As banks, fintech companies, and payment providers continue to expand their on-chain operations, on-chain asset management is gradually becoming a key integration layer between traditional financial services and DeFi protocols.
Author: Will Awang , Investment and Financing Lawyer specializing in Web3 & Digital Assets; Independent Researcher specializing in Tokenization, RWA, Payments, and DeSci
In 2025, DeFi established itself as the future direction of financial infrastructure, marking a key turning point for the development of on-chain asset management (DeFi Vault). According to DeFiLlama data, this sector (Risk Curators Protocols) grew rapidly from $300 million to $7 billion in less than a year, an increase of 2200%. As banks, fintech companies, and payment providers continue to expand their on-chain operations, on-chain asset management is gradually becoming a crucial integration layer between traditional financial services and DeFi protocols.
From multiple perspectives, the market's demand for on-chain asset management is becoming increasingly urgent: whether it is value capture of cross-chain assets, value leverage of real-world assets (RWA), segmented yield needs at the retail and institutional levels, or yield capture tools at the fintech backend, all of these are driving the rapid development of on-chain asset management.
This article will begin by introducing the fundamental concepts of DeFi Vaults and their Curators, and then explore how DeFi Vaults have grown from a niche demand to a mainstream trend through the key developments of Gauntlet, a major player in this field, in 2025. Building on this foundation, we will further analyze Gauntlet's origins and development through an interview with Gauntlet CEO Tarun Chitra by Money Code, understanding how DeFi Vaults evolved from traditional asset management, what unresolved issues they solved, and what this means for the fintech industry.
Although most of the opinions are biased towards Gauntlet, they do provide us with a more comprehensive perspective on on-chain asset management.
Key points
- As banks, fintech companies, and payment providers expand their on-chain operations, on-chain asset management is becoming an important integration layer between traditional financial services and DeFi protocols.
- The manager accepts capital from on-chain investors to generate returns and allocates on-chain assets across different sectors through a vault. This is similar to traditional asset management, where returns are generated for investors through asset management.
- Every new technological revolution in financial history has an incubation period, during which people take time to understand how these products work, understand risk models, and understand how they can collapse. On-chain asset management is a current product of DeFi.
- The biggest difference between on-chain asset management and traditional asset management is that the funds in the vault are always managed by smart contracts, ensuring real-time transparency and the ability to withdraw funds at any time.
- On-chain asset management and managers do not actually eliminate risk, but rather manage it, or they are simply playing the role of risk.
- The complete lack of transparency in DeFi 1.0 protocols results in market pricing efficiency that is far lower than that of centralized markets, thus creating limitations.
- The goal of on-chain asset management is to provide users with transparency and certainty about the location of their assets, while allowing managers to adopt private strategies.
- The key is not to pursue absolute transparency, but to find a proper balance, to clarify which information should remain private and which information should be made public, so as to smoothly launch these financial products.
- From an asset management perspective, considering the on-chaining of profitable RWA assets is actually more valuable than considering those RWA assets that do not generate revenue.
- When an asset has no natural returns, borrowing demand is very conservative. But when people see a clear source of return and realize that this return can be amplified through leverage, borrowing demand grows rapidly. e.g., Ethereum restaking.
- Ultimately, when building on-chain products, one can consider this statement: The appeal of stablecoin emerging banks lies in their ability to provide yield products to anyone globally at the same interest rate, achieving true equality.
I. On-chain asset management and managers (DeFi Vault & Curator)
1.1 The Shift in Trust
One of Bitcoin's initial principles, which Satoshi Nakamoto repeatedly emphasized in the introduction to the white paper, was to eliminate the need for trusted intermediaries and instead rely on irrefutable cryptographic proofs. This idea not only laid the foundation for Bitcoin but also became a core guiding principle for many subsequent projects, especially Ethereum. However, completely eliminating trust is virtually impossible in practice.
The biggest misconception about Web3 is that it implies the need for trusted intermediaries can be completely eliminated. The reality is that it's unrealistic to expect everyone to be an expert in the details of every protocol.
Nevertheless, this doesn't mean these ideas are worthless. On the contrary, DeFi is redefining the nature of trust by creating an open marketplace where anyone can provide or acquire trust. The true revolutionary significance of Web3 lies not in the disappearance of trust, but in the transformation of trust itself.
1.2 New Faces of Trust
Curators accept capital from on-chain investors to generate returns and allocate assets across different sectors through a Vault. This is similar to traditional asset management, where returns are generated for investors through asset management.
Asset managers typically encapsulate relatively complex yield strategies into easy-to-use vaults, allowing users to "deposit with a single click and earn interest." The manager then determines the specific yield strategy for the assets on the back end, such as asset allocation weights, risk management, rebalancing cycles, and withdrawal rules.
Are managers trustworthy intermediaries? In a world that claims to no longer need intermediaries, the role of managers is being discovered and redefined. Their responsibilities are broad: code auditing, governance management, setting financial parameters, and much more, still requiring human intervention. However, unlike past monopolistic models, managers operate in an open market, where economic incentives drive them to provide high-quality work at the best price, or risk being replaced.
1.3 Administrator and Treasury
Curator : On-chain asset management strategies are designed and maintained by curators, who are responsible for overseeing multiple aspects of the entire process. Their primary goal is to manage risk and optimize returns.
- The key difference between DeFi vault managers and traditional off-chain strategies is that DeFi vault managers never hold user assets in custody .
- DeFi's non-custodial nature allows users to always maintain control over their funds.
- Its programming features clearly define in each smart contract what managers can and cannot do with user assets.
