A16z: “The supposed fusion of DeFi and TradFi” is a false proposition.

Author: a16z Crypto

Translated by: Jiahuan, ChainCatcher

In the crypto industry, there’s a kind of imagination about the future that has almost become the standard answer: DeFi and TradFi merge, permissionless liquidity meets institutions’ distribution capabilities, and ultimately a graceful hybrid emerges that combines the best of both—the new system replacing the old one.

The story sounds reassuring, but it’s basically wrong.

A more honest version is this: as long as blockchain can help existing businesses do things better, traditional finance will use it. Not because they’ve embraced decentralization, but because the cost accounting adds up. This technology just happens to compress costs, improve settlement, expand distribution, and also let institutions tighten their grip on customer relationships.

That means institutions aren’t “fusing” with DeFi. They’re simply selecting the parts of DeFi that fit their operating constraints, discarding the parts that don’t, and then reassembling everything according to institutional requirements. The final product won’t look like traditional finance, and it won’t look like today’s DeFi either. We’re witnessing the emergence of a new category: programmable financial infrastructure that runs on blockchain rails, but is optimized for institutional constraints.

As regulatory frameworks mature, this setup may change. Legislation like the CLARITY Act could, in the future, make it easier for institutions to connect directly to permissionless systems. But no matter how far the law opens up, traditional finance’s risk appetite won’t reset overnight. When institutions evaluate technology, they always look at costs, risks, control, and operational fit. That’s precisely why there are two opportunities in front of the industry—not one.

The first opportunity is to help institutions adopt the infrastructure they’re already ready to accept. Every time an institution adopts a component—whether atomic settlement, programmable money, or tokenized collateral—it’s validating the technology, refining the shared rail, and bringing real transaction volume and capital onto the chain.

The second opportunity is to continue building open, crypto-native financial systems that institutions are not yet ready to use.

These two paths aren’t mutually exclusive. They can exist in parallel, and if done well, they can even reinforce each other. Open networks will keep producing new components, markets, and innovations, and institutions will eventually put these results to use. If both sides succeed, “fusion” will happen naturally—not one side swallowing the other, but both sides becoming increasingly dependent on the same underlying infrastructure.

What traditional finance is actually doing

When traditional finance adopts a component, it needs to satisfy two conditions: first, it must improve cost, risk, or distribution; second, it must not break control and accountability mechanisms. Those components that institutions discard—such as open access, anonymity, and tamper-resistant execution—can pass the first gate, but they won’t pass the second.

So institutional adoption patterns are predictable, not random. Founders can treat it as a design-and-testing exercise. In other words, if the value of a feature can only be achieved by depriving institutions of control, then no matter how elegantly it’s designed, it’s almost destined to be modified or rejected.

Let’s run a few components through this test. Atomic settlement eliminates the time lag between trade execution and final settlement, smooths out counterparty risk, and also frees up the collateral institutions have been tying up for unsettled trades. A shared ledger turns the biggest hidden backend cost—reconciliation—into something negligible.

Programmable money lets interest payments, top-ups for additional margin, and corporate actions execute automatically as code, so it no longer depends on a long chain of manual instructions. Once the permissionless wrapper is stripped away, the AMM curve mathematics turns into a pricing engine for on-chain foreign exchange and net asset value pricing for tokenized money market funds.

Each of these components can improve some number on a profit-and-loss statement, or eliminate an operational risk and its associated costs—but none of them requires institutions to “believe in” decentralization.

So let’s say it plainly: JPMorgan’s permissioned chain for institutional deposits, the tokenized money market funds from BlackRock and Franklin Templeton—these projects aren’t companies “testing the waters” with DeFi. They’re using blockchain to do things they already do, such as interbank payment and settlement, fund subscription management, and distribution of yield-bearing instruments—just via a better pipeline.

These deployments rely on blockchain’s technical properties: programmability, transparency, and atomic settlement. And they intentionally discard the properties that allow native DeFi to run: open access, anonymity, and trustless execution.

This is not failure. This is not compromise. It’s a deliberate architectural choice—and it clearly tells us which direction things are moving.

Different buyers, different rules

If you think institutional adoption is just opening a larger distribution channel for existing DeFi infrastructure, you’re mistaken. How institutions evaluate protocols is completely different from how crypto-native users do. In institutions’ eyes, this is about selecting software vendors and infrastructure partners—considering operational risk, compliance controls, and the long-term ownership of critical systems—while following their own standard internal processes. As a result, success in DeFi can’t automatically translate into success in institutional markets.

Companies rarely buy the “best” technology. They buy the technology that best matches real-world constraints such as existing workflows, risk models, procurement processes, and more.

Any technology entering a heavily regulated, heavily risk-managed, extremely liability-averse institutional environment will be reshaped by that environment. The internet went through it (corporate firewalls, intranets). Cloud computing went through it (private clouds, VPCs, FedRAMP certification). AI is going through it (on-prem deployment, data residency requirements, model governance). Blockchain will be no exception.

This reshaping unfolds along two axes:

The first axis is compliance. KYC, anti-money-laundering, sanctions screening, investor eligibility verification, and regulatory reporting—there’s little to no room for negotiation for most institutions. Permissionless systems by nature don’t support these requirements. Institutions need the capability to freeze assets, revoke transactions, and identify counterparties.

DeFi didn’t consider these from the start, and meeting them often means making major architectural changes. This may loosen in the future—for example, the CLARITY Act could allow institutions to access permissionless systems while meeting regulatory requirements. But today, when most institutions evaluate blockchain infrastructure, they still focus on control, accountability, and operational risk.

