How Onchain Vaults Reimagine Traditional Financial Instruments

November 2025

8 mins

Onchain vaults take many familiar functions in traditional finance and rewrite them in code as open, auditable software. You deposit funds, receive a yield-bearing share, and someone executes a strategy on your behalf.
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They’re not just carbon copies, however. While the roles that some vaults play rhyme with traditional instruments, — mutual funds pool and allocate, prime brokerage accounts offer better access to leverage, hedge funds engineer payoff profiles — they often reimagine them for a digital context that has more room for creativity and experimentation.

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Vaults are plausibly the next step in the evolution of financial instruments. This post explores the parallels between them and traditional options, and also where onchain vaults diverge and create something truly new and unique.

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Vaults and Mutual Funds and ETFs

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In the early 1900’s, mutual funds changed the investment landscape by allowing individuals to pool their capital into professionally managed portfolios. However, they were limited by operational frictions such as end-of-day pricing, high fees, and lack of liquidity. Then came exchange traded funds (ETFs) which combined the diversification and professional management of mutual funds with the flexibility of stocks.

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Over time, ETFs became the dominant vehicle for passive investment and they remain so to this day. Vaults, however, represent the next logical step for this financial instrument and already translate a lot of the core functionality behind mutual funds and ETFs.

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Mutual funds and ETFs aggregate many investors’ capital, deploy it into a portfolio, and issue proportional shares. Investors get passive exposure to a defined strategy while professional managers or an index methodology do the work. The same holds true for vaults with the added benefit of programmability.

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Onchain vaults pool user tokens inside a smart contract that codifies the strategy, be it lending, LPing, staking, basis trading, or a combination. Then they issue a claim token in return. With ERC-4626, that claim is standardized: deposits and withdrawals are predictable, “shares” track your slice of the pool, and other apps can integrate it without bespoke adapters.

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Similarities

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Pooled structure: Capital is aggregated to pursue a strategy at scale. Small deposits ride along with institutional-grade tactics.
Proportional ownership: You hold a share in the form of vault tokens that are analogous to fund units in TradFi and represent your slice of the pie.
Passive exposure: You don’t move funds around or claim/reinvest rewards; the vehicle does it for you.

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Differences

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Around-the clock-access: Vault tokens are ERC-20 assets you can transfer, trade on DEXs, or use as collateral in other protocols anytime, globally. Their liquidity, however, is subject to redemption profiles. On the other hand, mutual fund shares are more liquid but settle off-chain on business days and even ETFs rely on market hours and centralized rails which hinder composability.
Strategy as code: The programmability of vaults adds a new layer to the design space and expression of financial strategies. Vault logic rebalances, compounds, and enforces limits exactly as written that allows vault managers and participants to “set and forget.” Moreover, they can combine vault code with other components in crypto markets to create strategies that are composable.
Instant, transparent accounting: Vault total assets, share price, and recent moves are visible onchain in near real time. Traditional vehicles report net asset value (NAV) once per trading day, typically after markets close.

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Lending Vaults and Prime Brokerage Accounts

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Prime brokerage accounts are tools that allow active traders and institutions to streamline complex strategies such as securities lending and multi-asset exposure that ultimately bear yield for account holders. They facilitate these strategies by providing settlement, risk management, and trade execution services. More importantly, they let account holders access cost-effective leverage in lending markets.

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Lending vaults fulfill an analogous role to prime brokerage service providers in TradFi through their connection to DeFi lending markets. They behave as an automated function that routes digital assets into other protocols for the execution of DeFi lending strategies. In doing so, they expose their shareholders to leverage much like they would get in the context of prime brokerage with the added benefits of being self-custodial and yield-bearing.

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For example, a popular vault using Veda infrastructure may choose to participate in onchain credit markets such as Aave. There, deposited funds would be pooled to offer liquidity for over-collateralized loans. Vault shareholders then receive yield coming from borrowers in these protocols.

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Similarities

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Yield from lending: Both vehicles earn by letting others use their capital short-term.
Liquidity focus: Withdrawals are quick in normal conditions; volatility is low relative to risky assets.
Treasury use cases: DAOs, protocols, and crypto-native businesses park balances in lending vaults much like institutions use prime brokerage accounts.

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Differences

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Composability: Your claim on the pool is a token you can reuse immediately to pledge as collateral, trade, or bridge to other apps or services without exiting the strategy. Prime brokerage accounts don’t compose with other services like this.
Transparency: Utilization, collateral health, and rates are inspectable at all times.
No backstops: There’s no FDIC or sponsor support if things break. Guardrails are audits, risk parameters, and your own diligence, not a regulator’s buffer.

