Vault: The Future of Non-Custodial Finance

Author: Merlin Egalite, Co-founder of Morpho; Source: X, @MerlinEgalite; Translation: Shaw Golden Finance

Vaults are non-custodial blockchain infrastructure that enable functionalities impossible in traditional finance.

In traditional finance, financial products are built on decentralized, isolated, and often outdated infrastructure. 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 users bear high costs.

Vaults change all of that.

What are Vaults?

Vaults are programmable non-custodial strategies where users can choose to join, allocating deposits across different investment opportunities without relying on any intermediaries. All operations occur within a single atomic environment—the blockchain. Users can access their funds in the vault at any time without assistance (or interference) from anyone. Users always retain full control over their assets.

Vaults aim to achieve similar goals as traditional funds—providing users with a simpler, more efficient way to deploy capital—but they use automation and programmable code instead of intermediaries.

For those familiar with traditional finance, vaults combine the scale and accessibility of exchange-traded funds (ETFs) with the control and safeguards of separately managed accounts (SMAs). Vaults realize better financial solutions through:

• Composable Management: Operating in a unified environment without intermediaries, rather than multiple isolated databases, ledgers, accounts, and systems, enabling more flexible, affordable, and personalized financial products.
• Easy Access and Integration: Interact with vaults using just a wallet and digital assets, greatly lowering the entry barrier.
• Programmability: Vaults offer transparent and irrevocable security guarantees—these advantages are only possible when built on-chain.

Vaults and Funds

Vaults share some characteristics with funds but also have key differences.

Traditional Fund Structure: Users invest in a fund. The fund owns assets, and investors hold fund shares. The fund manager has full custody and control. Funds are legally regulated, often with lock-up periods, redemption windows, and minimum investment amounts. Users can only deposit and withdraw assets with the fund manager’s involvement.

Vault Structure: Users deposit assets into an immutable smart contract that is not controlled by any individual or entity. Users retain full custody—the assets are always under their control, free from traditional restrictions. Vaults automatically allocate deposits according to preset rules. Users can withdraw at any time instantly, without permission or counterparty reliance.

How does Morpho Vault work?

When users deposit into Morpho Vault, funds are allocated to lending markets (Morpho markets) according to strategies set by curators.

These funds are provided to borrowers seeking loans secured by specific collateral (e.g., Bitcoin, Ethereum, or tokenized government bonds). Technically, any asset on the blockchain can serve as collateral. Borrowers then pay interest on their loans, which becomes the yield for vault depositors.

Users can withdraw their funds at any time, receiving their initial amount plus interest.

Depositor Protection

Vaults are designed to provide strong protection for depositors:

• They are fully non-custodial: administrators can never directly hold users’ deposits.
• Allocations are only made within predefined limits and restrictions set by the vault.
• Any changes that could alter the vault’s risk profile are subject to timelocks—delays in execution—giving depositors time to react and withdraw if necessary.
• Optional “sentinel” roles can be configured, allowing depositors to veto allocation changes.
• Even if the vault’s liquidity is insufficient, depositors can always redeem their share of assets at any time.

Vaults and Tokenization

Tokenization brings traditional off-chain assets onto the blockchain. Its value lies in connecting traditional finance (TradFi) and decentralized finance (DeFi): enabling traditional financial instruments to be held and transferred on-chain. Tokenization improves asset allocation, but it does not inherently create better financial products. Tokenized assets still:

• Need to operate across decentralized environments, systems, and databases, making highly personalized products costly and difficult.
• Inherit legacy off-chain reporting, processes, and accounting systems, reducing efficiency and increasing costs.
• Lack the transparent and irrevocable security guarantees that smart contracts can provide.

Vaults lay the infrastructure for distributed development of financial products and fully on-chain construction. Users do not need to deposit all funds into off-chain tokenized funds; instead, they deposit into vaults, with all funds allocated on-chain.

Tokenization is a useful transitional tool, but vaults are the ultimate goal.

Not All Vaults Are the Same

Vault infrastructure exists along a continuum. On one end are fully on-chain vaults, such as Morpho Vault, where immutable smart contracts ensure strong security: users retain control of assets, allocations are transparent and verifiable, and all changes are made through timelocks. On the other end are “wrapped” vaults that maintain more traditional custodial arrangements, with vault operators controlling assets and having full discretion over their use.

Understanding what protections your vault infrastructure provides and how they are implemented is crucial.