Vaults : Users can deposit assets into on-chain vaults and receive the crypto asset yield (APY) they provide.
- A type of non-managed smart contract: code deployed on the blockchain that holds user assets and executes defined strategies.
- Transparent and verifiable: All transactions, holdings, and allocations are publicly verifiable on-chain.
- Determined by the parameters that define the manager's permitted behaviors: predefined rules that restrict the behaviors that the manager is allowed to do.
Infrastructure : On-chain vaults exist on top of a protocol, such as Kamino, Morpho, Drift, or Aera, and are deployed on a blockchain.
Decentralized finance (DeFi) provides a complex environment for institutional and individual participants: dozens of protocols are distributed across multiple blockchains, covering a variety of asset types and numerous yield generation strategies. Managers are responsible for navigating this ecosystem, while maintaining appropriate risk management, ongoing due diligence, and tracking the performance of decentralized distributions, which places a significant operational burden on them.
DeFi vaults and administrators address this complexity by providing a standard infrastructure layer for yield optimization.
As banks, fintech companies, and payment providers expand their on-chain operations, on-chain vaults are becoming an important integration layer between traditional financial services and DeFi protocols.
Although some analysts have directly compared on-chain asset management, managers, and their lending protocols to Celsius and BlockFi, the largest centralized lending institutions in the last cycle (which eventually collapsed), their roles are constantly evolving, and their governance mechanisms are becoming more decentralized.
For more information, please visit: vaultbook.gauntlet.xyz
II. Gauntlet 2025 Retrospective: Institutional Partnerships and Innovation Achievements
2025 was a strong year for Gauntlet's institutional growth. The company earned the trust of numerous leading institutions, fintech companies, and wallets seeking reliable on-chain yield acquisition pathways. Through extensive partnerships, Gauntlet's vault is becoming a bridge between traditional finance and on-chain opportunities. The following collaboration paths are worth learning from.
A. Institutional Cooperation and Innovation
Gauntlet has partnered with institutions such as Apollo, Securitize, Morpho, and Polygon to launch the first on-chain leveraged RWA strategy using Apollo's ACRED fund. This collaboration marks a fundamental shift in how institutional yields are acquired and optimized on-chain, successfully combining the efficiency of DeFi with off-chain yields.
B. Solana's explosive growth
Gauntlet's total value locked (TVL) on Solana has increased significantly, thanks to the successful integration of Phantom and Squads Protocol on Kamino and the establishment of a Delta-neutral vault on Drift. These initiatives have significantly enhanced Gauntlet's influence within the Solana ecosystem.
C. Corporate Banking System Integration
Wirex has become the world's first bank to integrate Gauntlet vaults with its corporate accounts. This integration allows Wirex's corporate clients to access stablecoin yields on their USD and EUR balances with a single click, seamlessly blending a traditional corporate banking interface with on-chain yield opportunities.
D. Popularize on-chain revenue generation
In 2025, Gauntlet launched several innovative features that further popularized on-chain yield earning. These features included:
- Gauntlet USD Alpha (gtUSDa): A multi-strategy vault offering cross-chain stablecoin yields. Users can deposit USDC into the vault on Ethereum, Base, Arbitrum, and Optimism and seamlessly earn stablecoin yields from the entire DeFi ecosystem.
- Gauntlet Mini-Program on Base: Through a brand-new mini-program on Base, Gauntlet introduces a simplified way to access vaults, helping millions of users worldwide experience DeFi for the first time.
Gauntlet envisions three major development trends for 2026:
1. The rise of multi-strategy vaults: It is expected that more vaults will adopt multi-strategy structures in the future, building a combination of underlying vaults with different strategies.
2. The increasing popularity of fixed-rate products: Fixed-rate vaults will increasingly provide the predictability that suppliers and borrowers need to achieve sustainable returns, and will be more in line with traditional financial standards.
3. On-chain migration of Real-World Assets (RWA): In 2025, real-world assets will begin to truly move onto the blockchain. In 2026, this trend will accelerate, and off-chain revenues and on-chain efficiency will be integrated.
summary:
Clearly, the integration of on-chain and off-chain will not happen overnight, but on-chain asset management is using these know-hows to further integrate traditional finance with DeFi.
Since on-chain asset management lacks the institutional credibility, regulatory protection, and advisory relationships required by Registered Investment Advisors (RIAs) and private banks, it is particularly important to cooperate with traditional financial institutions. In particular, it is necessary to encourage institutions and platforms with sufficient performance records, credibility, and distribution channels to adopt DeFi-native strategies.
Gauntlet's collaborations with these financial institutions, such as Coinbase's cbBTC project with Morpho, are typical examples. Additionally, Société Générale's digital asset division, SG-FORGE, partnered with Morpho because its architecture solved the problem of finding regulated and compliant counterparties for on-chain activities.
Furthermore, from a product perspective, on-chain asset management using blockchain and stablecoins can ideally realize innovative Fintech models:
- The interactive front end is designed based on the user's regional attributes and user habits;
- The backend uses an on-chain asset management yield engine to capture yields globally, across the entire chain, and across all scenarios;
- To meet the needs of different user groups or to build different application scenarios.
Therefore, we can understand the essence of the following statement:
The appeal of stablecoin emerging banks lies in their ability to offer yield products at the same interest rates to anyone in the world, achieving true equality.
III. The Origin of Gauntlet
With the above background in mind, let's delve deeper into the role and positioning of on-chain asset management through Money Code's interview with Tarun Chitra.
