Existing Challenges for Scaling Onchain Vaults

December 2025

8 mins

Onchain vaults have matured from yield farming wrappers to programmable financial infrastructure. Today, they mirror (and reimagine) many TradFi instruments such as ETFs, prime brokerage accounts, and hedge funds. The remaining question, however, is: can they reach the level scale in their traditional counterparts?

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We know the demand exists and is growing. Onchain vault TVL jumped from under $150M in mid-2024 to $16B peak by the end of September 2025. What’s missing now are three pillars of scalable finance: credit primitives, standardized infrastructure, and systemic backstops.

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Bottleneck #1: Overcollateralization’s Ceiling

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As much as the vault ecosystem has grown, it is still not at the scale of its traditional counterparts. There’s definitely a lot of room for growth when it comes to additional yield sources. One key avenue to unblock is a scalable and effective implementation of undercollateralized lending. This has historically been a major source of yield in traditional credit markets that’s still missing onchain.

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Lending markets are a major source of yield for many vault strategies today. However, most of these strategies rely on overcollateralized lending that demands 120–150% collateralization to secure loans. This approach is solvent by design but leaves a lot of room for capital inefficiency.

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So far this overcollateralized model has been necessary since DeFi lacks a credible credit system. There’s no shared onchain identity framework, no standardized credit scoring, and no legal recourse for recovering capital in the event of a default. As a result, borrowers must be overcollateralized, which effectively limits borrowing to those who already hold a significant amount of capital in digital assets.

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There are many attempts to solve this. Protocols like Maple, TrueFi, or Goldfinch brought real-world undercollateralized lending onchain by mixing offchain underwriting with tokenized credit markets. While successful in some cycles, these platforms have faced defaults and drawn-out recoveries, highlighting how fragile these systems can be without consistent default frameworks and legal remedies.

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For example, Maple suffered a $36M default when a borrower (Orthogonal Trading) went under in the 2022 credit crash, and TrueFi had a major default ($4M by Blockwater Technologies) around the same time. Goldfinch, which lends to real-world businesses in emerging markets, saw its first borrower defaults in 2023.

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The path to scaling credit supply (and thus vault growth) is developing trustworthy credit primitives onchain. This could take many shapes or forms, especially in a programmable, composable environment like what exists in DeFi.

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Some areas where there’s promising developments include projects exploring privacy-preserving financial identity and onchain credit scores that could allow risk-based lending. For example, Goldfinch uses a Unique Identity NFT with KYC verification to ensure each borrower is a real entity. Spectral Finance and others build wallet-based credit scores from onchain behavior. Credora and Chaos Labs provide a “credit oracle” service for “risk-aware DeFi” that evaluates a trading firm’s real-time financial health via encrypted data, outputting a credit risk rating onchain without revealing the raw financials.

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Solving the overcollateralization bottleneck will require blending offchain trust with onchain automation for identity, credit data, insurance, and legal recourse in order to unlock more borrowing against vaults. While current developments are part of the solution, they are still not sufficient for scale. In the meantime, onchain vaults remain constrained by a ceiling of low capital efficiency and niche borrower demand.

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Bottleneck #2: Missing Infrastructure and Standards

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In TradFi, financial products are built on a bedrock of standards: credit ratings from S&P or Moody’s, Basel risk weightings, regulatory audits, and stress tests. DeFi lacks such frameworks, especially since the traditional standards have a hard time understanding and properly rating its new category of financial products.

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Today, DeFi has risk modeling where each protocol uses bespoke frameworks. There is no universally trusted scoring system for vault risk or protocol health. Risk visibility is also inconsistent since not all protocols expose real-time vault composition, health metrics, or dependency mapping. When data is available, it often lives in Dune dashboards or isolated GitHub repos, not in standardized disclosures.

