are more efficient expression of asset management IP than even ETFs, which is saying something. So I think long-term you're talking about a 20 or$30 trillion industry. The ability for investors to customize their strategies will go up. The cost of forming a vault and raising capital goes down. It's like laughably the case. It's a tremendously new and exciting paradigm that I think is going to explode.

>> They're basically a way for you to encapsulate DeFi strategies that in theory you could do on your own. And now we're at the stage when you're starting to actually see the institutionalization of this thing that has been growing now for years. The level of control that a user has in a vault is very different from the level of control that an investor or an LP has in a fund. There's one difficult question that the industry will have to grapple through though which is Hey everyone, welcome back to Inflection

Point, the podcast for the institutional audience. With me as always is my co-contributors Michael Matt and David. Um, this episode, I think we're going to be talking about vaults. It's something we've been putting off for some time and really excited to talk about. But before we dive in, I want to note that none of the information discussed constitutes investment advice or any offer, recommendation, or solicitation by Block Works, Galaxy, Bitwise, or Anchorage, or any of their affiliates to buy or sell any securities. Okay, with that, let's kick into it. Um, glad to have you, Matt, and Michael back uh back on the pod after a little hiatus last week. Um, how you guys feeling?

>> Feeling good. Get ready to rip. Feeling great. Yeah, it's great to be here. Great to connect with you guys and for sure this one has been uh in the development stage for a while. So really excited for it. >> Well, Bitwise is leading I think I'm just going to kick it off. Bitwise is very much leading I think in the institutional space in vaults right now. You guys are forward thinking. I attribute that almost entirely to Matt the the great CIO of Bitwise. But but um yeah, I mean uh Matt, give me your take on on vaults here and why Bitwise is so focused on it.

>> Well, first of all, I should say that it's not me. I appreciate the kind word. Uh there's an incredible team working on the vault solution. Look, vaults are really interesting from uh two perspectives and then there's this muddy middled where there's a question. Uh from a short-term perspective, there is really significant demand for vaults uh from sort of cryptonative crypto foundations, people seeking yield. And our view at Bitwise is that as vaults mature and deal with this more sort of institutional crypto audience, there's a place for more established regulated crypto managers. So that's thesis one.

The other big thesis on vaults which I think is true and I've said this before is that I think they are ETFs 2.0. I think that uh asset management has been a 400year journey of making it more efficient for investors to gain exposure to IP investing in the markets and it's improved over time from closedend funds to open-end funds to ETFs. Vaults are just the next step in that. I think they are more efficient expression of asset management IP than even ETFs which is saying something. So I think long-term you're talking about a 20 or$30 trillion industry. The really interesting

questions in vaults from my perspective is how we get shortterm from the you know a few hundred billion dollar opportunity that's I think transparent to all of us to long-term to the $30 trillion opportunity. That's where a lot of the questions lie. But yeah, that's why Bitwise is so excited. We clearly see the immediate demand. We clearly see the long-term transition and uh we're excited to play a role in all of those processes. >> That's awesome. Uh does anybody want to start with a definition of all because I feel like this is a word that sometimes gets >> Take it away, David. You signed up for it.

>> Oh, me. I was expecting Michael to get this. I can hit it. I can hit it. I can hit it. >> Yeah, I can start. >> Um, yeah. So, I mean, maybe even before that, take a step back. The the re vaults are basically a container and they're basically a way for you to encapsulate DeFi strategies that in theory you could do on your own. If you were like touching the bare metal of some of these base DeFi protocols, you could do a lot of these strategies on their own. But the cool thing about vaults is that they productize these D5 primitives into something that can be encapsulated and utilized by an institution like like Bitwise. Um there is something cool here about us moving

from researching exploring new primitives into productizing things that already have product market fit which is basically onchain credit market. So, so that's the first thing I would say about vaults and why I think they're they're very exciting even beyond the product itself. It shows that we're going beyond this exploration phase within DeFi. But the way you think about vaults is basically a container. Um, vaults kind of existed for a while and maybe a maybe a preliminary form.

Uh, Matt Matt will remember this. We we wrote a DeFi primer what in 2022 and we were talking about all the big traditional finance verticals that could be uh put into a smart contract and one of them was was asset management. We had that category there very explicitly citing year finance. So, so earn finance was one of uh was one of the earlier D5 protocols uh created by this guy Andre Cronier like one of the D5 genius. He just got too tired probably of having to look for the best yield opportunities.

So, it started to automate some of that. It started very simple, started to get more sophisticated. I think at some point it started to go multi-chain started to go beyond Ethereum but that's probably where D5 vaults have kind of started. Um I think it was probably what in 2024 maybe uh that the vault curator model kind of started and we started to see things like like morpho and this thing started to evolve a little more and now we're at the stage when you're starting to actually see the instit institutionalization of these this thing that has been growing now for uh four years and has been breeding for a while. But the way

to think about vaults for me is kind of this container that in theory can contain many different strategies. To Matt's point, today it's very focused on yield strategies. On one end, you have a lot of stable coins that are chasing yield. For some reason, uh it makes sense for these stable coins not to go on and off fiat, for them to stay on chain. And it's natural for these things to search for a yield. On the other side, you have uh onchain uh borrowers.

