Vaults are getting plenty of attention as a new wrapper for onchain yield. But for serious allocators, is a better wrapper alone enough to motivate shifts in behavior?

We recently spoke with Ryan Rasmussen, Head of Research at Bitwise, to explore that question. Bitwise has spent nearly a decade selling crypto exposure to professional investors through traditional rails, which makes them unusually positioned to discuss the allocator adoption gap. They understand what goes into moving capital through committees, policies, and diligence processes. 

Here's what we took away from the conversation.

Yield is the wrong starting point

Historically, yield has rarely been the constraint stopping institutions entering DeFi. The bottleneck for institutional capital is operational burden and the absence of an accountable counterparty. 

No CIO at an endowment will spend hours analyzing smart contract risk and rotating positions across five lending protocols. The ROI on attention versus overall impact doesn’t add up when crypto is only 1-3% of their portfolio.

A vault delivering 9% that can't be diligenced as easily as a private credit manager loses to one delivering 6% that can. Legibility comes first; yield comes next.

You diligence a person, not a smart contract

Investment committees know how to underwrite managers. They have processes and frameworks for evaluating a person or team responsible for managing risk and capital. None of those frameworks carry over to evaluating a smart contract.

Ryan made it clear: institutions are far more likely to allocate to a risk manager than to a smart contract directly because a curator gives them something they can diligence. 

The recent Aave situation is a good example. If you were out of the country when the rsETH exploit occurred or simply offline and focused on something else, you couldn't have proactively managed a position on Aave. Vault curators have teams actively managing those situations. That human accountability is an essential credit layer that vaults restore to DeFi.

For vault builders, this reframes the mission. The product is ultimately the curator's judgment expressed through the smart contract. Construction choices that obscure or weaken curator accountability cut against the format's core value.

Vaults make complicated opportunity sets underwritable

Ryan compared vaults to ETFs. ETFs took existing exposures (equities, bonds, commodities) and packaged them into a more efficient structure that fits into their existing allocation workflows.

The numbers tell the story of where vaults might be heading. Three decades ago, ETFs were nonexistent. Today they're a $20 trillion market. Vaults sit at roughly $30 billion today, and Bitwise expects that figure to reach many trillions.

Crypto has spent a decade producing different ways to make money: lending, market making, basis trades, restaking, real-world asset collateral. Most of that opportunity set sat out of reach for normal institutional allocators. Surfacing and managing it required full-time attention they couldn't justify. Vaults compress much of that complexity into a single allocation decision.

The current design challenge for builders is to make existing yield underwritable. That's a different problem than generating new yield, and it's the one that unlocks a new kind of scale.

Watch the full conversation above, or read the complete transcript below.

Transcript

Editor’s note: This transcript has been lightly edited for clarity, concision, and readability.

Crews: We are here today with Ryan Rasmussen, Head of Research at Bitwise, to talk about vaults and what makes a vault product actually allocatable.

Ryan, you’re Head of Research at Bitwise. Bitwise is known as a crypto asset manager, but the products you currently offer run on traditional financial rails today, primarily. Can you tell us a little bit about Bitwise’s biggest products today and why you’re excited about vaults in the future?

Ryan: Yeah, absolutely. Happy to be here and chatting with you.

Bitwise is a crypto asset manager. We’ve been around since 2017, so nearly a decade in the space doing nothing but managing crypto assets on behalf of clients.

As you mentioned, we largely started off as a traditional asset manager. A lot of the products we initially offered were ETFs, OTCQX-traded funds, and private funds that were index-based or passive in nature. Our flagship product is the Bitwise 10 Large Cap Crypto Index Fund, which has been around for nearly a decade.

Nowadays we’re well known for launching Bitcoin, Solana, Ethereum, and other spot crypto ETFs. We also have a number of other public equity products across the US and Europe. I think we have more than 35 regulated products today and have moved recently into the onchain realm of vaults and staking.

So really excited to be here today and talk about it.