The second axis is enterprise value delivery. This axis is often underestimated. Institutions don’t adopt blockchain because they believe in permissionless principles. They adopt it because it compresses costs, reduces reconciliation friction, opens new distribution channels, or embeds them more deeply in customer relationships. The value proposition must be expressed in this language, or the procurement process won’t even pass.

Stablecoins may be the clearest example. Banks, payments companies, and fintech firms increasingly treat them as useful settlement infrastructure because they allow dollars to move faster across networks and across regions. But very few are truly embracing the philosophy of permissionless finance. They adopt programmable dollars because it’s practical—not because they want to rebuild the financial system according to DeFi principles.

Circle’s evolution says it all. Its Arc network reflects how blockchain infrastructure is being packaged and sold to institutional buyers: emphasis on compliance, operational control, trusted counterparties, and integration with existing workflows—not permissionless access and composability.

It’s not selling “permissionless” itself. It’s selling faster settlement, global reach, and higher capital efficiency—and delivering it in a form institutions can actually use.

Even organizations like SWIFT increasingly view blockchain through this lens. Its various attempts at interoperability for tokenized assets aren’t meant to replace existing financial institutions. They’re meant to help existing institutions collaborate better with the help of the SWIFT network. The same pattern keeps repeating: blockchain adoption strengthens existing financial networks rather than replacing them.

Powerful technology meeting a massive, mature market is, historically, how things evolve.

Two opportunities in front of founders

At the industry level, it’s wrong for everyone to give up one opportunity to squeeze into the other. At the company level, it’s also wrong to try to capture both.

Institutional adoption and open network ecosystems can reinforce each other, but for the vast majority of teams, these are two fundamentally different businesses. To do institutional business, you must understand procurement, compliance, internal controls, channel partners, and long sales cycles. To do open network business, you must optimize around developers, liquidity, composability, and network effects.

Who the customers are, how distribution works, what the product must satisfy, and how success is measured—these often differ completely between the two.

This doesn’t mean one opportunity is better. It only requires founders to think clearly about which market they’re serving, while remembering that the underlying rail connecting both is the public chain as a neutral settlement layer.

Working with institutions and building a parallel financial system are not mutually exclusive. If done well, they can amplify each other’s value. The permission layer brings transaction volume, legitimacy, and capital; the open layer continues producing the next components that the permission layer will adopt. If “fusion” happens, it will occur at the rail layer—not because one side surrenders to the other.

The role of public chains as settlement rails may become increasingly important, even if the applications running on top become more and more permissioned.

Built for programmable financial infrastructure

To build this new programmable financial infrastructure, there are two routes: building from scratch, or transforming existing products.

Let’s first look at a network like Canton. It didn’t set out to modify existing DeFi infrastructure. Instead, from the beginning it was designed around institutional requirements for privacy, compliance, and controlled interoperability. Its goal isn’t to pull banks into DeFi. It’s to use blockchain-based collaboration mechanisms while preserving the governance, confidentiality, and operational control that institutions require.

But not every successful institutional strategy needs to start from scratch. Morpho takes the opposite route. It didn’t abandon its DeFi components; it focused on making those components easier for institutions and asset issuers to use.

For example, Apollo’s ACRED fund incorporates Morpho into its on-chain lending strategy, combining a DeFi-native lending component with institutional-grade distribution, compliance, and fund architecture.

The final shape is neither pure DeFi nor a fully isolated institutional technology stack. It’s a model where institutions selectively adopt existing crypto infrastructure, then repackage it according to their requirements for control, compliance, and distribution.

This new category is built specifically for institutional constraints. It draws nutrients from DeFi, but runs in a more permissioned and more compliant way—so it must be different from anything that exists today.

Teams like Morpho that successfully transform crypto-native infrastructure into institutional use cases do exist. But founders shouldn’t treat that as the default playbook. Institutions are an independent customer segment with unique needs. In many cases, designing around those needs from the start will be more effective than retrofitting products that were originally built for an open network.

Opportunities to keep building in DeFi

None of the innovations institutions are adopting today were born inside banks, asset management firms, or existing financial infrastructure. All of them come from open networks—the places where entrepreneurs can freely experiment with new market structures, new coordination mechanisms, and new financial components.

This distinction matters. Institutions aren’t the primary source of innovation in this industry—permission layers are often downstream of the open layer.

This leads to a more critical strategic judgment: if the whole industry is busy selling to banks and asset managers, we may mistakenly treat a large customer segment as the entire opportunity. TradFi is an important customer, but it isn’t the only customer.

Designing for institutional needs is a legitimate and valuable path, but it’s only one lane, not the entire highway. Companies that last are the ones that are always clear about who they’re building for. Institutional adoption could be a huge opportunity, but it’s not a simple extension of DeFi. Success in one market doesn’t guarantee success in another.

If you’re building for institutions, go all in. Don’t assume that success in the crypto-native market will automatically translate into enterprise customer adoption. Learn your customers, understand the procurement process, and consciously design around institutional needs.

If you’re building for open networks, keep going. Don’t abandon your vision just because institutions are currently the loudest buyers in the market.

Remember: these two paths are complementary, not competitive. One is responsible for taking validated innovations, adapting them, commercializing them, and scaling them. The other is responsible for discovering these innovations.

A version of this technology will almost certainly become part of the financial pipelines in today’s TradFi system, but that’s not the only future being built. Open networks remain the industry’s most important testing ground and source of innovation, and many of the components that tomorrow’s institutional infrastructure will rely on will most likely be born there first.

TradFi isn’t adopting DeFi—it’s selectively adopting the parts that match its own operating model.

Founders’ opportunity isn’t to chase every market at once, but to think through which market they’re building for, and then execute accordingly. The future may indeed run on institutional infrastructure, but the most important innovations will continue to come from open networks.

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