This is mostly folks who want to go levered long, ETH or BTC in any way, shape or form. So you have these credit markets that are basically putting these two parts of the market together and and and and vault is a way to do that in a way that you have like a risk curator role that is parameterizing like all the risk factors. there's a compliance layer. So like all these things. So it's a way to make an institutional product out of something that has existed in D5 for a while. But but Mike complete what I'm what I'm missing here. Yeah. No, I think that was excellent, David. Um the way I think about vaults are well first just to be very clear about you know

because you said container and that is accurate but like if you think about it a vault is a smart contract and it is a smart contract which just means it's a computer program. I'm going real basic here just so it's very clear. It is a computer program that lives autonomously on a blockchain. And um it's a computer program that lives autonomously on a blockchain that you can program to do any number of things, right? And it is being used today in such an exciting way because it is being used as a programmable fund. So, I used to talk about how smart contracts before I knew anything about DeFi like 10 years

ago. I think I've mentioned this um I think I've mentioned this on the on the pod history uh in the past. When I was a lawyer and when I was in law school, I got really into DeFi because I was studying contract law and I thought, "Wow, there's something called smart contracts. I need to know what that is." Right? And then, of course, I learned about smart contracts and I learned that they have almost nothing to do with contracts. But I'm now revising that thesis a little bit. Okay? Because they actually look a lot more like legal contracts in this context than you would think. So what is a so what is a fund? A fund is a series of legal contracts, right? When you invest into a fund, you sign a bunch of paper, right? That paper

one of which is contributing assets into something. What is that thing you're contributing to? It is a limited partnership. What is a limited partnership? It is a corporation of some sort under corporate law. These are all contracts, right? But they're all paper, right? To employ, to police, to oversee that fund, you need lawyers to look at that paper and see if you are complying with the terms of the fund. It's very slow. It's not dynamic. And no matter how dynamic you try to make it, at the end of the day, you got to get a lawyer to interpret all of that dynamism when in the context of crypto, a smart contract actually can serve as that fund

structure, but it's now a computer program. It's now programmable. And so you can now deposit money instead of into a regular fund into a smart fund. Maybe we should rebrand Vault's smart funds, right? a a smart fund that it already has encoded in it a strategy and you will get not daily updates, not weekly updates, not quarterly updates. You can get real time updates on the performance of that fund and you can have real time transparency. And here's the best part. The best part is it can be non-custodial.

So one of the biggest barriers to funds today and to the entire hedge fund and asset management industry is that you the government and the law treats it in fairness very appropriately treats it as something that is a high risk to investors because they're parting ways with their money. And so it's heavily regulated, right? You have to be a registered investment advisor. You have to comply with a ton of different rules because you as the fund manager control the capital. We are entering a new paradigm with vaults in which you can deposit funds into a vault and the vault manager doesn't have custody over those

funds. It's a tremendously new and exciting paradigm that I think is going to explode. So when Matt says it's going to how do we get it to a $30 trillion um industry, I think this is plays a big part of that. Yeah, that's that's exactly right. That's exactly what I meant where it's it's sort of distilled asset management, right? With all the gunk that you had to do as an asset manager, all the lawyers, all the paperwork, all the custody, all of that is removed. Now, there's still a lot of things that exist. It still needs to be a high quality strategy. You still need to diligence that strategy. You still need to look at credit risk. You need to look at liquidity risk. You need to look at duration risk. But what's left at the vault layer is what most people think of

as asset management. It's just when you work in asset management, you know that the actual portfolio management and risk management is like this tiny little sliver on top of this really thick cake that's expensive and slow. And what I love about vaults is it it just gives you the fro like the frosting or whatever. It just gives you what you want and you don't you remove all this sclerotic mess. So yeah, I loved how you guys described it. >> Matt, can I ask you just real quick, Matt, follow up on that? Um, are you seeing any innovation in this right now and how it's working, right? Like because once you once you upgrade a product in finance from what we let's

just call web two to web 3 or you're uh updating it from a uh a a sort of um an old school way of doing things to a programmable or computerized way of doing things. It unlocks a tremendous amount of innovation. Are you seeing any of that right now Matt? Well, uh, certainly there's a lot of innovation, but I I I mean I'll I I'll raise a few things and and maybe you can direct me where you want to go. Um, but we are seeing a breaking down and I think this will increase between onchain and off-chain yields uh driven by this desire uh for vaults to express that and to be able to weigh the relative risk of those two things. So it's actually

driving the convergence from my perspective that like if you want to think of the catalysts that are bringing us onchain, the real world on chain vaults like exploring that I think is a real innovation. I think you're going to see innovations in terms of transparency, in terms of insurance, in terms of diligence on these vaults as well. Um but but that cross comparison of onchain and off-chain yields and opportunities and risks I think is one of the innovations that that that vaults are really driving right now. The other thing that um is pretty important I think and and you don't see this in every single vault and again vaults are different across each others and there's

the vault curator layer there's the vault infrastructure layer maybe we need to define these things a little more but one interesting thing in this let's say onchain finance or onchain asset management I've been calling it onchain robo advisor world is that the user has more input than it would in a traditional asset management structure. >> Yes. Yes. >> It depends a lot again on the type of vault, but for truly decentralized vaults, the user can have an input. There's there's kind of a quote unquote governance mechanism that the yield can uh the user can override certain things that for whatever reason doesn't make sense.

