Will DeFi and TradFi eventually merge? a16z overturns the market’s mainstream speculation

TradFi never wants decentralization. Written by Christian, Pyrs Carvolth, compiled by Saoirse at a16z. In the crypto world, there is a near-conclusive vision of the future: DeFi (decentralized finance) and TradFi (traditional finance) merge into one, permissionless liquidity-connecting entities eventually evolve into institution-level distribution channels, and a refined hybrid system combining the strengths of both will replace the old one. This vision sounds appealing, but it largely doesn’t hold up. A more accurate picture is this: as long as blockchain can help traditional finance optimize existing business operations, they will adopt the technology. It’s not because TradFi embraces decentralization as an ideology; it’s because blockchain has highly attractive cost advantages—cutting costs, optimizing settlement processes, widening business channels, and further strengthening its control over customers. This means financial institutions will not simply merge with DeFi. Instead, they will selectively absorb DeFi technology components that fit their operational constraints, discard parts that can’t be adapted, and rebuild DeFi around their own needs. The end product that takes shape won’t be traditional finance, nor will it be today’s DeFi. We are witnessing a brand-new track emerge: programmable financial infrastructure built on blockchain foundations and optimized for institutional business constraints. As regulatory frameworks gradually mature, the industry landscape may change. Bills like the 《CLARITY Act》 may in the future lower the threshold for institutions to connect directly to permissionless systems. But even if laws and regulations loosen, traditional finance’s risk appetite won’t flip overnight. Institutional technology assessment always revolves around four dimensions: cost, risk, ability to manage and control, and business fit. That also means there are two big opportunities in front of the crypto industry—not just a single way out. The first opportunity: help institutions deploy infrastructure components they can handle today. Every infrastructure component an institution deploys—atomic settlement, programmable money, tokenized collateral, and so on—will validate technical feasibility, co-build a common underlying network, and bring real capital and transaction volume onto the chain. The second opportunity: continuously build a financial system with open, native crypto infrastructure. This system is not yet accepted by institutions. These two tracks are not mutually exclusive; they can develop in parallel. When run well, they can even empower each other. Open networks and ecosystems continue to produce all kinds of foundational modules, market models, and innovative results—and those results will later be adopted by institutions. If both routes mature, fusion will naturally happen: not one side completely replacing the other, but both sides increasingly sharing the same underlying infrastructure. The real action logic of traditional finance Only when traditional finance satisfies two conditions will it adopt a technology component: on one hand, it must optimize costs, risks, or business distribution; on the other hand, it must be compatible with control and accountability mechanisms. Those traits that institutions discard—open access, anonymity, and execution methods that are tamper-proof—may satisfy the first standard, but they cannot pass the second. Therefore, institutional technology selection follows a clear pattern, and developers can use it as a product-design test. In other words, if a feature can only create value by weakening institutional control, no matter how cleverly it’s designed, it will almost certainly be modified or outright rejected. We use several core technologies to validate this standard. Atomic settlement eliminates the time gap between transactions and final settlement, mitigating counterparty risk and freeing collateral funds reserved by institutions for pending settlements. Shared ledgers can solve one of the biggest hidden backend costs: reconciliation—making tedious reconciliation no longer a hard problem. Programmable money supports automated processes such as coupon redemption, margin top-up notifications, and entity-related operations executed by code, escaping a chain of manual instructions. Automated market maker (AMM) curve algorithms, after stripping away the permissionless wrapper, can be used as pricing engines for on-chain FX and net asset value (NAV) of tokenized money market funds. Each of the above technologies can improve P&L reporting data, reduce operational risk, and reduce related expenses—yet they do not require institutions to accept decentralization ideology. Therefore we should clearly understand the essence of JPMorgan building permissioned blockchains for institutional deposits, and projects like BlackRock and Franklin Templeton launching tokenized money market funds: companies aren’t “testing DeFi.” They use blockchain to run business that they were already operating—interbank settlement, fund subscriptions/redemptions, distribution of interest-bearing products—just upgrading the underlying technology architecture. These applications fully leverage blockchain’s properties (programmability, transparency, atomic settlement), while deliberately discarding the traits that native DeFi depends on: open access, anonymity, and