Tarun Chitra is the CEO and co-founder of Gauntlet and a managing partner at Robot Ventures. This episode delves into the evolution of DeFi, focusing on risk management, vault management, and the evolution of lending markets. Tarun reviews Gauntlet's history, explaining its origins in simulation-based risk analysis and its current role in on-chain asset management.
The discussion also touched upon the concept of vaults as on-chain funds, comparing them to traditional finance while highlighting the unique aspects of transparency and self-custody in DeFi. They also discussed hybrid models, how to balance public and private information to optimize yield and security, and what this means for fintech builders and asset managers. The discussion also covered the importance of yield-generating assets, the challenges of tokenization, and the future of DeFi as a space for proxy asset management in a secure, sandboxed environment.
3.1 Starting with the Quantitative Model
Tarun Chitra:
I think to potential listeners of this podcast, and even some people in the cryptocurrency space, we might seem a bit like products of the "dinosaur era." Gauntlet was founded in 2018 when my co-founder and I were both working in quantitative trading . We witnessed what happened during the ICO boom, when people were creating all sorts of protocols and new chains.
However, their economic models weren't very rigorous. Some networks had 10,000 times the supply of Bitcoin but charged the same economic fees, which we found unreasonable; moreover, I think the term DeFi (decentralized finance) didn't even exist at the time; the stablecoin landscape was dominated by USDT (98% share), while USDC was just starting out and its development needed to leverage the growth of DeFi; there were some failed algorithmic stablecoins on the market, such as BitShares, which many listeners may never have heard of, and hopefully they never will.
So in this context, our goal is to try to figure out how to build software to stress test these systems, just like you would backtest a trading strategy or stress test a newly created financial model.
At that time, modeling different participants in DeFi systems was still in the research field, not in practical applications. We see multi-agent modeling in areas such as quantitative finance and autonomous vehicles, used to estimate rare events, such as what will happen to complex systems when things collapse.
3.2 From the monetization of consulting to on-chain asset management
Tarun Chitra:
We started as a company building simulation software, similar to Palantir (a big data analytics company) in the AI field. We provided stress testing for protocols, stablecoins, and blockchain projects to identify system crash points and security boundaries. Our primary role was consulting.
The company originated from my one-man consulting business, which was then acquired. While the market demand was clear, it wasn't clear how to monetize it, and the profit model was unclear. However, over time, we gradually shifted from this more customized consulting model to a more SaaS-like model, where people pay for parameter updates— for example, what should the interest rate be under certain conditions? Or, if I were to give you a loan, what should the loan-to-value ratio be? Things like that.
Then, starting in February 2024, we entered the world of Vault Curation, a form of on-chain asset management. In February 2024, we managed zero assets. Today, we manage slightly over $2.1 billion in assets.
IV. From Traditional Asset Management to On-Chain Asset Management
Money Code:
The key to risk management lies in starting with simulated risk analysis and assessment, which forms the core theme of our discussion. Risk management is crucial in the financial and capital markets. You mentioned that you've been acting as an on-chain vault manager since February 2024, which is undoubtedly noteworthy. What exactly is on-chain vault management? Perhaps we can briefly analyze DeFi to explore this further.
DeFi encompasses numerous areas. Among them, trading is a relatively familiar aspect, similar to Uniswap. Beyond that, lending is also a crucial component of DeFi, which can be viewed as the provision and allocation of capital: some people expect to earn returns by lending funds to others, while others wish to use those funds for trading, investing, or other activities.
Essentially, these on-chain managers accept capital from investors to generate returns and allocate assets across different sectors. This is very similar to their role in traditional finance, which is to generate returns for investors through asset management.
Today, we can implement this process on the blockchain, although some steps are not yet fully on-chain. Vault management is essentially a fund managed by these asset managers, who are known as "managers."
4.1 Asset Management Schools Derived from Risk Management
Tarun Chitra:
Perhaps I can start by offering some historical analogies before discussing the current situation. In my view, every new technological revolution in financial history has an gestation period where people spend time understanding how these products work, understanding risk models, and understanding under what circumstances they might fail. Inevitably, unless some rare and disastrous event occurs, you can't understand under what circumstances they might fail. Then, from there, you build models to figure it out.
So how do I truly own these assets? How do I utilize them? How do I expand them?
If we look back at the 1980s, there were two schools of thought regarding risk management that later evolved into asset management companies. The first was BlackRock. Before the municipal and junk bond revolution of the 1980s, BlackRock primarily functioned as a risk manager, providing risk advice to those participating in the market. This gradually shifted to them managing funds that invest in fixed income.
Therefore, in the realm of funds and fixed income, there's a natural tendency for those engaged in risk management to eventually become asset managers. Conversely, in another scenario, they might become like credit rating agencies, never crossing that chasm.
Another school of thought is in the quantitative finance field, with old-school quantitative funds like AQR, DeShaw, and my longtime employer Renaissance. They actually started by researching these different products before they even began trading. So I think, similarly, there's a gestation period where people spend a long time researching and understanding these products before they start trading.
Now, in the cases of AQR and BlackRock, they've spent years, even decades, writing numerous academic research papers on the unique characteristics of these markets, making them more accessible to people. Because ultimately, why do you build a risk model? On one hand, it's to protect your assets and invest responsibly; but on the other hand, it's also a form of education. If you're an asset manager, it's crucial to make investors understand the types of risks involved in their capital. Research and transparency are actually very important for this.
4.2 Risk Model-Driven Asset Management
In fact, from the technological revolution of the 1980s to the present, what you see is that they were very transparent at the beginning, and then became less transparent over time.
