S&P Global brings risk assessments to growing crypto lending vault sector

S&P Global Ratings has launched a risk assessment framework for digital asset lending vaults as the onchain investment products gain traction.

According to Monday’s announcement, the framework evaluates vaults across six areas: portfolio credit quality risk, liquidity mismatch risk, curator risk, blockchain risk, protocol risk, and vault security and governance risk.

S&P said the assessments will evaluate the risk of losses to investors in lending vaults, but will not constitute credit ratings or evaluate yields. As well, the framework was not designed to single out any one category of the six that poses a greater risk than the others, according to S&P Global Ratings analyst Lisa Schroeer.

“A material weakness in any factor can constrain the overall VRA,” Schroeer told Cointelegraph. “A strong score in one factor does not offset a material weakness in another.” She said that the approach reflects a sector where “there are many points of risk/failure that can break.”

Digital asset lending vaults pool investor deposits and deploy them through predefined strategies managed by smart contracts or human curators. Depositors receive tokens representing their share of the vault’s assets and returns.

According to S&P, deposits in digital asset lending vaults reached about $10 billion in September, up from $1.5 billion two years earlier. S&P said it plans to publish its first Vault Risk Assessments in future announcements, though it did not identify which vaults will be assessed first.

Explaining the framework’s potential role for investors, Schroeer said: “The assessment aims to provide more transparency on the risks so that any entity can make more informed decisions when deciding how to allocate capital to DeFi vaults.”