trustless execution. This isn’t compromise; it’s an intentional architectural choice, and it signals the industry’s long-term direction. Different service targets, different rules If you think the institutional market is just a bigger sales channel for existing DeFi infrastructure, you’re mistaken. Institutions evaluate protocols from a completely different perspective than native crypto users. When institutions select software vendors and infrastructure partners, they focus on operational risk, compliance and governance controls, and long-term ownership of core systems, strictly following internal standards and workflows. Therefore, success of a product within a DeFi ecosystem does not automatically translate into institutional customer approval. Companies rarely buy “the technically best” product; they tend to choose technical solutions that best match existing business workflows, risk models, and procurement processes. Any technology entering an environment with strong regulation, heavy emphasis on risk management, and a strong dislike of responsibility disputes will be reshaped by the environment. The internet is like this: creating company firewalls and private intranets. Cloud computing is also like this: leading to private cloud, virtual private cloud, and FedRAMP compliance frameworks. Today, artificial intelligence is going through the same process: on-prem deployment, data residency requirements, and model governance standards. Blockchain will not be an exception. Technology restructuring mainly advances along two major dimensions: Compliance layer: KYC, anti-money laundering, sanctions list screening, accredited investor determination, and regulatory reporting requirements leave little room for negotiation for most institutions. Native permissionless systems cannot be adapted to such rules. Institutions must have permissions for asset freezing, transaction rollback, and identifying counterparties. Original DeFi was not designed around these needs, and achieving compatibility often requires large-scale architectural changes. The situation may improve in the future—for example, 《CLARITY Act》 could help institutions connect to permissionless systems under regulatory prerequisites. But at present, when most institutions evaluate blockchain infrastructure, the top considerations are control capabilities, accountability mechanisms, and operational risk. Business value realization layer: this is often underestimated. When institutions adopt blockchain, they’re not treating permissionless as a doctrine. Instead, blockchain can compress costs, reduce reconciliation friction, open new distribution channels, and deepen customer stickiness. Product value propositions must land on these kinds of commercial metrics; otherwise it’s hard to pass corporate procurement approvals. Stablecoins are the clearest example. Banks, payment service providers, and fintech companies increasingly view stablecoins as high-quality settlement infrastructure, making it easier for dollars to move quickly across networks and regions. But almost no institutions accept the entire set of ideas behind permissionless finance. They use programmable dollars only because they have practical value, not because they want to rebuild the financial system according to DeFi principles. Circle’s development history is an excellent case in point. Its Arc product clearly shows that blockchain infrastructure is being re-wrapped for institutions: it highlights compliance, operational controls, trusted counterparties, and integration with traditional business systems—not permissionless access and composability. Its value proposition isn’t simply chasing permissionlessness; it’s delivering capabilities institutions can actually deploy and use: faster settlement, global coverage, and higher capital efficiency. Even SWIFT is starting to view blockchain through this logic. Their push for interoperability of tokenized assets is not aimed at replacing existing financial institutions, but at optimizing how different institutions collaborate using the SWIFT network. The pattern keeps appearing: when institutions deploy blockchain, the goal is to strengthen mature financial networks, not to replace them. When mature technologies penetrate large, existing markets, they often take this path. Two opportunities for developers From an industry perspective, if everyone chases one track and abandons the other, they will miss a huge opportunity. From a startup perspective, trying to run both lines in parallel is also extremely risky. At the ecosystem level, the institutional business track and the open network track can mutually reinforce each other. But for most teams, the two are fundamentally entirely different businesses. Building for institutions requires familiarity with procurement processes, compliance regimes, governance and control solutions, channel partners, and lengthy sales cycles. Building for open networks requires continuously optimizing around the developer ecosystem, liquidity, composability, and network effects. The target customers, promotion models, product requirements, and performance metrics of these two types of businesses are usually vastly different. This doesn’t mean one track is better than the other. Founders should clearly position the market they serve. The intersection points between the two routes lie in the underlying infrastructure: public chains as a neutral settlement layer. Working with