You can also see a similar framework in low-latency electronic trading in the early 2000s, from research to production. DeFi has seen a similar trajectory from 2019 to the present. Therefore, I believe Gauntlet, at least in the DeFi space, has written some of the most cited academic papers on these mathematical models, what these risk models should look like, which mathematical models are flawed, and so on.
The reason I bring up this analogy is that there's always a natural tendency to need a robust risk model that can withstand major shocks and market conditions before you're managing large amounts of assets for an extended period. It's difficult to build such a risk model before data or events occur.
It's like when I was writing hurricane insurance for Louisiana in the 90s. Sure, I could charge premiums for 10 or 15 years, and then Hurricane Katrina came and completely wiped me out. None of the research I did before that event helped me price it correctly. So, the analogy is that you usually need these rare events. So many times, it makes more sense to spend time really refining your analysis and risk models for these systems before you put your capital at risk.
So, I'm using this analogy of financial history to illustrate that the concept of on-chain vault curation, and the overall concept of a vault, arose from observing the evolution of early DeFi protocols over time and the occurrence of some rare and disastrous events. From these disastrous events, people began to understand that we needed these types of risk controls, or that we needed these mechanisms to make different types of assets safer. So, if I were to describe the history of DeFi, I should probably start here.
4.3 Limitations of DeFi 1.0 from an Asset Management Perspective
So the historical goal of DeFi is that, although cryptocurrency initially started as a decentralized revolution where anyone could run their own node, use their own wallet, and self-custody their funds, empirical evidence shows that most users use custody products . They use Coinbase or Binance and keep their assets there for many good reasons, some offering insurance, some offering better returns.
But in every cryptocurrency cycle I've been involved in since 2013, there's always been this pattern: historically, we've seen multiple centralized entities accumulate massive amounts of assets, only to suffer catastrophic collapses. Examples include Mt. Gox, the South Korean exchanges of 2017, and FTX—these events form a cautionary tale. DeFi can almost be seen as a direct response to these catastrophic events.
Whenever a serious problem arises, the market always adjusts accordingly. Take the 2017 ICO boom as an example: the reaction at the time was that exchanges controlled the listing process for all tokens. This raises the question: why can my token be issued on the Ethereum blockchain but not traded on it? Why must I go to Binance or other centralized exchanges to complete a transaction?
DeFi has been dedicated to transforming various financial tools and services that people are accustomed to using in a centralized manner into decentralized ones. Its goal is to eliminate the "gatekeeper" role of exchanges, preventing them from restricting user behavior and telling users "you can't do this." However, at the same time, DeFi is also striving to find a way to rival centralized exchanges in terms of security and convenience. Herein lies a paradox: can we truly achieve this goal? Over time, we've seen a growing preference for a hybrid model, which has become particularly important.
Taking FTX as an example, one key issue is that users cannot know the exact location of their funds in real time, making it impossible for them to accurately determine whether they can fully withdraw their funds. The hybrid model effectively solves this problem by allowing users to clearly see where their funds are going and how they are allocated, while keeping the specific allocation algorithm confidential, thus achieving an effective separation of private and public data.
I believe the construction of the vault is based on this principle. In financial markets, competition is inevitable in order to optimize returns. In the process of competing for risk or reward, participants need to possess certain private information in order to obtain the best returns in a highly competitive market. If all information is completely public, then optimal pricing cannot be achieved. This is precisely the limitation of DeFi 1.0 protocols; their overemphasis on transparency leads to pricing efficiency far lower than centralized markets. In centralized markets, traders or users can retain some private information, thereby gaining a more advantageous position in trading.
4.4 The Natural Need for On-Chain Asset Management – Vault
The Vault was created to meet a practical need: we want to maintain decentralization while achieving the efficiency of a centralized exchange, but without repeating the mistakes of FTX.
In protocols like Morpho, managers are called "Curators," though different vault protocols use different names. Despite the variations in terminology, they are essentially on-chain asset managers. These Curators, based on their own strategies, decide how to allocate user funds across different yield opportunities. For example, suppose there are three yield opportunities: the first offers a 5% return but carries some risk; the second offers a 10% return but carries even greater and less precise risk; and the third offers a 3% return but carries lower risk. In this scenario, the Curator must allocate user funds reasonably based on risk assessment and expected returns.
Therefore, these vaults are essentially a special form of fund into which users can deposit funds in a non-custodial manner.
The core of this process lies in the manager calculating a risk model, then determining how to allocate funds based on this model, and charging a performance fee for this. However, it's important to note that...
The manager never actually handles the funds themselves. The funds are always held in custody by smart contracts, which allocate the funds to different markets according to the manager's instructions, but the manager never truly has custody rights over the funds. I believe this is a very important difference between a vault and a traditional fund.
When you buy a traditional fund, you are sending your money directly to the fund manager. Although the legal system may restrict the fund manager's investment scope, and there may be other mechanisms such as auditors to supervise the process, fundamentally, the fund manager holds the custody rights of the funds.
The biggest difference between on-chain vaults and traditional funds is that the funds in an on-chain vault are always held in custody by smart contracts. You can clearly see where the funds are allocated, and you can withdraw or deposit funds at any time. The only part that is not publicly disclosed is why the funds are allocated.
Through this separation, the goal of on-chain vaults is to provide users with transparency and certainty about asset location, while allowing managers to employ private strategies. These strategies are not fully public and do not face the risk of commoditization or worse pricing as in a fully private centralized venue. So, while it may sound a bit complex, this design does offer users greater protection and flexibility.
V. On-Chain Asset Management – A Fusion of Publicity and Privacy
Money Code:
This explanation is indeed excellent and deserves further in-depth discussion.