>> Yes. On the transparency side, you can think a lot of these vault infrastructure providers as basically NAV calculators. They're they're calculating this NAV. >> And to the extent that this is done entirely on chain and at least to some protocols, I think that's true, right? Morpho, for example, you have 100% transparency on how this quote unquote 10av is calculated, on how everything is happening under the hood. And and I think this speaks a little bit to the transparency benefits that >> match. I I love those. Let me just build on those and make some tie to the traditional asset management industry because that may resonate with our audience. Uh some of the things that

you're pointing out, David, are things we've seen the traditional industry take a step towards. I come from an ETF background. Used to be that no active management strategies disclose their daily holdings. ETFs blew that up. Now the best active managers in the world are showing you every day what they hold. it hasn't harmed their returns. It has improved transparency. It's made diligence by the end investor better. This takes that concept and like puts it on infinite steroids. So in terms of empowering users to have that transparency and view to make the right evaluation, it's a huge innovation. The other one towards what what you were talking about, Mike, uh wealthy individuals are able to customize their portfolios through SMAs in traditional

asset management uh if they meet certain thresholds. If they have 10 million, if they have 15 million, if you have a hund00 million, Goldman Sachs will build a portfolio that does whatever you want. But if you're a traditional investor, good luck with that level of customization. And one of the things these vaults do and David was talking about uh sort of governance style input is that they drive that service down, right? They make they're so much more lightweight that it drives that down. And I think that's also really powerful for >> Oh yeah. Oh yeah. The cost of forming a vault and raising capital goes down.

It's like laughably the case, right? So, um I was talking with um I was talking with um a couple of people a couple months ago. Um and um one of them was the founder of Compound. Um and uh Compound, you know, was an original sort of borrow lend protocol on on uh on Ethereum, one of the like the OG, right? And um I was so I I I always knew this to be the case, but I it it it really clicked when when someone said Compound would make, you know, $100 million a year, zero expenses, like zero. They they didn't it was it was it was a smart

contract program on there was zero expenses, right? I mean, that is incredible. Now obviously with vaults there there might be you know some some slightly more friction especially in permission vaults and that institutions are going to uh be attracted to and I do think we should talk about the drift hack. Um I think this is sort of important um and and adjacent um but uh the the cost will be driven so down the am the ability for investors to customize their strategies will go up. not through a lawyer, through a program that they can tune. It is so exciting.

Um, and the only limitation, there's a couple limitations obvious, but the one big one is we just need more real world assets on chain, right? That's what we need, right? The technology is there right now. It's the assets that aren't there. I >> I was I've been listening to you guys and vaults are definitely revolutionary. Um but I from one side of it you know we we've compared it to asset management. We've used the word fund many times. We've used the word creator which is basically asset managers and then the risk curator which is you know part of the risk um you know regulations of it the internal regulations.

>> By the way we should we should define what a curator means. I think some people in our audience might not be that uh clear about what that concept is but keep going. Sorry Mark. >> No. Yeah for sure. Um, I mean, basically an asset manager, but I'm saying like we're using all of these terms and then this is a question I brought up maybe a few episodes ago. Um, is this is this a security, a vault, a security? Um, and just, you know, we're we're kind of skirting the regulations right now. The regulations aren't there. And then I mean, does it really matter? Because if they are, because to Matt's point, you know, it's like maybe what that tens of billions of dollars industry now, 20 billion. And you know he put the the goal as tens of trillions of of dollars

right and I mean the way that we're going to go there is not through retail is through institutionals and like you mentioned there's not enough real world assets on chain and so is it where you know are we going to see the growth mostly from permissioned KYC institutional vaults um where you can where you will have all of these benefits of transparency and everything that you said but most of DeFi. When I say DeFi, most of the crypto natives that exist now will essentially not be a part of it unless they choose to conform out of their cyberpunk values.

>> Well, can I take the security point first? >> Yes. Yes. I was for you, Michael. >> Yeah. Yeah. Um, so they can be a security, right? I'm not I'm going to try and guys on this pod, I'm going to try to not give the obnoxious lawyerly answers. I'm going to try to give it to you guys straight, right? because most lawyers would say, "Well, they could be, maybe they are, maybe they're not, depending on these different factors, and you left being like, I don't know what I don't know what uh what's up or down." Um, quite simply, if the vault has tokenized securities in it, it's obviously a security, right? The question is then if it doesn't have tokenized securities in it does the process by which you deploying your nonsecurity assets into a

vault and being curated by a third party curator does that elevate it to something that looks more like a registered investment advisor activity and therefore regulated under the securities laws. Not to say that it is a security but that it should be regulated as a security. Um, and the answer is in my mind is that curation does not in most cases there's many flavors to curation. I want to be I want to be nuanced here, but in the way we're seeing it predominate today, um, because of the non-custodial a aspect of this, it removes a big reason for it to be registered as an RAIA.

Right? This is not to say that RAIA products will not predominate because investors prefer registered investment advisors to be curators, but is just to say that right now as it stands today, companies like Gauntlet I don't think need to be raas and I don't think they need to be considered as such. >> Yeah. I I think this also speaks a little bit to our ability of coming up with really terrible names for primitives. Vaults is one of them actually, right?