Crews: You mentioned selling into the US and Europe currently, so right off the bat there’s a big access challenge that vaults could potentially solve. What middlemen could be cut out by offering products via vaults? What are the big advantages in terms of Bitwise being able to offer products onchain as vaults versus selling them in brokerage accounts?

Ryan: We view vaults as the next evolution of traditional funds.

If you go back to when the first fund structure was created, back in the late 1700s, there was this guy from Holland who created the first ever fund. The reason he did that was because there were a bunch of investors who wanted to access the returns of bonds but couldn’t do that easily on a one-to-one basis. So they pooled all of those bonds into a fund and then gave shares to the investors. That really was the first use case for traditional asset management as we know it.

About 150 years later, the next iteration of funds launched in the 1920s, which were mutual funds. At that time those were an innovation, but they still had a lot of problems. Mutual funds only strike their NAVs once at the beginning of the day and once at the end of the day. There are liquidity issues there. They’re not as efficient and therefore less cost-effective for investors.

Then 50 years later we had index funds, then shortly after that ETFs, and now vaults. Each of those innovations reduced the amount of friction for investors. They reduced the amount of intermediaries, made products more cost-effective, more tax-efficient, and more accessible to a broader range of investors.

That’s really what we see vaults doing and why we believe vaults are the next natural innovation to come to the asset management space.

Today they’re still a small industry, around $30 billion in vaults to date. We believe that will be many trillions in the not-so-distant future, and that’s why we’re really excited about vaults. It expands accessibility, brings new opportunities to investors who have difficulty accessing them, and removes tons of the middlemen and friction involved in operating a fund. That allows asset managers to reduce costs, which means end investors have a lower-cost fund they can allocate to, and that juices returns for investors.

That’s what it’s all about at the end of the day: giving the investor the best, most efficient products so they can access markets and generate the highest returns.

Crews: Sounds like vaults are definitely a better vehicle for crypto’s largest asset manager to issue products on.

We talked a little bit there about access and reducing friction. What about speed? If you think about the way funds move in traditional finance, T+1 settlement is a term people definitely hear a lot. Can you talk a little bit about how vaults allow money to move faster?

Ryan: That’s what it’s all about, really. This 24/7/365 global liquidity layer that asset management can move onto.

If you think about the big evolution from mutual funds to ETFs, one of the big improvements there was going from once-a-day liquidity to intraday liquidity. ETFs allowed investors to go in and out at NAV throughout the entire trading day. What vaults do is take that one step further and use blockchain-based rails to allow investors to access these opportunities 24/7/365.

Not only does that increase the window in which investors can access outside of business hours, but it also allows asset managers to move more quickly, to be more dynamic in the strategies they offer, and to increase their capital efficiency. There’s no more waiting a day or a weekend to move out of one yield-generating opportunity into another.

We’re moving into a world where the fastest and most agile asset managers will ultimately have the edge, and vaults allow those that are willing to embrace them to have that edge.

That’s really important for the next leg up of asset management, particularly onchain. Investors want alpha when they invest in crypto, and sure, some of that can be gained by taking spot exposure to crypto assets. But another area where we’re seeing institutions show interest is generating additional yield on their crypto portfolio or reducing volatility by allocating a portion of that portfolio into DeFi and vault-based strategies.

Crews: That makes sense. Availability is one of the best abilities, always.

I think about when rates started to go up over the last few years. My dad would tell me to make sure if I had spare cash, to deposit it into a money market fund on a Friday if there was a long weekend, because otherwise it might take four days to start earning yield unless I got my deposit in early. But if a vault is available 24/7/365, it obviously eliminates that headache of long weekends, which is a pretty big thing in finance.

So yeah, the speed of vaults really makes a difference.

Ryan: Yeah. Traditional markets are closed something like ~85% of the year, which is remarkable because, to your point and your dad’s point, investors want to gain exposure to yield 365 days a year. Businesses that are trying to increase their capital efficiency want to have any excess cash invested in yield-generating opportunities 24/7/365.

Vaults really improve that in a remarkable way.