First, let's start from the DeFi Summer, which has been four or five years since then. During this time, the market has experienced countless ups and downs, which have also brought many byproducts. We are now in a battle-tested system that is not only transparent but also supported by immutable code.
Secondly, another important aspect you mentioned is that, as a new monetary platform, historically, funds have typically been managed by banks, custodians, or fund managers. While these traditional financial systems have some built-in compliance mechanisms and related legal frameworks, transparency actually depends on whether the fund manager is willing to disclose this information to you.
Now, with these new systems, transparency is embedded through immutable smart contracts, along with a distributed ledger. Therefore, whether as an entity or a user, you can see everything. If you find that something is no longer in your best interest, you can quickly decide to withdraw. In the past, if a fund manager started acting recklessly, by the time you discovered the problem, it might be too late to withdraw your funds in time.
So, there are a few interesting principles to follow when entering this new currency platform. First, it's transparent. You have a lot of flexibility in deciding whether to enter or exit a certain strategy. Moreover, there's a wide variety of strategies to choose from. The hybrid model you mentioned is also very interesting. For example, the model of Coinbase and Morpho, also known in the fintech world as a DeFi Mutant. This model uses some kind of smart contract or protocol in the background, but on the front end, it provides high-yield or fintech services.
Could you elaborate on this hybrid model? Especially the evolution of DeFi, which is now accessible through Coinbase or fintech platforms. This is a huge step forward, allowing more people to truly access and use these systems.
5.1 The Divergence Between Publicity and Privacy
Tarun Chitra:
Yes, my point is that there has always been a separation between public and private information in the financial sector. For example, stock prices are public, but individual investors' specific holdings are confidential. Blockchain technology clearly provides a good foundation for information transparency, but requiring everyone to fully disclose their information is detrimental to individual investors.
This tension between information disclosure and privacy protection has always existed. Throughout the development of financial markets, this tension has been a constant companion. Looking back at the evolution of rules in publicly traded stock markets, there was a time when order books were completely public, but later some order types became closed while others became public again. This evolution has always revolved around a core question: to what extent should quoting and market making be transparent, and to what extent should privacy, such as that of an individual's portfolio or account balance, be maintained?
I believe this tension perfectly encapsulates the current situation facing the stablecoin sector. For the average investor, the value of privacy wasn't apparent in the past. It wasn't until they started using stablecoins that they realized they were essentially exposing their account balances to the world, and possibly even revealing their purchases of embarrassing meme coins. Now, investors are beginning to realize that some information they're willing to disclose because it might lead to better trading prices, while other information they wish to keep private, not revealing all their investment decisions.
I want to emphasize that different users have different preferences. Some large "whale" investors don't actually care much about privacy. In a sense, they are so large that they don't mind being preempted in some relatively small trades. But they may value self-custody very much because they don't want their assets to be at risk like they would on a platform like FTX.
On the other hand, the situation is different for ordinary investors. Ordinary investors may only have a few thousand dollars in their bank accounts. They want the highest possible returns, but they also need downside protection; they cannot afford losses. They want a way to maximize returns without having to do complex mathematical calculations, figure out fund allocation, or be caught in countless preemptive trades only to discover they've made a wrong investment decision. For these investors, they prefer investing in funds, ETFs, or actively managed or semi-actively managed investment vehicles that can handle these complexities. In the US stock market, this trend has been particularly pronounced over the past 10 to 15 years, with the number of ETFs now exceeding that of single-name stocks. Investors prefer this type of managed portfolio.
On-chain vaults are built on this premise, providing a concept of portfolio management that aligns with the self-custodial values of cryptocurrencies, as well as their withdrawal and exit capabilities.
5.2 Balanced Solutions for On-Chain Asset Management
Fundamentally, I believe what DeFi truly values is the right to exit. For example, I can check my funds at any time, and if I don't like an investment decision, or if I don't like what's happening on-chain, or if there are unusual market conditions, I can exit at any time. I believe that the right to exit needs to be guaranteed through openness and transparency.
However, the right to obtain the best and safest returns may not be something you want to disclose completely. Therefore, on-chain vaults attempt to strike a balance between the two. From a fintech perspective, fintech companies have been forced to accept this separation.
We can think of fintech as the front end of a bank, where the bank handles all banking transactions, while fintech companies process loans and other transactions over the weekend. This way, their end users are unaware that their funds don't actually move until Monday morning, or something similar. Fintech companies actually retain a lot of data privacy, such as metadata, which they don't share with banks.
For example, Robinhood doesn't tell its agent banks which options a user bought over the weekend. But they do tell the banks the user's balance on that exchange. The banks can access that information. Then, if the user makes a credit card transaction using a connected service like Plaid, all parties involved can be assured that the account has sufficient funds. This is a clear example of separating public and private information.
I believe that DeFi has long been a daunting area for many fintech companies because it seems to require everything to be public, as they cannot separate information as they used to.
The on-chain vault model and smart contracts that separate the public and private sides are key to solving this problem. It allows customers to enjoy the user experience they expect from fintech while utilizing a private off-chain portion to handle sensitive information. The public portion provides guarantees regarding integrity and exit capabilities, as well as letting users know where their assets are located. These public guarantees enable the efficiency of stablecoins.
6. What does this mean for fintech?
Money Code:
I think this viewpoint is very insightful. The key is not to pursue absolute transparency, but to find a proper balance, clearly defining which information should remain private and which should be made public, so that these financial products can be launched smoothly. The actively managed funds and assets you mentioned remind me of an on-chain version of ETFs, or even platforms like Wealthsimple and Wealthfront.