>> Agreed. >> Agreed. >> You just throw things there and just leave them there. Um is another. Um but but we we are very good at coming up with these these bad terminologies. >> Almost an undefeated record on that. smart contract is the only one that's good. It's the only one. Everything else is terrible. I agree very much. >> It's a very good one. I I'll give you that. Uh but but I think to to to Michael's point, it's very important to keep in mind and and that's why I think sometimes you got to be careful with the asset management label here because you have in traditional finance these let's say legal enforcements and a lot of what's going on in DeFi is coming from

cryptographic enforcements and and a lot of this activity and we all spoke a little bit about this is it's the level of control that a user has in a vault is very different from the level of control that an investor or an an LP has in a fund. So, of course, our industry has an issue with decentralization theater and at some point you're going to have to mark a line on the sand and say what is one thing and what is another thing but at least today and again definitely not a lawyer but it does feel that the activity is extremely different from what we see in a traditional fund and I think this is important to keep in mind.

I I I would absolutely agree with that. But I would add that the risk for the industry, the risk to vaults is that that means there's the ability for good and bad actors to participate unfettered in this space. And to the extent that the industry can fill that what what you're saying is true, but fill it with some version of of like almost self-regulatory uh enforcement of good actors will be to the behooment of the growth of vaults long term. Right. I do think one of the risks is that it does have this openness there, as you said, good legal reasons to believe that that is true, but that creates brand and reputational risk that I think is is meaningful in the space.

And I I hope the industry steps up uh on standards around that. >> I I don't think they will. This is why I I believe it will tend towards the permissioned vaults being the dominant factor because I mean, okay, Michael brought up the drift hack, right? Like the contagion between all of these different strategies is so vast and you want like you want some kind of accountability through legal recourse. You want professional advisers. You want professional risk curators. And and and I'm talking about for institutions. I mean, obviously retail wanted to, but retail is going to punt their funds into any vault with a high enough APY, so I

don't think it matters there. And then Yeah, Matt, go ahead. >> No, I I I I I think you're generally right. I think over time um what we found in the growth of DeFi where there's a there's a similar example here um is that brand and reputation risk that builds over time is is part of the solution to that. So I don't think you're wrong but I do think that that is part of the solution that we'll see in the space. >> Yeah. Like the gauntlets and the other risk creators of the world becoming those institutional players given their years of experience. Yeah.

>> Yeah. and and you have a Lindy element and a a brand value at stake that constrains negative action. >> Hey all, Block Works co-founder Michael Apaleo here. Quick break to talk about something we've just launched, Block Works investor relations. As the market shifts toward institutional capital, investors want more transparency, more standardization, and a higher level of professionalism. But the traditional IR model is slow, manual, and not built for how crypto works. If you're building on chain, your data is already live. Your business is already transparent. The challenge is turning that into a clear, credible story for investors. That's exactly what we're solving with Blockworks IR. It's a single platform that brings together real time analytics, branded investor portals, and hands-on advisory support so you can

communicate what matters. If you're an onchain business looking to level up your investor strategy, check out Blockworks investor relations at blockworks.com/investor-reations. All right, back to the episode. Is this a good time to define what a curator is and maybe differentiating the curator from the vault infra provider and maybe other layers that we might find relevant here? >> Yeah, >> take it away. >> Uh I can take it I can take it real quick David if you want. >> Go for it. Um so in the beginning there was a and there was compound and these are borrow lend pro uh protocols where you deposit collateral in you receive a

receipt token of your collateral in there and then there is a fixed formula for pricing that uh that that that coin in the protocol. a fixed formula for lending it out and you and you get interest on this by virtue of a fixed formula that is hardcoded in the protocol and these were very very successful they still are very very successful. However, um by virtue of it being a permissionless immutable system on chain, there's only so much dynamism you can encode into this fix, borrow

lend algorithm to uh make it um competitive with an alternative product in which it is actively managed actively managed by someone else. And that active management came about with Morpho in which Morpho created vaults. They didn't create vaults, but they what they did is they took the concept of vaults and they layered a a custom risk manager on top of it that was able to dynamically adjust the risk parameters as they saw fit based on a proprietary risk engine that they work hard to build in order to determine at what rates they should be lending out

third party um non-custodial capital that is deposited into a Morpho vault. And and and just one other thing just so uh our listeners are very smart on this. You can analogize this to dexes what you're seeing right now with dexes. So in the beginning you had unis swap and unis swap was defined as x * y equals k. What does that mean? That is a fixed formula in the original unis swap pool. And what that means is that if you deposit assets into a pool, you deposit a pair of assets into a pool, ETH and USDC, and there's a fixed formula by which you price those assets. So if I swap USDC in, I get a fixed amount out.