I think for many asset managers the term vault is maybe a little bit confusing. Then you go into looking at onchain and asking: how do we operate this? Do I need a wallet? What infrastructure do I use? What blockchain do I use? How do I make sure I have KYC, AML, and other compliance restrictions checked off?

There are a lot of challenges for traditional asset managers who don’t spend all of their time in crypto or aren’t crypto native. I think that’s why we’ll continue to see crypto-native asset managers like Bitwise take advantage of being first movers in the space. We’re excited to be one of, if not the first, regulated RIAs offering vault curation to investors.

I think we’re going to see a huge wave of it. Tokenization meeting vaults is really going to be a big moment for DeFi, and I’m really excited about that.

Crews: We’ll get into that next topic here.

What types of customers do you talk to today at Bitwise, and what are they excited about allocating to today that’s maybe different from a few years ago?

Ryan: It’s changed so much over the past five years of my time at Bitwise, and of course from when we first launched back in 2017.

We primarily face off with professional investors. Think financial advisors and wealth managers, as well as institutional investors like pensions, endowments, family offices, some sovereign wealth funds, as well as corporates and public corporations who are looking to get yield on their crypto assets or crypto treasuries.

A few years ago, they just wanted exposure to the crypto industry. We didn’t have spot ETFs here in the US, so they had to do that through funds that weren’t that efficient, like the traditional closed-end bitcoin funds that had huge discounts and premiums to net asset value. Not the most ideal way for investors to gain exposure.

A lot of them back then would just go through crypto equities, even though there weren’t that many out there, mainly Bitcoin miners and Coinbase.

Today we’ve seen the investment landscape broaden dramatically. We now have spot crypto ETPs, index crypto ETPs, a bunch more publicly traded crypto companies, and DeFi is having another moment. So there’s this broad range of investable opportunities for the investors that we speak with.

There are a few different types of investors. There are these large institutions, endowments, pension funds, sovereign wealth funds. Many of these have lower risk appetites than traditional professional investors like financial advisors, or retail investors, of course. They’re just looking to meet their benchmark return of 6% or 7%.

In a world like that, vaults become very attractive because they allow investors to manage risk, get exposure to yields in DeFi, and take advantage of crypto volatility without having directional exposure and taking on all the risks that come with holding spot crypto.

Then there are advisors who just want broad-based exposure to crypto as an asset class. Those are the types of advisors buying spot crypto ETPs, index-based ETPs, etcetera. Hedge funds, of course, are running much more active strategies, like the basis trade.

Crews: Let’s focus on these lower-risk, larger professional investors you mentioned.

What has prevented them from allocating in the past? Did you pitch depositing to Aave directly for stablecoin yield, for instance, to some of these larger investors? What were their specific objections?

Ryan: A lot of the hurdles were operational in nature.

A lot of these large institutions aren’t going to spin up a wallet and use DeFi apps on their own. They might not even go through the process of conducting due diligence on an institutional custodian that allows them to participate in DeFi, the Coinbases, the Geminis, the Anchorages of the world, or Copper and Fireblocks.

So it just wouldn’t even get off the ground. It was a non-starter. It was too much work for too small a percentage of their portfolio when they’re thinking about everything else, like equities, bonds, private credit, etc.

Today we’re seeing more appetite for that. Part of that is because traditional market yields are coming down, and these large institutional investors have mandates of 6% to 7% annual returns that they have to meet. Think about the CIO of an endowment or a pension fund, where they have to ensure they’re hitting that return level so they can at least meet the liquidity needs of the fund.

They’re starting to have to go further out on the risk curve to generate those returns as interest rates come down, and that’s why they’re starting to look to crypto at the same exact time that crypto infrastructure is finally getting to a level that’s easier for them to access. It’s not as big of a diligence burden. It’s not as big of an operational burden for them to work with a regulated asset manager in the DeFi space. They start to view it as just another asset class.

Vaults and ETFs have really brought down the operational and administrative burden of investing in crypto at a time where institutional investors are really interested in the types of strategies that DeFi and vault curators can now offer.