Users might say, "Look, I only want to take the risk and get the corresponding reward. I don't want to do all the tedious work of rebalancing assets, investing, and tracking the market myself." They want someone to do it for them, but they also want to be able to choose the balance between risk and reward themselves. This is precisely how a decentralized approach achieves the same goal, while also providing the transparency you mentioned to ensure key elements such as the ability to withdraw assets and that users clearly know the location of their assets.
Therefore, I think this perspective is very insightful. Returning to the main topic, what lessons should fintech and financial product developers learn from this? I believe the Coinbase example is a good reference. Let's say I'm building a consumer-facing financial application. I can now offer my users a range of financial products. Simultaneously, users also have the ability to withdraw their assets at any time.
So what does this mean in the real world for today's builders?
6.1 Development of the DeFi Lending Market
Tarun Chitra:
I think a key point about the lending market is to describe it from a more micro-structural perspective, rather than simply exploring what smart contracts are doing from a technical standpoint, but rather analyzing it more from a supply and demand perspective. The DeFi lending market has changed dramatically in the past few years. If you understand its development history and how we got to where we are today, it's easier to understand why it's so attractive to people now.
In 2018 and 2019, the DeFi lending market was actually in its infancy, with no truly reliable centralized lending institutions. Therefore, platforms like Compound, Dharma, and many ICO projects, including Ethlend, began to emerge. They all revolved around a core idea— the lending services offered by exchanges were questionable; you couldn't know for sure whether they actually held your collateral, or whether they would simply take your collateral when you borrowed from them, and the entire process lacked transparency.
At the time, the Ethereum network was congested due to the popularity of applications like CryptoKitties, making effective oversight and monitoring difficult. In contrast, decentralized exchanges (DEXs) offering spot trading, such as Uniswap, had a much clearer concept. The idea at the time was: since a centralized trading product existed, could we develop a decentralized version?
A. Decentralized version of lending
In the lending sector, there was a lot of over-the-counter (OTC) lending activity at the time. I would message someone and ask if they would like to do a loan transaction with me, but this lending method was relatively loosely organized. Apart from the lending services of exchanges and the then-common USDT lending, there were no truly decentralized lending smart contracts.
Therefore, in 2018 and 2019, the initial users of DeFi lending were mostly Ethereum whales. At that time, the price of Ethereum plummeted from nearly $1,000 to $80, and many investors holding large amounts of Ethereum simply borrowed USD stablecoins or funds from MakerDAO to hedge their Ethereum exposure. So, the initial demand for lending was quite low, somewhat similar to home equity loans.
If you look at the situation in the United States, taking housing as an example, on average, homes and home equity are among the most valuable assets owned by Americans, regardless of the state or jurisdiction. However, home equity is also one of the least borrowed assets in the US. It's as if people are reluctant to borrow this asset. In a sense, DeFi lending initially resembled home equity lending. For example, I accidentally participated in an Ethereum ICO, which was my "house," and I was borrowing dollars. But at that time, everyone was very risk-averse, so lending activity wasn't aggressive.
B. DeFi Summer Spurs Demand for Lending and Mining
This also means that lending at that time did not generate much return. Fast forward to DeFi Summer, people started lending because they felt that they needed to borrow this token in order to do liquidity mining and earn returns on other assets, but they did not want to sell their assets, so they chose to lend.
In 2022, a significant change occurred: the emergence of yield-generating assets in the crypto space finally took hold.
In October 2022, Ethereum merged, transitioning from Proof of Work to Proof of Stake. This meant that if you held Ethereum, you could stake it and earn some yield, approximately 3% to 4%. While other assets already had staking mechanisms, such as Solana and Near, these didn't truly develop a robust DeFi ecosystem, and stablecoin liquidity was limited. At that time, stablecoins were primarily concentrated on Ethereum, and while Ethereum still dominates the stablecoin space today, it was even more so then.
C. Leverage effect of Ethereum staking
So, once a yield-generating asset is available, you start to see a divergence in lending demand. On one side of the market are users like whales who own large amounts of assets and are simply borrowing some dollars to pay fees or make other investments. On the other side, you see people who want leveraged returns. They think, instead of getting a 3% return on Ethereum, why don't I stake my Ethereum and get a 5% return? Because if I borrow 100%, then I get a 3% return, but I have to pay a 1% borrowing cost, so I end up with a 5% return, which is 3 plus 3 minus 1. This leveraged return market grows rapidly because it makes Ethereum returns more attractive, which in turn creates significant demand in the lending market.
I bring this up because what I'm seeing in the tokenized asset RWA space right now is that a lot of people want to tokenize assets that don't inherently generate returns. This reminds me of the early days of DeFi. They were like tokenizing real estate (figuratively). People were actually afraid to lend and borrow these assets; they were somewhat risk-averse. But when people saw the returns, they thought, "If I could get many times that return," they would be more willing to lend and borrow actively and create more demand.
6.2 Amplifying borrowing demand through leverage
Therefore, I believe that thinking about putting yield-generating assets on-chain is actually more valuable than thinking about hard assets that don't generate returns. This goes against the prevailing view in the cryptocurrency space that Bitcoin is like gold, so all our assets should be like gold. But if you look at the DeFi lending market, it truly allows for demand-side activity because the supply side is very resilient.
When assets have no natural returns, borrowing demand is very conservative. But when people see a clear source of income and realize that this income can be amplified through leverage, borrowing demand grows rapidly.
In DeFi, the supply of funds is often highly elastic. If there is sufficient demand, on-chain capital such as stablecoins, ETH, and SOL will follow.