Okay. Um, now there was a lot of innovation in these fixed formulas on Dexes, but they were never as good as order books, right? They could never price things as dynamically as order books, but you could not have order books on chain because order books on chain there's they suffer from a host of different problems. And so for much of the history of dexes, you had these fixed formulas that were really really good at pricing assets, just a little less good at pricing assets as order books. And the order books existed offchain at Binance and Coinbase and Kraken. And the onchain dexes were really good for DeFi natives for composability and for um illlquid I call

illlquid assets or small cap assets. They're actually superior at pricing small cap assets than order books because market makers are what power order books and market makers aren't going to hold illlquid small small cap assets. So what came about over the last year was the invention of the prop AMM and the prop AMM is on it was originated on Salana but it it moved on to base. Now there's talk that they might even be on Ethereum. And these are very analogous to curators in the sense that you have a vault of capital and you have a market maker that set instead of it being instead of market making defined by a fixed curve set on chain, it is

defined by a dynamic curve that is adjusted in real time by the market maker. So you're seeing these parallel innovations happen in real time with curation for the borrow lend and for the asset management type strategies and prop amm for high frequency market making on in DeFi right now. >> Yeah, this this is a great description and I think it talks a lot a lot a little bit about this hierarchy of services within DI and at the very bottom comes liquidity. Everybody needs liquidity. Even if you are a you need a liquidity layer because you need a place to execute your liquidations for example. So liquidity sits at the bottom and then you have the lending protocols and now uh vaults are kind of coming on

top or integrated with these uh protocols uh and and the the borrow activity. The the one thing perhaps is also worth highlighting is that when you think about the vaults ecosystem, there's there's the curator layer, right? And these are kind of quote unquote risk managers. And there's companies like Gauntlet, there's companies like Stakehouse now, companies like Bitwise and some others. These folks are basically spend a lot of their time uh kind of defining the risk parameters, kind of building trust with their uh let's say uh clients or or investors. There's also the the part of the node of the vault infrastructure provider. So basically this is where

Morpho fits in. There's this is where a company like Veta Labs would fit in. Maybe Morpho and Veta are a little different. Maybe I don't know uh VETA is more multi-chain. Some folks would say Morpho are more decentralized. But these guys are also basically building the infra that a lot of the curators will use. some of the curators they own more of the stack. So like Gauntlet has its own uh vault infrastructure system. So so so there there are folks that go to a more uh verticalized model but but it's important to keep these uh two roles uh in in mind and and I would add that there's there's there's now a third

layer emerging which is the integration layer. That's where Anchorage fits by the way. So the integration layer are folks who are giving access to some of these curators especially within a regulatory perimeter right. So like encourage started to provide access to select morpho vaults to our clients without them having to leave their assets off qualified custody. So there's a bunch of benefits and and kind of regulatory comfort with doing those kinds of things. I would argue that there's now an emerging kind of integration layer. So I think hopefully that helps kind of put into context what are the layers who's at who's at play.

>> Great point. >> That's exactly right. I love that. And and mirrors what exists in the traditional world as well where you have similar layers not quite the same but similar layers with similar roles uh from people who aggregate clients and give them exposure to certain things to tools and operators to asset managers as well. So it really um it's really beautiful to see the important parts of that ecosystem being recreated in the vault side uh while a lot of the DRE is not being recreated because it's not necessary. That's the beauty of this innovation process.

>> On the trify side, David mentioned the you know the liquidity layer, the lending layer, the vaults on top of that. Do we see a world where vaults, you know, right now it's primarily lending and yield strategies. Do we see a world where it branches out from that where it becomes more akin to maybe just ETFs? And also, if not, or whether or not that does take that path, do we see ETFs being the lay on top of that where an ETF could be an actively managed ETF that holds multiple vault securities or something of the sorts? I mean I mean that's a that's it's a beautiful I love dwelling in the absolutely eventually I think is the answer we're we're we're

look from 30,000 foot view we're moving to a world of financial super apps where the lines between crypto and tokenized securities and traditional securities and other offerings are all blurred and they're all effectively held in the same place right the Paul Atkins has said that is the world that he wants he wants to see the emergence of these super apps. He wants all traditional assets to move on chain. Uh that is the world I think where we are going to be at some point in the next 5 to 10 years. And so the question becomes in that world what is an asset manager? And I think the answer to that is vault. So that's a that's a sort of roundabout way of saying that I think of course eventually it could be multiple different types of

assets. We're sort of, as I mentioned, already seeing that to some degree with considerations by vaults expanding beyond onchain strategies to tokenize real world assets, right? That is like the first baby step. And then from there, could it be other assets as well? Of course, I'd bring another allergy from ETF land. ETFs were only equities and bonds were quote unquote impossible until they launched. And then commodities were impossible until that launched. and then hedge fund strategies were impossible until that launched and then leverage and then private loans etc. This is just the same story repeated. We're starting on yield because that's where the approximate demand is right from the stable coins

search. It's urgent and it needs to stay on chain. It's urgent. So that's where it's starting. But I'd be interested what the guys think. I I don't see in a super app world how it doesn't expand beyond that to to include other assets. it it 100% should expand. But but I think it's also important to keep in mind how early we are today. Most vaults are very short-term duration and very real like we we we barely I don't think we even have a fixed deal uh market. We cannot go much further than a few days kind of duration. So we're still very early and I'm sure we're going to see a lot of advancements especially if you bring in maybe an AI component. I would

be interested in seeing how uh like AI could be running some of those uh risk strategies, but but those things are probably uh further down the future. Um we have a few interesting I would I wouldn't call them vaults, but we have a few interesting structured uh uh kind of structured uh finance products that work in crypto very well. Athena is a great example. Um and that's basically a tokenized basis trade. So, I think we're going to see more and more of these strategies get incorporated into vaults, but still very early. And that's why we're a few billion dollars big, right?