Crews: Infrastructure has definitely picked up. There’s a lot more secure infrastructure available for these types of investors. They don’t feel like they have to do mountains of diligence, and there’s more trusted research too.

What do vaults specifically solve in this, and what still needs improvement for these large allocators? Are stablecoin yields enough today, or do rates need to come up more for them to be interested?

Ryan: I think the thing vaults solve for these large institutions is that they don’t have to go and diligence individual DeFi protocols.

No one at a large endowment or traditional foundation is going to spend the hours required, or have the technical know-how, to analyze different smart contract risks, learn the difference between Aave and five other lending protocols, and then continually monitor which one, which pool, which app has the higher yield and move in and out of those strategies.

This is one, two, maybe 3% of their broader portfolio. Vaults solve the problem of them having to do that because they can choose a curator, conduct due diligence on the curator, and then that curator takes on all of the risk and position-management expertise that the institution doesn’t have in-house.

That curator can go and manage the positions, transition from Aave to the next lending protocol, maybe take advantage of some other arbitrage, maybe start incorporating real-world assets into what they’re doing. Meanwhile, the institution is just allocating to a manager like they would in any other asset class.

Vaults unlock the ability to access a wide range of crypto and DeFi yield in the same way they access yield and exposure in other asset classes like private credit. It’s really powerful.

Crews: The accountability of having a vault manager that you can really interface with, and diligencing a person rather than a smart contract, is something they’re a lot more familiar with. DeFi starts to look a lot more like TradFi.

Ryan: Exactly.

A lot of these investment committees want exposure to crypto. They look at this industry and see that it’s innovative and that it’s going to have a huge impact on the traditional finance infrastructure they work in every single day. They understand traditional finance infrastructure is extremely slow and costly.

So they want exposure, but they can’t necessarily just buy directional spot exposure to a 50% to 60% vol asset class. Even if there are asymmetric return opportunities, that’s still a lot more volatility than they can stomach.

What we’re seeing happen increasingly is pairing some kind of yield strategy with directional long exposure. I think vaults filling that need for yield, to help pad crypto’s volatility while still accessing decent returns, is going to be increasingly important.

I think we’ll see institutions pair directional exposure with vault exposure to reduce volatility and diversify their broader crypto risk.

Crews: That’s definitely something I’ve heard anecdotally as well.

Today the biggest use case for vaults is stablecoin yield, undoubtedly. But if vaults are the new ETF, we imagine they’ll ultimately cover a much wider range of use cases. What do you think the growth trajectory of vaults looks like, and what use cases are likely to emerge outside of stablecoin yield?

Ryan: I think ultimately we will see all kinds of strategies wrapped in vaults.

I think these will be more active trading strategies. I wouldn’t be surprised to start seeing a bunch of different real-world asset collateral types brought into vaults to allow for more diversification across different yield-generating opportunities and also more tranching of yield for vault curators.

That’s the first step. But I also wouldn’t be surprised if 20 years from now you see actively managed funds, similar to how you see actively managed ETFs today. I wouldn’t be surprised if you saw an entire crypto portfolio that includes tokenized crypto equities, covered call strategies on tokenized equities, tokenized oil futures trading, private credit, private equity, tokenized gold. It’s a wrapper for a strategy in the same way that an ETF is a wrapper for an investment strategy in traditional finance.

I think you’ll see those two things merge, and that’s why we expect so much of the traditional financial landscape to be brought into the vault wrapper.

ETFs 30 years ago were nonexistent. Today they’re a $20 trillion market, and that journey was basically straight up and to the right. I think we’ll continue to see that play out for vaults as the next evolution of the space.

Crews: Do you think tokenized equities, and the lend-borrow activity that comes with bringing tokenized equities onchain, could ultimately be a bigger market than what DeFi lending is today?

Ryan: Yes, definitely.

Equities are many-trillion-dollar markets. One of the issues equities currently have that tokenization solves is global liquidity. There are issues with investors outside the US accessing US-based stock exchanges outside trading hours, and vice versa.