The role of managers is to match supply and demand. So, assuming these things become more efficient over time, the question becomes: where does the demand come from? In my view, the demand comes from income-generating assets.
I think that's it. If you're a fintech company and you want your users to use these things, people will generally allow you to lend and borrow yield assets on-chain, which is usually cheaper than lending off-chain.
So if you are a fintech product, and you offer margin, stock-backed loans, or other types of return products to your users, and another group of your users want to get 1.5x or 2x amplified returns, then this is a very natural use case.
So this is the historical lesson I'm giving you, more about showing you the real picture. In reality, the crypto market had to develop these yield-generating assets for it to grow like it is today.
6.3 Risk Preference in Fintech
Money Code:
That makes a lot of sense. If I were a fintech builder today, let's say I'm launching a new bank. I might have a high-yield savings account that offers a risk-free rate, perhaps 3% to 4% on deposits. However, my users are already tired of 3% to 4%. They say, "I want more." But of course, the trade-off is that there will be more risk.
In this context, what options are available to fintech developers? Could you describe the differences between traditional financial options and DeFi?
Tarun Chitra:
Next, I will explain in detail from the perspective of Gauntlet's on-chain vault. Based on the needs of fintech clients and on-chain vault users, we divide the vault into three risk levels:
- Prime: Yields are the risk-free rate plus a premium of 50 to 100 basis points, applicable to low-risk collateral (such as Ethereum or Bitcoin with a 10% LTV). This lending demand exists, but the yield is lower.
- Core: Returns range from 6% to 9%, involving income-generating assets and leveraged lending. In this case, you will bear basis risk (the risk of declining returns) and some principal risk. The risk is higher, but the manager will help users assess collateral risk. The insolvency ratio is typically between 10 and 50 basis points, making it relatively safe.
- Frontier: The goal is to achieve returns exceeding 10% by finding high-risk collateral. It carries the highest risk but also the highest potential reward.
The key point is:
- Fully understand the collateral and the borrower's needs.
- Use on-chain data to track user behavior and assess risks.
- Adjust the LTV ratio based on user behavior to optimize revenue.
The advantage of on-chain lending is that, although the user's identity is unknown, the flow of funds can be seen, allowing for the tracking of behavior and risk assessment. Administrators can then offer more aggressive LTV ratios, adjusting interest rates and LTV based on block frequency, much like traditional banks do.
This tiered design meets the needs of different fintech companies, from Robinhood users seeking high returns and high risks, to Revolut offering high-risk financial products, and even those who only want slightly higher returns than government bonds with extremely low risk, all can find suitable solutions.
The appeal of stablecoin emerging banks lies in their ability to offer yield products at the same interest rates to anyone in the world, achieving true equality.
Traditional banks and fintech products often fail to achieve this. This model can integrate different sectors to meet diverse needs. However, currently, fintech companies do not have a high demand for high-risk, high-leverage lending; rather, cryptocurrency exchanges and similar platforms tend to offer higher-risk products.
7. What does this mean for traditional asset management?
Money Code:
For asset managers, fund managers, and capital allocators, DeFi offers new opportunities to diversify investment options for clients. These opportunities can be categorized into three types, similar to risk preference classifications in investment applications: high risk, high return; medium risk, medium return; and low risk, low return.
If you are an asset manager, you have two main options:
- Tokenize existing funds: Convert existing funds into tokenized form, then find managers to partner with and promote your tokenized fund.
- Become a manager: Directly participate in the DeFi market, manage assets, and provide investment strategies.
How should we think about this problem?
Tarun Chitra:
Indeed, this is a question worth exploring. We have already undertaken some initial projects in the on-chain vault space, and although the total value locked (TVL) has not yet grown significantly, we have accumulated valuable experience. For example, we tokenized Apollo's Grade A credit fund and made it available with leverage, increasing the yield from 11%-12% to approximately 19%. However, the user KYC process remains somewhat cumbersome, and many teams (such as Securitize and Superstate) are working to improve it.
Tokenization platforms are still in their infancy, while DeFi leads in functionality and segmentation. Much work attempts to map the paper world of traditional finance to the digital world, but this mapping is imperfect and there's room for improvement. This is more attractive if your fund is closer to a liquidity fund (like daily liquidity or ETF-like products). If you're a fund manager with highly liquid funds (like medium-yield funds) and users are interested in the interest rate spread between DeFi and traditional finance (TradFi) and want a leveraged version, then this is currently an ideal middle ground.
These individuals are more likely to be insurance company or bond fund managers than participants in the private lending sector, as private lending is typically non-standardized and still has room for further development. Generally speaking, the closer you are to highly liquid assets (such as government bonds), the greater your chances of success.
As for whether to become a manager or cooperate with a manager, I think the key lies in management.
The appeal of the manager role lies in the need to continuously bid on interest rates, a quantitative lending operation virtually nonexistent in traditional finance. Traditional finance's lending portion still relies on manual record-keeping and telephone transactions, while DeFi provides a 24/7 electronic lending market. As an asset manager, you need to continuously trade and bid, much like a high-frequency trading (HFT) firm. If your structure is suited to this model, becoming a manager might make sense. Otherwise, partnering with a manager might be more appropriate, as it avoids a host of complex issues related to security, custody, key management, and business development.
8. How to build DeFi yield products
Money Code:
Yes, that's one of the reasons we named this show "Money Code," because money has now become code, a new evolution that some advisors and fintech companies need to recognize and adapt to.
If I were a product manager (PM) or engineer at a fintech company, and my task was to leverage DeFi to provide high returns for my users, from your perspective, would you have a simple checklist, such as what to focus on and how to assess those risks?
