I think the vassal system is mostly fine, but could still use a few tweaks. I have only played a few games of BTS, so correct me if any of this has already changed since Warlords.
I've noticed that usually when you are crushing someone and they vassalize to another nation, usually they would have capitulated to you a turn or two earlier had you asked. It's kind of a pain to have to check every turn to see if your opponent is ready to capitulate; it would be nice if as soon as they were willing they would talk to you and make the offer themselves. It would make sense for them to seek someone else's protection after you turned them down, since at that point it's the only alternative to being completely destroyed.
My main beef, though, is with voluntary vassals, especially in the hands of the AI. Voluntary vassals are pretty much useless to the human player and a borderline bug in the hands of the AI. Particulary irritating is the habit of the AI of immediately granting all its technology to a backwards nation who then turns around and breaks free shortly thereafter.
I think there needs to be some additional restrictions on voluntary vassals to make them more worthwhile to take on, and/or changing the AI to not just give away their technology to a vassal who can break free whenever it wants.