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Author: Merlin Egalite, co-founder of Morpho; Source: X, @MerlinEgalite; Compiler: Shaw Bitcoin Vision
Vaults (“Vaults”) are non-custodial blockchain infrastructure that enable functionality not possible with traditional finance.
In traditional finance, financial products are built on infrastructure that is fragmented, siled, and generally outdated.Offering a single product requires coordinating multiple intermediaries, integrating proprietary systems and managing manual processes.Even so, the “best” financial products still lack personalization, convenience and transparency, while still incurring high costs for users.
Vault changes all that.
What is a vault?
Vaults (“Vaults”) are programmable, non-custodial strategies that users can opt-in to allocate deposits into different investment opportunities without relying on any intermediaries, all on a single atomic environment – the blockchain.Users can access funds in the vault at any time without anyone having to assist (or block) the relevant transactions.Users always have full control over their assets.
Vaults have a similar goal to traditional funds – to provide users with a simpler and more efficient way to deploy their money, but it uses automation and programmable code rather than intermediaries.
For those familiar with traditional finance, vaults combine the scale and accessibility of exchange-traded funds (ETFs) with the controls and safeguards of privately managed accounts (SMAs).Treasury achieves better financial solutions in the following ways:
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Can be combined and managed: Operating in a unified environment without intermediaries, rather than multiple isolated databases, books, accounts and systems, enables more flexible, affordable and personalized financial products.
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Easy to access and integrate: Only a wallet and digital assets are needed to interact with the vault, greatly lowering the barrier to entry.
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Programmability: Vaults provide transparent and irrevocable security measures—advantages only available when built on-chain.
Treasurys and Funds
Treasurys and funds share some characteristics, but there are also some key differences.
traditional fund structure: User invests in the fund.The fund owns the assets and the investors own the fund shares.The fund manager has full custody and control.Funds are governed by law and often have lock-in periods, redemption windows and minimum investment amounts.Users can deposit and withdraw assets only with the participation of the fund manager.
vault structure: Users deposit assets into a smart contract that cannot be tampered with and is not controlled by any individual or entity.Users have full custody rights – assets are always under your control without any restrictions in the traditional sense.The vault automatically allocates deposits based on preset rules.Users can withdraw instantly at any time without any permissions or reliance on counterparties.
How does the Morpho Vault work?
When a user makes a deposit to the Morpho vault, the funds will be allocated to the lending market (Morpho Market) based on the strategy set by the curator.
These funds are available to borrowers who wish to obtain loans secured by specific collateral such as Bitcoin, Ethereum, or tokenized Treasury bonds.Technically, any asset that exists on the blockchain can be used as collateral.The borrower then pays interest on the loan, which becomes earnings for the depositors of the vault.
Users can withdraw funds from the vault at any time and receive the initial amount plus interest.
Depositor protection
Vaults are designed to provide strong protection to depositors:
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They are completely non-custodial: administrators can never take direct custody of user deposits.
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Allocations can only be made within the vault’s pre-set caps and limits.
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Any changes that alter the vault’s risk are time-locked—delayed in execution—giving depositors time to react and withdraw funds if necessary.
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An optional “sentinel” role can be configured, allowing depositors to veto allocation changes.
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Even if the vault is illiquid, depositors can redeem their share of the assets at any time.
Vaults and Tokenization
Tokenization brings traditional off-chain assets to the blockchain.Its value lies in connecting traditional finance (TradFi) and decentralized finance (DeFi): enabling traditional financial instruments to be held and transferred on the chain.Tokenization improves asset allocation, but it does not create inherently better financial products.Tokenized assets remain:
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Delivering highly personalized products is expensive and difficult due to the need to operate across disparate environments, systems and databases.
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Legacy off-chain reporting, processes and accounting systems are inherited, which reduces efficiency and increases costs.
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There are no transparent and irremovable safeguards of the kind that smart contracts can provide.
Vault provides infrastructure for the distributed development and fully on-chain construction of financial products.Instead of depositing all funds into a tokenized fund invested off-chain, users deposit it into a vault and all funds are distributed on-chain.
Tokenization is a useful transitional tool, but vaults are the end goal.
Not all vaults are created equal
Vault infrastructure exists on a continuous lineage.At one end are vaults based entirely on the chain, such as the Morpho vault, where immutable smart contracts ensure strong security guarantees: users retain control of assets, asset distribution is transparent and verifiable, and all changes are made via time locks.At the other end of the spectrum are vault “wrappers,” which maintain more traditional custody arrangements where the vault operator controls the assets and has complete discretion over how they are used.
It’s critical to understand what safeguards your vault infrastructure provides and how these safeguards are implemented.