What the tokenization wrapper allows you to do is take a traditional product and wrap it in a globally movable and accessible token. That’s where you start to see a ton of the future growth of DeFi: taking traditional assets, wrapping them in a structure that expands accessibility, gives you more capital efficiency, and lets you pull together all kinds of asset classes as collateral that you can borrow against or deploy in more creative ways.

DeFi today has done a remarkably impressive job of growing at the rate it has, but we’ve seen that growth stall out a bit. I think the next wave is tokenized equities and other tokenized assets.

Crews: Last question here. What are vaults competing with? Where is the capital that is flowing into vaults coming out of?

Ryan: I think vaults are competing with everything, and capital is coming from everywhere, but there are a few specific examples where we’re likely to see capital flow into vaults.

One is money market funds or traditional funds that buy US Treasuries and give off some of that yield. I think those are increasingly going to see competition from vaults that have a more active strategy when it comes to generating yield.

Another area where vaults are directly competing is DeFi applications themselves. As an investor in DeFi, you can either go into the individual app and find a liquidity pool that at the time is generating a decent yield, or you can choose a vault curator. Maybe you want to buy USDC and deposit into a lending protocol, but then you have to monitor that position. If utilization rates change and USDT yields are higher, or maybe a different application’s USDC yields are higher, you have to go manage that position. It’s actually a lot of work for the individual investor, for someone who just has a portion of their portfolio allocated to stables and just wants the market.

So I think vault curators and vaults in general are actually competing with DeFi applications because the ability to outsource the active management of a stablecoin allocation is very valuable, not just to individual investors but to corporations, e-commerce companies, and payment companies that hold stablecoins for shorter periods of time. Maybe a week, maybe 30 days, maybe a weekend, like we were talking about earlier. They just want to sweep it into a vault and know that it’s going after the best opportunities in the market.

That’s one area where vaults are actively competing. It’s a bit of DeFi-on-DeFi competition.

Crews: Tailwinds for vaults are all around us. Aave TVL is down significantly over the last week with what’s been going on, and every rate cut that brings the risk-free rate down pushes more capital out of money market funds too. So that capital is flowing toward vaults right now.

Ryan: Yeah, I think what’s happening with Aave right now is a good example of the benefits that vault curators can bring to the market.

It’s obviously not great what’s happening with Aave, and we hope and expect the community to rally from here. I know we’re already seeing signs of that. But if you zoom out and think about the issue at hand as an investor, if you were out of the country this weekend, or not paying attention, or offline, or focused on something else, you would not have been able to manage the position proactively.

Vault curators have systematic ways of managing liquidity. They have teams that are actively managing these kinds of situations and ensuring that investors have as little exposure to them as possible. Having that systematic and human layer in the vault curation space is really important for the growth of DeFi.

Institutions are way more likely to allocate to a risk manager or vault curator than they are to a smart contract directly or a DeFi protocol directly. I think that’s why vaults are going to become a multi-trillion-dollar industry.

Crews: The enthusiasm for vaults today, is it about the potential future state that this wrapper can unlock, or is it about the product-market fit of what vaults actually bring to the table today? What makes current vaults actually allocatable?

Ryan: I think we’re finally starting to see all the infrastructure come into place for vaults that makes them allocatable.

That’s really exciting because once we hit escape velocity, it’s going to take over the investment landscape. Vaults are the ETFs of the crypto world. They package the many ways to make money in the crypto economy into a simpler wrapper that anyone can access. That is an incredible innovation.

Those of us who have used DeFi for the past six years or so are aware that there are so many ways to make money in the crypto economy. New investors don’t have the time, the scale, or the operational know-how to survey the landscape and invest in those different ways.

Vault product-market fit is taking everything in crypto that has been developed over the past decade-plus and packaging it in a way that makes it accessible to everyday investors, institutional allocators, and everyone in between. That’s why we’re so excited about vaults at Bitwise. It’s the next evolution of asset management.

Crews: If you want to sell a product, you’ve got to give it to people in a package that fits their business needs today.