a16z: Traditional finance has no intention of blindly embracing DeFi; what it cares about is the blockchain.

Author: Christian Crowley, Pyrs Carvolth; Source: a16z crypto; Compiled by: Shaw, Jinse Finance

The crypto industry has nearly formed a set of future narratives that are almost settled: decentralized finance (DeFi) and traditional finance (TradFi) converge, unpermissioned liquidity connects with institutional distribution channels, and ultimately gives birth to a sophisticated hybrid system that combines the advantages of both — the new system will absorb the old one.

It’s a desirable story, but it mostly doesn’t match reality.

A closer-to-the-truth narrative is this: As long as the blockchain can help traditional finance optimize existing business, they will adopt it. This isn’t because they embrace decentralized ideals; it’s because blockchain has an extremely compelling cost-optimization logic: the technology can reduce costs, improve settlement processes, expand distribution channels, and further strengthen its relationship with customers.

This means institutions aren’t, in any meaningful sense, blending into DeFi. Instead, they selectively absorb the DeFi components that fit their operational constraints and discard the parts that don’t; they rebuild DeFi around institutional needs. The end product is very likely neither like traditional finance nor like today’s DeFi. We are witnessing the rise of a brand-new category: programmable financial infrastructure built on blockchain’s underlying layer, but deeply optimized for institutional constraints.

As regulatory frameworks gradually mature, this landscape may evolve. Legislation like the CLARITY Act may, in the future, lower the threshold for institutions to directly access permissionless systems. But even if legal restrictions are loosened, traditional finance’s risk appetite will not change overnight. Institutions evaluate technology—always—around costs, risks, control, and business fit. This creates two parallel opportunities for the industry, not a single choice.

First opportunity: Enable institutions to deploy the infrastructure that already meets the conditions to adopt today. Deploying any foundational module—whether atomic settlement, programmable money, or tokenized collateral—will validate technical feasibility, co-build a common underlying channel, and bring real transaction volume and capital on-chain.

Second opportunity: Continue building open, native crypto-finance systems that institutions currently can’t put into use.

These two tracks do not compete with each other; they can and should develop in parallel, and—when run well—can empower each other. As open networks continuously produce foundational modules, trading markets, and innovative solutions, institutions will gradually adopt them over time. If both paths succeed, fusion will happen naturally: it won’t be one system completely replacing the other, but both sides increasingly relying on the same underlying infrastructure to operate.

Real institutional decision logic in TradFi

For traditional finance to adopt a technology base component, it must satisfy two conditions at the same time: improve cost, risk, or distribution efficiency—and also be compatible with governance mechanisms and accountability requirements. The DeFi traits that institutions discard—open access, pseudonymous interaction, and tamper-proof execution—can satisfy the first requirement, but not the second. That’s also why an institutional deployment path is predictable rather than a matter of random selection; developers can even use it as a product-design yardstick: if a feature can only create value by stripping away an institution’s control and governance permissions, no matter how clever the design is, it will almost certainly be modified or discarded outright.

We use several foundational modules to validate these standards. Atomic settlement eliminates the time gap between execution and final settlement, removes counterparty risk, and frees collateral reserved by institutions for outstanding transactions. A shared ledger turns the biggest hidden operational cost in the background—reconciliation—into a routine process. Programmable money automates business flows such as interest payments, margin calls, and corporate actions by code, no longer relying on long chains of manual instructions. AMM curve algorithms—after stripping away the permissionless wrapper—can serve as pricing engines for on-chain FX and for net asset value (NAV) pricing of tokenized money market funds.

Each of these can optimize profit-and-loss statement metrics, eliminate a category of operational risks and their associated costs, yet it doesn’t require institutions to endorse decentralization as an ideal. So we need to recognize the reality precisely: when JPMorgan offers permissioned blockchain for institutional deposits, and when BlackRock and Franklin Templeton issue tokenized money market funds, these actions do not represent companies “testing DeFi.” They simply use blockchain to run existing businesses—interbank settlement, fund subscriptions/redemptions, and distribution of yield products—only with the underlying infrastructure upgraded. These deployment cases leverage blockchain’s technical characteristics (programmability, transparency, atomic settlement) while deliberately discarding the traits that native DeFi relies on to function: open access, pseudonymous mechanisms, and execution that doesn’t require trust.