That's why we're not the uh at at the hundreds of billions. That's not why we're at the trillions and all all these big numbers. I think the market will also need a lot more maturity. Not only we need more real world assets on chain, but we also need more sophisticated activity in the market. And today, most of the borrowing activity are folks overcolateralizing their ETH and getting more dollars to buy more ETH, then do that loop a few times and get a levered ETH uh position or BTC, whatever the underlying uh liquid crypto asset is.

So, that's that's where where the market is today. And as as Matt said, now maybe we're moving a little bit more towards RWAS and I think things will move from there. But those things take time which is natural and I would say it's even good right where you want to evolve in a stable uh but but sustainable way and and and making sure things are are not moving that fast. >> Yeah. >> Yeah. It's such a good point. One of the challenges in vaults is it's so clear where they're going long term that people are like want to rush ahead to uh these you know this endgame but as David mentioned uh it's really really early you know it's it's it's daily you know liquidity like it's it's it's really early so we have to expect it to take

time to expand. Yeah, I think it's it is so early. Um and because it's so early uh we are still um you know I talk to hedge funds every day and I'd say 75% of them have no idea what we're talking about right now honestly. I mean maybe you have a different experience. I mean, I know David and and Matt, you do the same, but um I talked to my hedge fund buddies and they're like and I'm like, "You should get into some vaults and they're like, "What is that?" So I I actually want to revise something I said earlier because it it made me think of what you just said Matt is although um

we this is a massive efficiency gain that we will see with vaults there is also a massive learning curve that has to take place and an auditing process of institutions of this technology that actually probably will be longer than any bilateral uh negotiated uh agreement to enter into another traditional fund that any institution goes into any day because institutions already have the infrastructure to push new deals um in the traditional model out quite efficiently, right? What they don't have is in infrastructure to audit a a new vault very efficiently. They don't even know where to begin and they don't even

know who to trust in many ways, right? Okay. I mean, this is why Bitwise is so important and um obviously Anchorage and Galaxy and a couple others because um you know, we specialize in focusing on um on building trust with institutions, but you know, you go you say to an institution um you know, don't worry, the vault was audited by Otter and they're like, who the hell is Otter? Now, Otter, in fairness, Otter is one of the most reputable security firms in crypto, but they they've never heard of Otter. So even if the even if the the report is like 10 out of 10 perfectly clean they still have to underwrite Otter now right and so there is a a big learning curve there's a lot of

infrastructure that needs to take place in on the periphery to really unlock this capital >> yeah that that's absolutely right and there there questions will insurance on vaults become a required prerequisite for most people investing in them right what do we when do we get credit ratings across all yeah uh onchain challen challenges. These are like these are infrastructure. You will see growth without these things, but these are infrastructure and decision unlocks that are necessary if we're going to get to work. That's part of the messy middle that I talked about between the immediate opportunity and this $30 trillion is questions like insurance, credit ratings, due diligence, all those things. You have to stack them. That's the stair that gets us from there to the

other side. Part of the stairs, >> right? And hacks are a very real risk as we've seen very recently with Drift. >> Yeah. >> And quite a few. It's actually been a bad season for for DeFi hacks the past like 3 to six months. >> The Drift the Drift hack was absolutely scary because of how sophisticated it was and it was even scarier because it was not an exploit in the traditional sense. Right? Typically what you see is an exploit in which there is a bug in the smart contract code. I've actually been very very impressed over the last year and a half on how good the smart contracts are now. And you're you used to see in 2021 2022 you used to see

exploits every day, right? And what like every day in which a giant protocol got absolutely drained because they you you know they they didn't uh some vector um was not encoding properly the right order of different operations right and it was just an easy mistake to make or or um and many security firms audited these contracts but it was still so new but over time those exploits hardened the technology against exploits but now there's a newish form of exploit in which there's this social engineering that happens, right? And what happened with Drift is very scary because it almost seems like a nation state actor had a team that met with Drift and built

a relationship over many. It it reads more like a James Bond spy novel than a typical DeFi exploit. Right? So, this is the brave new world. I will say one thing though of hope. Tokenized securities actually are going to be a tremendously powerful force against this type of activity. And I'll tell you why. Imagine if the Drift hack actually h was hacked and all the tokenized securities got robbed. Well, tokenized securities would just get burned by the issuer immediately and reissued to the proper parties. End of story. No big deal. One of the problems with the drift hack and it's been a historical problem for crypto is that most of the assets that have historically gotten hacked are

permissionless assets that by their very nature there is no central party that can actually rewind the chain, roll back the hack, burn those assets, right? Um, in the drift hack, there was a USDC opponent, a circle component that we can get to, but it tokenized securities being being issued by a central party, which is what they would do have because they are a company's securities is actually a very nice centralization balance to decentralization, right?