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Oracle design is another weak link. Vaults depend on price feeds (like Chainlink) to value collateral and trigger liquidations. But oracle misconfigurations or lags during volatility can lead to cascading failures as seen in MakerDAO’s “Black Thursday” or the more recent “Black Friday”.

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Improving this means building shared infrastructure: risk-weighted vault classifications, composability-aware stress tests, and standardized reporting. Protocols like Morpho, Euler V2, and Veda are making progress by adopting the ERC-4626 standard into their architecture and exposing more analytics by default, but broader adoption is needed.

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One key direction to go for is Standardized Playbooks. Currently, when a borrower fails to repay, for example, each protocol improvises on a recovery plan.

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As the industry matures, we should expect clearer frameworks around smart contract risk oracle configurations, LLTVs, liquidation paths, and many other common events and practives. Onchain lending might integrate more “pre-packaged” default procedures or community-agreed liquidation rules. Ideally, we’d see the development of mechanisms such as onchain arbitration triggers. Protocols like TrueFi have already outlined multi-step default processes such as slashing stake, tapping an insurance fund, pursuing legal enforcement.

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As more real-world asset (RWA) loans flow onchain, having standard playbooks will make institutions more comfortable supplying large capital to vaults. The ideal outcome here would be to have industry-driven self-regulation. In TradFi we see regulation enforcing risk, disclosure, and listing standards. There’s no reason to have analogous yet decentralized systems in DeFi.

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Bottleneck #3: Systemic Contagions and Backstops

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Vaults rarely operate in isolation. Their strategies stack on top of each other as they use stablecoins, staking tokens, or derivatives from other protocols as inputs. This composability, while powerful, introduces correlation risk.

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When one core component such as USDC, stETH, or a cross-chain bridge fails, the impact can propagate through many vaults. The March 2023 USDC depeg, for example, caused widespread liquidation chaos across DeFi, despite being triggered by offchain bank failures.

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Unlike TradFi, DeFi has no lender of last resort. There’s no FDIC, no Federal Reserve, no guarantee of liquidity during panics. When queue lines get crowded, users are stuck as exit liquidity as it continues to happen even in recent events.

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This risk is compounded by the absence of systemic mapping tools. Few users or protocols know exactly how interdependent their vault strategies are. A single exploit can freeze capital across protocols that rely on its markets or collateral. To mitigate this, DeFi needs “composable risk” design patterns: dependency maps, correlated-risk scores, portfolio concentration limits, and “break glass” emergency tools like circuit breakers.

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One promising innovation is tokenized risk. Protocols like Cork let other protocols tokenize tail risk for stablecoins, oracles, or other primitives. Vaults can buy this protection to offset systemic shocks, creating a DeFi-native backstop that prices catastrophe risk in real time and broadcasts stress through market signals. The key benefit here is that the tokenized risk primitive also doubles as a liquidity buffer. In a stressful event, vaults that have purchased protection with Cork can bypass duration risk and have access to an immediately liquid pool that will allow them to make their shareholders whole.

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While these programmable hedges don’t eliminate risk, they allow protocols to price it, segment it, and provide liquidity buffers during adverse events. As vaults become systemic infrastructure, tools like this will be critical for confidence and scale.

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From Clever Products to Durable Infrastructure

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The current ceiling on vault scale is institutional readiness. The appetite for yield, composability, and tokenization is there. Now they need credit rails, safety nets, and composable risk infrastructure to operate at the scale of mutual funds or ETFs.

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The industry is responding. We’re seeing:

Experimentation in onchain credit infrastructure with Goldfinch, TrueFi, Credora, and Chaos Labs.
The rise of risk curators who define and manage vault risk like Gauntlet, Steakhouse, and MEV Capital.
ERC-4626 vault wrappers that improve composability and transparency.
Risk tokenization with Cork to create hedging layers and buffers.

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As these tools mature, vaults can evolve from clever DeFi wrappers to foundational yield infrastructure. The long-term vision is that vaults become default interfaces for structured yield that are composable like software but resilient like utilities.

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