Jason Yanowitz hosts John Zettler from Kraken and Sun Raghupati from Veda to explore the explosive growth potential of on-chain vaults. John leads product development at Kraken after five years at Coinbase building DeFi products, while Sun founded Veda as a multi-protocol vault infrastructure platform.

The conversation covers vault fundamentals, revenue models, risk frameworks, and competitive dynamics. Jason's prediction that vaults will grow from $6 billion to $15 billion in 2025 is challenged by both guests who expect significantly higher growth.

Key topics include the technical architecture of vault systems, the role of risk managers like Chaos Labs and Steakhouse, and how traditional asset managers are rapidly entering the space. The discussion reveals how DeFi is evolving from direct user interfaces into back-end infrastructure powering traditional fintech products.

Vault Growth Predictions Exceed $15 Billion Target

Sun and John both predict vault TVL will exceed Jason's $15 billion forecast, with Sun declaring "2026 is going to be the year of the vault" due to perfect market conditions.

The setup includes embedded wallets working well, declining Fed rates creating yield hunger among fintechs, and infrastructure like Veda now fully operational.

"I don't think our launch is going to be the last one people hear about in the next coming months" - John expects major vault announcements throughout 2025.

Vault Architecture: From Primitives to User Products

Vaults are "a layer that sits above DeFi that allows you to package up the best of DeFi and distribute it globally to consumers" - Sun explains the fundamental value proposition.

The DeFi stack operates as a pyramid: liquidity at the base powering AMMs, then borrow-lend protocols like Aave and Morpho, with vaults at the top aggregating opportunities.

Primitive DeFi lacks user-friendliness, risk controls, compliance, and product customization flexibility that institutions require for their user base.

"Liquidity and yield are fundamentally tied" - vault construction involves optimizing across withdrawal timeframes, yield targets, counterparty risk, and smart contract risk.

Yield Sources and Borrower Demand Dynamics

Vault yields primarily come from on-chain borrowers who "want to borrow assets out of these protocols, typically for the use case of going levered long."

USDC is the most borrowed asset because users post crypto collateral, pull out USDC, buy more crypto, and "lever up again" in repeated cycles.

Assets flow from vaults into protocols like Aave or Morpho, which handle the actual peer-to-peer lending through their pooled systems.

Protocol Comparison: Aave vs Morpho vs Veda Models

Aave operates a pooled model where users deposit any supported asset and can borrow from the global pool without needing vaults for decision-making.

Morpho introduced isolated markets (one collateral, one loan token) requiring vaults to aggregate fragmented, siloed markets for efficiency.

Veda provides "multi-protocol, multi-chain" infrastructure allowing vaults to aggregate "any form of DeFi, whether it's Morpho, whether it's Aave, whether it's Pendle, whether it's RWAs."

"Institutions want flexibility because they want the best yields, they want the most product flexibility" - Sun argues the evolution toward maximum vault flexibility is inevitable.

Risk Management Ecosystem and Revenue Splits

Vault operations involve three key parties: infrastructure providers (Veda), risk managers/curators (Chaos Labs, Steakhouse, Gauntlet), and distribution partners (Kraken).

Kraken's vaults charge 25% performance fees split through smart contracts, with "the lion's share goes to that distribution" partner who owns the customer relationship.

Risk managers are selected based on track record with protocols like Aave, security models, familiarity with vault providers, and "craftiness and innovation" in finding yield opportunities.

"There's a huge, there's a very long tail of people that are just doing stuff" but power laws emerge favoring curators who "have managed billions of dollars at scale."

Traditional Finance Integration and Competitive Threats

At a holiday party, two traditional asset managers in suits were "deep" on vaults, knowing "Steakhouse, Gauntlet, Morpho" and planning to enter the business.

"BlackRock does have distribution" and when major asset managers launch vaults "they will do it on Veda" according to Sun's prediction.

Traditional managers will succeed because "they have the customers" and "customer relationships" plus "assets that they can funnel into their products."

However, crypto-native firms may retain advantages in "the crypto native, DeFi native stuff" and building trust with existing DeFi capital allocators.

Risk Framework: Smart Contracts vs BlockFi Comparison

Three primary risk categories: bad debt risk from under-collateralized lending, liquidity risk for withdrawals, and smart contract/cybersecurity risk from protocol bugs.

Unlike BlockFi/Celsius where "you had no idea where it was going," vault users "know where your assets are at all times, it's all on-chain."

"Even if Kraken goes down, there's a global outage, you lose your phone, you can literally go to the blockchain and see your assets."

"All of DeFi went unscathed" during the 2022 CeFi collapses because "these were over-collateralized loans" with orderly liquidation mechanisms.

Product Strategy and Future Roadmap

Kraken's approach uses embedded wallets through Privy (acquired by Stripe) where users control assets via OTP codes but Kraken "can't touch it, can't move the funds."

"DeFi is increasingly becoming a back end" with vaults serving as packaging layers for traditional fintech distribution channels.

"This is actually the only way that DeFi succeeds" - Sun argues the integration model is necessary rather than building an independent financial system.

Future products will include more vault strategies, with John seeking risk managers who can "show me that you've been doing it before" with sustainable track records.

Resources Mentioned

Atomic Habits

James Clear's habit formation framework was referenced when discussing how small daily improvements compound over time, relating to the gradual adoption and growth of DeFi vault products in traditional finance.