these two things working together will actually balance each out in a very healthy way. >> That's that's a fascinating point that uh will be hard for crypto to wrap its mind around, but um but I agree with it. I think it's I think it's really clever. >> I people like to push back on that, but the permissionless aspect of crypto means that you're allowed to use this technology however you'd like and adding layers of centralization within the infrastructure to protect users. I I don't think that's a bad thing. I do think that with the drift talk I do think yes it was sophisticated social but social engineering isn't necessarily new it's maybe more newer for crypto I think you know drift shouldn't have had one admin key with all of these

resources um with all of these controls but you know and this kind of like leads me to be like an intermediary like Kraken released earn which you can use vault products through that and there's some sense of viability there and it's going to just push people to these more regulated options because It's, you know, it's 2026 and we still have multiund million dollar hacks going on. And then we want to add, you know, crypto is the front end. You want to add AI agents managing VS before everybody else. Like, and Claude just released their new their new tool. Well, not privately released because of security concerns. So, it just it just feels like it's becoming it the industry is maturing, but it seems like it's becoming a little bit wild again in

terms of this space. >> No, 100%. It's it's an interesting time for DeFi hacks. Uh fully agree with Michael. The the the drift hack looks a lot like the bybit hack, right? So it was basically someone had a key that had a lot of control over assets. That key that secret was compromised and that's basically where the attack came from. This is very different from the previous attacks we we have seen in the past. Um but but the one thing the one important thing is uh Bybit is a centralized exchange. Drift was supposed to be a decentralized exchange. And I I don't want to be too rough. I think Drift is a great protocol. It's obviously a great

team doing great work. But one of the reasons why DeFi should exist and and improve on the traditional system is that you kind of avoid single points of failure. and and in the drift situation, we kind of had that. But perhaps the other the other example I would use that is maybe even more directly related to vaults is actually the resolve hack. There was uh resolve was a different protocol, much smaller hack. I think was in the tens of millions of dollars range, maybe $20 million.

But some of the vault curators had exposure to resolve and and and there were the there were a few uh a few issues there. The interesting thing here and I spoke to some of these vault curators is that the behavior of the market that we saw during the resolve hack was that folks were moving from the riskier vaults to the less risky vaults. And I'm saying this because if you compare this to another hack we had which was the stream finance hack and that this was maybe six months ago or so that hack when when that hack happened what you saw was basically an exodus from faults. So, so the market is evolving from seeing these hacks and

just getting completely away from the technology to maybe seeing a hack and maybe even seeing some some parts suffering a few losses here or there and instead of completely abandoning the technology, they're just moving to safer or to less risky vault. So, I think that's that's the uh I think that's that's the bright side uh of these more recent hacks that that we saw. the market seems to be more mature in terms of different differentiating of risks. But I fully agree that the drift hack was scary and with methos which is the new entropic tool that apparently can catch bugs pretty much everywhere to the point that it has not even been released

yet. This is definely a time to stay on your toes as it regards to to to OBSAC. Yeah, we thought that uh quantum was going to be uh the big risk for uh for breaking in uh cryptography and encryption, but it could be a AI could get there first, which is very scary. Very scary. >> Yeah. Or it could still be social engineering, getting beers with people, right? >> Different attack vector, but just as scary. the oldest one in the oldest one in history. Get beers.

Yeah. Yeah. I I think that uh that we need to um we need to have a better So, I here's the ontology in my mind, the Mark Antonio decentralization versus centralization. It should go like this. The base layer, whether it's Ethereum, Salana, whatever should be decentralized. This is going to galvanize and and and uh catalyze nations of all different stripes, businesses of all different stripes to build on this decentralized platform just like the internet is not owned by any single party, right? But then there should be businesses that are built on the on this decentralized layer that

range in different degrees of centralization to decentralization. Some will be fully permissionless and decentralized. Others will be more centralized and institutions in that world will have at least a menu of different options to choose from when deciding whether to deposit into a decentralized platform or a centralized platform. And when you have a centralized platform on a decentralized network, what you'll be able to find is that that centralized platform will probably be able to get insurance easier. I think one of the big issues for insurers is that how do I ensure some decentralized uh platform um and you will be able to have more of the

bells and whistles that institutions are more comfortable with and if that centralized platform is the conduit to then bridging composability across the decentralized layer with other decentralized platforms you're going to have I think that is what you're going to start to see over the next year year to 18 months. >> Totally agree. Yeah, there are places where it's valuable, places where it's not, and there's everything in between. It's always been a spectrum. It's always been presented as a binary and a a good versus bad. And of course, it's a spectrum and its benefits and risks. And I think the beautiful thing is people will get to choose where they want to be on the intersection of those two things.

>> I 100% agree with that. I do think that this provision of services can happen on a more decentralized way and on a more decentralized way and they're complimementaryary with each other. There's one difficult question that the industry will have to grapple through though which is where is the dividing line like what what are the requirements for you to be a let's say curator and at what point you are just a rapper and you should register as an RAIA and this applies not only to vaults right this applies to we talked about the security versus commodity distinction for certain crypto assets I think this is probably the more difficult question that we'll find an answer to. We'll we'll we'll

figure that out. We're for now answering the easier questions and but I think this is a big one that we'll have to grapple with uh hopefully in the next couple of years. >> I do see things leaning a little bit more centralized. That's tends to be the trend especially with this institutional adoption. I just and I agree it's permissionless. So everybody should you should be able to build whatever you want and put whatever layers on top of it. I just fear of this future where some young kid is like I used unis swap and the other kid is like you raw dog unis swap you just did that onchain by yourself and I'm just like where it's only the super geeky hackers actually using def like the proper defi native onchain stuff. side because you know I I

I want not maybe not the greatest term but I want DeFi to be the Trojan horse to instead bring the traditional finance industry into this more permissionless nature versus the other way around. Yeah, I think we I think it's worth mentioning some big news that happened this last week um about the SEC pushing for a just a a a sort of blanket, not a blanket, but a a a reasoned exemption for a period of time to experiment in DeFi. Um, and I think that is extremely interesting because rather than come up with all of these different rules on how to police defi sort of have a pilot

program, right, in which uh DeFi operate uh you know institutions and and uh and different uh different uh traders can operate within DeFi in in a way that um is is over the is under the oversight of the SEC but is not is not necessarily going to get uh policed uh on a day-to-day with with certain uh rules that they're going to have to come up with. So, I think it's really a really positive step forward and I'm really excited about about um you know participating in that.