This isn’t a compromise or failure; it’s an intentional architectural tradeoff—and it foreshadows where the industry is headed.

Buyers differ, rules differ

If you think institutional deployment is merely existing DeFi infrastructure gaining broader distribution channels, you’re badly mistaken. Institutions evaluate protocols from a completely different perspective than native crypto users. When they select software vendors, infrastructure partners, assess operational risk, ensure compliance governance, and decide on long-term ownership of core systems, they strictly follow internal process standards. Therefore, DeFi’s success lessons cannot be copied directly to the institutional market.

Companies rarely choose the “technically best” solution; they usually prioritize matching existing business workflows, risk models, and procurement policies.

Any technology entering a heavily regulated, risk-management-focused, responsibility dispute–averse institutional environment will be reshaped by that environment. The internet is like this (enterprise firewalls, private intranets), cloud computing is like this (private cloud, virtual private cloud, federated compliance certifications), and AI is also like this (on-prem deployment, data residency requirements, model governance). Blockchain is no exception.

Reconstruction mainly revolves around two dimensions:

• Compliance layer: Most institutions cannot avoid KYC, anti-money-laundering, sanctions list screening, qualified investor verification, and mandatory regulatory reporting. Permissionless systems are natively incompatible with these rules. Institutions need permissions such as asset freezes, transaction rollbacks, and identifying counterparties. DeFi was not originally designed around these needs, and compatibility usually requires large-scale architectural changes. The situation may change in the future—for example, the CLARITY Act might help institutions access permissionless systems while satisfying regulatory prerequisites. But for now, the core yardsticks most institutions use to evaluate blockchain infrastructure remain control capabilities, accountability, and operational risk.

• Enterprise value realization: This is often underestimated. When institutions adopt blockchain, it isn’t because they believe in permissionlessness. The driving force is compressing costs, reducing reconciliation frictions, opening new distribution channels, and deepening customer lock-in. The value proposition must be presented in this language; otherwise it’s hard to pass procurement approval.

Stablecoins are the most direct example. Banks, payment institutions, and fintech companies increasingly treat stablecoins as efficient settlement infrastructure, enabling fast USD transfers across networks and regions, but they rarely adopt any broad permissionless financial ideology. Institutions adopt programmable dollars for practical value rather than trying to rebuild the financial system according to DeFi principles.

Circle’s development history is highly representative. Its Arc platform shows how blockchain infrastructure can be re-packaged for institutions: it emphasizes compliance, operational controls, trusted counterparties, and integration with existing business systems—not open access and composability. The value proposition no longer purely pursues permissionlessness; instead, it enables faster settlement, global coverage, and improved capital efficiency in a form institutions can accept.

Even SWIFT increasingly views blockchain through this logic. Its work related to tokenized asset interoperability is not aimed at replacing existing financial institutions, but at leveraging the SWIFT network to optimize the collaboration patterns among different institutions. A repeating pattern emerges: blockchain deployments more often strengthen existing financial networks than replace them.

When powerful technology enters mature, large markets, it often follows this kind of evolution path.

Two opportunities for developers

From a macro industry perspective, everyone should not just chase one track and abandon the other. But at the level of a single company, don’t try to run both lines at once.

At the ecosystem level, institutional business and open networks can empower each other. But for most teams, the two are fundamentally completely different businesses. Developing for institutions requires mastering procurement processes, compliance frameworks, permission and access controls, channel partnerships, and long sales cycles. Developing for open networks requires continuously optimizing around developers, liquidity, composability, and network effects. Target customers, distribution models, product requirements, and success metrics are often entirely different.