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Actively-Managed Vaults and Hedge Funds

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Hedge funds pursue sophisticated, sometimes levered or derivative-heavy strategies such as options writing for yield enhancement, basis trades, and tranching payoff profiles. However, minimums and accreditation often restrict access, their disclosures are periodic, and information about their positions are opaque.

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Actively-managed vaults run those same playbooks in the open. Options vaults sell volatility for weekly premiums, “looped” vaults recursively borrow to amplify yield, basis trade vaults hedge spots with perpetuals to capture funding. We even see meta-vaults that allocate funds across multiple sub-strategies. Platforms like Ribbon and Veda have turned hedge-fund-style tactics into permissionless products.

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Similarities

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Sophisticated engineering: Strategies juggle derivatives, leverage, and multi-venue positions to optimize yield.
Risk-tolerant users: Higher expected returns come with drawdowns, tail risks, and strategy complexity.
Explicit mandates: Products target a defined goal such as yield enhancement, market-neutral carry, or convexity capture.

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Differences

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Open access: No accreditation or seven-figure minimums for vaults.
Full transparency: Strategy code and transactions are onchain where positions and flows can be monitored by anyone.
Disclosures: No standardization in terms of structure and risk disclosures since risks live in code, docs, and dashboards instead of SEC-style prospectuses.This also means there are no issuer guarantees and smart-contract risk is part of the package.

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Breaking Point: Trusting Code, Not Counterparties

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The echoes between onchain vaults and traditional financial instruments are clear:

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Mutual funds and ETFs ↔ ERC-4626 vaults

Prime brokerage accounts ↔ lending vaults

Hedge funds ↔ actively-managed vaults

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However, onchain vaults take a sharp break from traditional financial instruments when it comes to their implementation and what it means for the future of finance. The essential difference is in who you trust and how claims are enforced.

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Code as custodian

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When you deposit funds in an onchain vault it is a smart contract, not a custodian, who holds assets and enforces rules and your claim is a token in your wallet. Likewise, redemptions, fee accrual, and strategy moves follow pre-written logic (which can be modified onchain and offchain) and everything happens with atomic, onchain settlement.

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Self-sovereign claims

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With onchain vaults, you hold a bearer-style token that the rest of DeFi understands instead of an IOU in a broker database. This safeguards your right of ownership over funds and avoids the typical red tape that exists in the traditional financial world. However, it pushes key management and operational security onto you depending on how you gain exposure.

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Glass-box finance

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Vaults are inspectable and balances, flows, and parameters are queryable by anyone. Open-source code and immutable ledgers shrink information asymmetry and enable third-party risk analytics to sprout around popular vaults without waiting for quarterly letters or reports.

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No guaranteed backstop

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Onchain vaults carry their own risks, however. The flipside to their reliance on code is that there’s no FDIC, no sponsor capital, no lender of last resort. Some protocols add circuit breakers, guardians, or insurance funds, others rely on audits, formal verification, and bounty programs to counter these risks.

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This is where a protocol like Cork is adding value by turning negative tail events into explicit, tradable instruments. Cork is a programmable risk layer for onchain assets, enabling asset managers to spin up custom swap markets that enhance redemption liquidity, transparency, and trust.

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Onchain vaults can use it to buy Cork Swap Tokens or Cork Principal Tokens as an onchain hedge mechanism for:

Duration Coverage: Instantly unwind illiquid collateral types at any time enabling more efficient looping trades for RWAs.
Default Protection: Default coverage for holders of stablecoins, LST/LRTs, RWA tokens, and more.

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While this doesn’t conjure an FDIC, it prices and transfers part of the catastrophe risk from end-users to risk speculators. Onchain vaults could even embed “programmable backstops” at the product layer by using Cork markets as liquidity buffers.

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Onchain Vaults Are Finance’s Composable Future

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Instead of simply imitating traditional financial instruments, onchain vaults reassemble them into new instruments. At the same time, these new instruments act as software primitives that anyone can compose.

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As onchain vaults mature and absorb more real-world assets, they’ll steadily become the interface for global yield opportunities. Imagine a wallet that presents any users, regardless of accreditation, with a simple menu with save, lend, hedge features while sophisticated machinery routes capital under the hood across chains and strategies, with clear labels for risk. This is the upgrade that onchain vaults represent for traditional finance.

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