>> Yep. I think that's right. I would say Mark, don't worry about it. Decentralization wins at the end. I think of the Jeff Bezos your margins my opportunity. It's just getting incrementally better. It doesn't have to go uh full uh uh full direct but uh but but but that's the that's the direction we're head >> that that consolation. >> Yeah. >> Sorry, just to be clear about what I just said before like they issued a a a proposal for a safe harbor, right? Safe Harbor is going to be very interesting for DeFi because right now, for example, just as an example, market makers can't trade tokenized securities on chain because there's securities and there's just it's just unclear about whether or

not even if they are registered dealers that can trade securities on the NASDAQ, whether they can do those same things on a blockchain. So the safe harbor is going to move very far because one thing we didn't talk about here that I think is is relevant is um how important the growth of vaults and curation is um dependent on a healthy trading environment high frequency trading environment um on chain right so one of the big issues and I get calls about this every week um for RWA vaults specifically is that they need liquidators.

But those liquidators um maybe I should explain this like maybe I should just break this down for our audience really quickly. Like when um a pool when a vault has bad debt um typically how it works is they they sell that bad debt to liquidator bots that buy that bad debt at a discount and then swap it into a decentralized exchange. Okay. And this is how the the uh the vault or you know the you know a or or compound or maker will will remain solvent right but you need the decentralized exchange or historically you've needed the decentralized exchange components in order to even have the

lend borrow lend protocols in vaults. Um, similarly, if it's an RWA vault, you need some sort of pool to be able to to sell that collateral into to incentivize liquidators. And you don't have that because RWAS are typically not sold on DEX's today because they're securities. And so bridging that is a big issue, right? So the unlock with the safe harbor of being able to potentially trade securities on chain as a registered dealer could you could see a massive explosion on on the other side on the on the curator side of RWAS.

>> Yeah, that all makes sense. The thing I would say is this is not only true in the DeFi world. This is also true in the centralized trading world. Like a lot of the crypto trading desks don't have broker dealer licenses. Most of them don't. So if you want to trade a security and again a tokenized security is a security by definition and according to this the recent guidance that the SEC and the CFTC provided um you if they are securities in theory you need a broker dealer license to engage with those things. So even in the centralized world there is a little bit of uncertainty here and a little bit of limited engagement.

>> Okay. Nice. Sounds like a open sandbox um type of approach which I which I'm an advocate of. Um we're coming up on time there. Any last thoughts on vaults from anybody? >> I I I would just give a party thought here. Um, I do think that the companies today that really invest in the vault technology and invest in figuring out how to uh build more dynamic vaults with more expressive operations um are going to have a a market uh they're going to capture market share faster and potentially could have a moat in the future. So getting in early um I think

and getting in right now is is I think very important. >> I would say wait till Bitwise establishes its boat and then jump into the space would be my recommendation. Um no I absolutely agree with that. That's the history of asset management. Uh early movers in new technologies have benefited from it uh over time. The other thing I would say to people, I think this has actually been a great conversation really clarifying on how vaults work uh is I I I I say this in DeFi in general, hands-on experience is a real unlock in learning. That doesn't mean everyone should go experiment with vaults. I'm not suggesting you do that personally, but personally, hands-on experience has been one of the two

primary vectors to learn about anything in DeFi. And if you just learn academically, you're missing sort of half of the story. Um, so that's a that's a generalized thought, but I think it's true here, too. >> I absolutely love that. I think anything related to crypto, if you get your hands dirty, it's probably the easiest way to not only learn, but also get excited. Getting an onchain transaction in is is actually very exciting. Um the one thing I would highlight is uh we we talked a lot about the supply side here, right?

Which is what these curators are doing. They're they're bringing supply to onchain credit markets. The one thing I'm very curious to see is the demand side. So today we have relatively limited use cases for DeFi credit demand. Right? As I said, it's mostly levered kind of buying to the point that today because there's not a lot of demand for leverage in DeFi, DeFi rates are extremely low and we've we've talked about this uh many times. What I'm interested in seeing is because we're seeing all this supply growing and it's kind of a given that we're going to see stable coins growing and a lot of that will makes its way uh into vaults.

That's kind of the primary driver here. I'm very interested in seeing what new demands for or what new use cases for onchain credit demand we're going to see. Uh because the rates are now getting probably low enough that maybe we're going to start to see some interesting things popping up. >> Yeah, strongly agree. Really great point David. >> Great point. >> Love it. Yeah, definitely agree with both points. I'm looking forward to the evolution of vaults and you know for listeners out there you heard it. Get your hands dirty. use this new tech.

There's, you know, there might be some costs along the way and mistakes, but that's that's the price of this education and this in this journey. So, thanks for listening everybody, and we'll see you next week.