institutions to build supporting financial systems and partnering with institutions do not conflict. With proper layout, they can create mutual value: the permissioned track brings transaction volume, industry credibility, and capital; the open track keeps producing innovative components that are later implemented by the permissioned track. True fusion in the future will happen at the underlying settlement network level, not through one system compromising with another. Even if top-layer applications gradually become permissioned, public chains will remain increasingly important as common settlement infrastructure. Two routes to build programmable financial infrastructure To build this emerging track, developers have two paths: build a brand-new system from scratch, or modify existing products. Taking networks like Canton as an example: without modifying existing DeFi code, the system is designed from the ground up around institutional needs for privacy, compliance, and controlled interoperability. The goal is not to guide banks into the DeFi ecosystem, but to use blockchain to enable multi-party coordination while preserving governance permissions, data confidentiality, and operational control capabilities that institutions require. Not all institutional business requires building from scratch. Morpho chooses the opposite approach: instead of abandoning DeFi underlying components, it continuously optimizes the product and lowers the access threshold for institutions and asset issuers. For example, ACRED fund under Apollo incorporates Morpho into on-chain lending strategies, combining native DeFi lending modules with institution-grade distribution, compliance frameworks, and fund structures. The final form is neither pure DeFi nor a completely independent institution-closed system. Institutions selectively adopt existing crypto infrastructure, and then re-wrap it according to their own governance, compliance, and distribution requirements. This new track is built specifically for institutional constraint conditions—borrowing DeFi technology, but operating under a stronger permissioned and compliance framework, and therefore naturally differs from today’s native DeFi. Some teams, such as Morpho, have successfully adapted native crypto products to institutional scenarios. But developers should not treat this path as a standard answer. Institutions are a customer group with completely independent needs. In most cases, designing products from the start based on institutional needs is far more efficient than modifying products originally built for open network development. The opportunity in continuously deepening DeFi The various innovations that institutions adopt and deploy today were not initially created by banks, asset management companies, or traditional finance infrastructure. Everything originates from the open network—where developers can freely experiment with new market structures, collaboration mechanisms, and financial module building blocks. This point is crucial. Institutions are not the source of industry innovation; the permissioned track is often the downstream adopter of open network innovation outcomes. From this comes a key strategic conclusion: if the whole industry becomes overly fixated on selling products to banks and asset managers, it will make a cognitive mistake—equating one kind of large customer with the entire market. Traditional finance is an important customer, but it is absolutely not the only market. Products built for institutional needs have rationality and huge value, but that is only one track, not the entire solution for the industry. Teams that can survive long-term will clearly identify who they serve. Institutional business space is broad, but it cannot simply be viewed as an extension of DeFi. Success in one market doesn’t mean it can be copied to another market. If you choose to develop for institutions, throw yourself entirely into it. Don’t assume that the popularity of native crypto markets will automatically convert into corporate customer orders. Understand customers deeply, master procurement processes, and develop products in a planned way around institutional needs. If you choose to deepen the open network, stick with it. Don’t give up your initial vision just because institutions are currently the strongest buyers in terms of capital strength. Remember: the two tracks are complementary, not competitive. One route is responsible for adapting mature innovations, commercializing, and scaling deployments; the other route is responsible for continuously exploring innovations. Blockchain technology is almost destined to become a foundational component within existing traditional finance systems, but that is not the only future being formed. Open networks remain the industry’s most important ground for experimentation and innovation, and many of the foundational modules that will support institutional infrastructure in the future will be created here first. Traditional finance will not accept the complete DeFi ecosystem; it will only select portions of the technology that fit its business model. The opportunity in front of developers is not to chase every market at the same time, but to find your own track and execute in a targeted way. Future financial infrastructure may be led by institutional systems, but many key innovations will still keep emerging from the open network.

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