This doesn’t mean one track is superior. **Founders should clearly position the market they serve, while recognizing that both tracks rely on the same underlying base: **a permissionless blockchain as a neutral settlement layer.

Connecting with institutional customers and building a parallel financial system are not in conflict. When operated well, they can add value to each other: the permission layer brings transaction volume, industry credibility, and capital; while the open network continuously incubates foundational components that the permission layer can deploy later. The real fusion that arrives happens in the underlying settlement channel—not through one system compromising with the other.

Public chains may become increasingly important settlement layers, but the applications built on top of them will continue to gain more permissioned characteristics.

Building programmable financial infrastructure

**To deploy a brand-new programmable financial infrastructure, developers have two paths: **build from scratch, or modify existing products.

Taking networks like Canton as an example, it didn’t retrofit an existing DeFi architecture. From the outset, it was designed around institutional needs for privacy, compliance, and permissioned/interoperable control. The goal is not to guide banks into DeFi, but to use blockchain to enable multi-party coordination while preserving the governance rules, information confidentiality, and operational control permissions institutions need.

Not all institutional-track strategies require reconstruction from scratch. Morpho chooses the opposite route: it didn’t abandon the original DeFi foundational components; instead, it optimized the components to reduce the onboarding threshold for institutions and for asset issuers. For example, Apollo’s ACRED fund includes Morpho in its on-chain lending strategy, combining native DeFi lending modules with institutional-grade distribution, compliance frameworks, and fund structures. The final shape belongs neither purely to DeFi nor fully to a segregated institutional-only system. Under this model, institutions selectively connect to existing crypto infrastructure while packaging it according to their own governance, compliance, and distribution requirements.

This new track is tailored specifically to institutional constraint conditions: it borrows the DeFi mindset, but runs in a more permissioned and more robust compliance environment—so it must differ from today’s products.

Some teams—for example Morpho—have already successfully reworked native crypto infrastructure services for institutional scenarios. But developers can’t treat it as a universal template. Institutions are an independent customer segment with special needs. In most cases, designing products from the beginning around institutional requirements is far more efficient than modifying a solution originally built to serve open networks.

Ongoing opportunities in the DeFi track

Today’s institutional deployments of various innovations were not initially created by banks, asset managers, or traditional financial infrastructure providers. Instead, they came from open networks—developers can freely experiment with new market structures, collaboration mechanisms, and financial modules.

This distinction is crucial. Institutions are not the source of industry innovation; the permission layer is often the downstream application of open-network innovation.

This leads to a key strategic conclusion: if the whole industry crowds excessively into selling products to banks and asset managers, it’s easy to mistakenly treat a category of large buyers as the entire market. Traditional finance is an important customer, but it’s not the only market.

Developing around institutional needs is a reasonable and valuable direction, but it is only one track—not the whole road. Teams that can survive long-term will clearly identify the object they serve. Institutional business has ample space, but it cannot simply be viewed as an extension of DeFi business; success in one market does not mean it can be replicated in another track.

**If you focus on serving the institutional market, go all in.**Don’t assume that the native crypto track’s current hype will directly translate into enterprise customer orders. Dig deep into customer research, fully understand procurement processes, and deliberately build products with institutional needs in mind.

If you deeply work on open networks, stay true to your original intent. Don’t give up your vision just because institutions are the loudest buyer right now.

Remember this: the two tracks are complementary, not opposed. One is responsible for innovation deployment and scaled commercialization; the other is responsible for incubating innovation. A portion of this technology is almost destined to become foundational infrastructure for the traditional financial system, but it’s not the only future being built. Open networks remain the industry’s most important arena for experimentation and innovation, and many of the foundational modules that will shape institutional infrastructure in the future will very likely be born there first.

Traditional finance (TradFi) isn’t blindly embracing decentralized finance (DeFi); it selectively absorbs the parts that fit its own model. For developers, the opportunity isn’t to chase every market at once—it’s to find the track that suits them and commit to building and deploying there. In the future, institutionalized infrastructure may run widely at the base layer, but a large share of core innovation will continue to originate from open networks.