8.1 External Checklist
Tarun Chitra:
Yes. Actually, I think the first question is probably the hardest because there's a lot of noise and hype in the market right now. So, for fintech companies, the first key question is: which stablecoin should they choose for their users?
This is because not all stablecoins have an equal yield market. Clearly, USDC is likely the top choice for on-chain yields, although USDT is now very close. From 2020 to 2024, USDC will undoubtedly be the best option for on-chain yields. Off-chain, such as yields on Binance or Bybit, USDT is the clear winner. But in terms of on-chain yields, USDC truly holds the advantage.
If you look at USDC's supply curve, you'll see that its growth was primarily concentrated in the early stages of DeFi. Therefore, it became the best place to earn yields. However, Tether followed closely behind. If you had to choose between USDC and USDT, I think there's not much difference; it mainly depends on your geographic location and user habits.
If fintech companies want to launch their own stablecoins, they need to consider the DeFi ecosystem effect, ensuring sufficient liquidity between the stablecoin and other assets (such as Ethereum or Bitcoin) and good integration with platforms like wallets and exchanges. Furthermore, they need to consider other issues such as cross-chain functionality to ensure the stablecoin can integrate seamlessly into the DeFi ecosystem.
If a fintech company becomes the largest depositor of a stablecoin (e.g., holding 50% of its supply) after users deposit funds, this will create concentration risk.
Therefore, choosing established stablecoins like USDC or USDT is safer, unless the company is as large as JPMorgan. However, it's clear that launching a new stablecoin yourself carries significantly more risk. I don't think you can promise high interest rates because you need incentives for liquidity and other factors; you can't offer rates as high as USDC and USDT.
I believe PayPal learned this lesson in their initial foray with PyUSD. If you look at the PYUSD chart and the dates they started and stopped incentives, you can clearly see the shift in usage. I bring this up because I think a lot of people are still struggling with this issue. I attended the Money 2020 conference just a week or two ago. I felt like I met a lot of people who were deciding which stablecoin to use. That's why I'm so focused on this issue, because it seems like people in this space are still thinking about it.
I believe this is a very important platform decision. From a yield perspective, USDC and USDT are the easiest choices. Once you've made that choice, the second question is, given any regulatory restrictions you might face, what products can you offer?
On-chain vaults offer a flexible solution, much like a fund, except not through a limited partner (LP) agreement. They can be customized via smart contract code to meet specific constraints, such as user restrictions, borrower types, or interest rate caps. This flexibility makes vaults superior to traditional DeFi protocols in terms of configuration and risk assessment.
These things were difficult to achieve in early DeFi protocols because everyone was put in the same pool and shared the same set of parameters. On-chain vaults, however, allow you to isolate different risks and compliance requirements .
So, if I simplify this checklist, it would be roughly as follows:
- First, select a stablecoin;
- Second, clearly define your compliance and risk constraints;
- Third, select available protocols under these constraints;
- Fourth, these agreements are ranked based on revenue and historical performance;
- Finally, a risk assessment should be conducted on the manager himself.
After completing these steps, you will be able to build a DeFi yield structure that suits your users.
8.2 Internal Checklist
Money Code:
That's a good summary. I think having a framework is helpful. I think there's a lot of noise surrounding how these things perform in volatile market conditions. For example, did Ethena really malfunction on Binance a few weeks ago, or was it just due to a problem with the oracle settings, etc.? It all seems very confusing to people outside the market. Could you add something else to help people figure out where they should be focusing?
Tarun Chitra:
This is a very important question. I will answer it in a relatively "outside-in" order.
First, the underlying blockchain itself is actually where you need to invest the least due diligence effort —provided you're using a widely used chain that has weathered multiple market cycles. Examples include Ethereum, Solana, or some widely used L2 blockchains like Base, or even L1 blockchains that have existed for years, experienced market crashes, but whose validator nodes haven't collectively withdrawn.
For me, a very simple criterion is: when the market experiences a severe crash, do the validators on this chain "run away"? If the chain can continue to operate normally under extreme market conditions, then this chain is likely reliable.
Secondly, for protocols, the "lindness effect" (the likelihood of a system continuing to exist the longer it exists ) is one of the most important factors. Another important aspect is the protocol's performance over time, especially in terms of yield and scalability . DeFi emerged to address the challenges following the 2017 market crash, emphasizing low risk and over-collateralization (such as MakerDAO's initial 150% collateralization ratio). Generally, the longest-surviving protocols are more trustworthy, but their performance and scalability should also be considered.
Some protocols may reach their capacity limits, requiring technological innovation to scale. For example, the perpetual contract market has undergone several design and technological changes. In lending protocols, metrics such as lending depth, total value locked (TVL), and trading volume typically reflect genuine market activity because collateral costs are high and "fake loans" are not present.
Then there's the community and governance structure. The main issues lie in incident response and community management, especially if the protocol is a decentralized autonomous organization (DAO). DAOs may add some higher-risk assets, which requires special attention. But overall, however, the "Lindy effect" is probably the most important factor.
Finally, there's the manager themselves. When evaluating managers, I approach it very similarly to traditional asset management. I focus on their track record, performance in specific events, and Sharpe ratio. Furthermore, a strong security stance is crucial. Unlike traditional finance, security issues in the cryptocurrency space are very real, requiring close attention to the manager's commitment to security and stress testing.
You need to assess whether the administrator truly understands: private key management, multisignature security, the signing process, and the attack surface unique to blockchain. We've seen far too many cas
