a16z: “The ‘fusion’ of DeFi and TradFi” is a false proposition

Author: a16z Crypto

Compiled by: Jiahui, ChainCatcher

In the crypto industry, there’s an imagination about the future that has almost become the standard answer: DeFi and TradFi converge—permissionless liquidity meets institutions’ distribution capabilities—ultimately giving birth to an elegant hybrid that combines the strengths of both, replacing the old system.

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

A more honest version is this: as long as blockchains can help existing businesses do better, traditional finance will adopt them. Not because they accept decentralization, but because the cost equation adds up. The technology just happens to compress costs, improve settlement, expand distribution, and also let institutions keep customer relationships tightly in hand.

This means institutions aren’t “fusing” with DeFi. They’re simply picking out the parts of DeFi that fit their own operational constraints, discarding what doesn’t, and then reassembling everything according to institutional requirements. The final product won’t be like traditional finance, and it won’t be like DeFi today 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 landscape 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 open the legal environment becomes, traditional finance’s risk appetite won’t be reset overnight. When institutions evaluate technology, they always look at cost, risk, control, and operational fit. That’s exactly why there are two opportunities in front of the industry—not one.

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

The second opportunity is to keep building open, crypto-native financial systems that institutions aren’t yet ready to use.

These two paths aren’t either/or. They can coexist 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 those results to use. If both sides succeed, “convergence” will happen naturally: not one side swallowing the other, but both sides becoming increasingly dependent on the same underlying infrastructure.

What traditional finance is really doing

For a component to be adopted by traditional finance, it needs to satisfy two conditions: first, it must improve costs, risk, or distribution; second, it must not disrupt control and accountability mechanisms. The components institutions discard—such as open access, anonymity, and tamper-resistant execution—can pass the first test, but they fail the second.

So institutional adoption patterns are predictable, not random, and founders can treat this as a design-and-testing exercise. In other words, if the value of a feature can only be realized by taking away an institution’s control, then no matter how ingeniously 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, leveling out counterparty risk, and it also frees up the collateral institutions lock up for unsettled trades. A shared ledger turns the biggest hidden backend cost—reconciliation—into something trivial.

Programmable money allows interest payments, margin top-ups, and corporate actions to execute automatically in code, no longer dependent on a long chain of manual instructions. Once the permissionless “shell” around AMMs’ curve mathematics is stripped away, it becomes a pricing engine for on-chain foreign exchange and net asset value (NAV) for tokenized money market funds.

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

So we need to say this clearly: JPMorgan’s permissioned chain for institutional deposits, and the tokenized money market funds from BlackRock and Franklin Templeton—these projects aren’t companies trying out DeFi. They’re using blockchain to do things they already do, such as interbank payment settlement, fund subscription management, and the distribution of yield-bearing instruments, but with a better pipeline.

These deployments use blockchain’s technical attributes: programmability, transparency, and atomic settlement. At the same time, they deliberately discard the attributes that allow native DeFi to function: open access, anonymity, and execution that doesn’t require trust.

This isn’t failure. It’s not compromise. It’s a deliberately chosen architecture—and it clearly tells us which direction things are headed.

Different buyers, different rules

If you think institutional adoption is simply opening up a bigger distribution channel for existing DeFi infrastructure, then you’re mistaken. Institutions evaluate protocols in a way that’s completely different from crypto-native users. In institutions’ eyes, this is selecting software vendors and infrastructure partners—assessing operational risk, compliance controls, and the long-term ownership of critical systems, all carried out according to their own standard processes. The result is that success in DeFi can’t automatically translate into success in institutional markets.

Companies rarely buy the best technology. They buy technology that best fits the real-world constraints of their existing workflows, risk models, procurement processes, and so on.

Any technology that enters a heavily regulated, heavily risk-controlled, extremely responsibility-averse institutional environment will be reshaped by that environment. The internet went through this (enterprise firewalls, intranets). Cloud computing went through it (private clouds, VPCs, FedRAMP certifications). AI is going through it (on-prem deployment, data residency requirements, model governance). Blockchain won’t be an exception.

This reshaping unfolds along two axes:

First is compliance. KYC, anti-money-laundering, sanctions screening, investor eligibility verification, and regulatory reporting—there’s no room for negotiation for the vast majority of institutions. Permissionless systems don’t naturally support these requirements. Institutions need the ability to freeze assets, cancel transactions, and identify counterparties.

DeFi didn’t consider these from the beginning, and meeting them often requires major architectural changes. This may loosen in the future—perhaps legislation like the CLARITY Act could allow institutions to access permissionless systems while meeting regulatory requirements. But today, when most institutions evaluate blockchain infrastructure, they still primarily look at control, accountability, and operational risk.

Second is enterprise value delivery. This axis is often underestimated. Institutions adopt blockchain not because they believe in permissionless principles, but because it can compress costs, reduce reconciliation friction, open new distribution channels, or embed them more deeply into customer relationships. The value proposition must be expressed in these terms; otherwise it can’t even pass the procurement stage.

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

Circle’s evolution makes this especially clear. Its Arc Network reflects how blockchain infrastructure is being packaged and sold to institutional buyers: emphasizing compliance, operational control, trusted counterparties, and integration with existing workflows, rather than permissionless access and composability.

It’s not selling permissionless itself. It’s selling faster settlement, global reach, and higher capital efficiency—and it’s delivered in forms that institutions can genuinely use.

Even organizations like SWIFT are increasingly looking at blockchain from this angle. Its efforts around tokenized asset interoperability aren’t intended to replace existing financial institutions; they’re intended to help existing institutions collaborate better using the SWIFT network. The same pattern keeps repeating: blockchain adoption strengthens existing financial networks rather than replacing them.

That’s how it has always evolved: strong technology meets a massive, mature market.

Two opportunities in front of founders

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

Institutional adoption and open-network ecosystems can reinforce each other at the ecosystem level, but for the vast majority of teams, these are two fundamentally different businesses. If you’re doing institutional business, you need to understand procurement, compliance, internal controls, channel partners, and a long sales cycle. If you’re doing open-network business, you 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 are often completely different between the two.

This doesn’t mean one opportunity is better than the other. It only requires founders to think clearly about which market they’re truly serving, and to remember that the two are connected by the same underlying rail: a public chain as a neutral settlement layer.

Working with institutions and building a parallel financial system don’t conflict. If done well, they can amplify each other’s value. The permissioned layer brings transaction volume, legitimacy, and capital; the open layer keeps producing the next set of components that the permissioned layer will adopt. If convergence comes, it will happen at the rails 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 paths: build from scratch, or adapt existing products.

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

But successful institutional strategies don’t necessarily have to tear everything down and rebuild from scratch. Morpho is taking the opposite approach. It didn’t abandon its DeFi components. Instead, it focused on making those components easier for institutions and asset issuers to use.

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

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

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

There really are teams like Morpho that successfully reshape crypto-native infrastructure into institutional use cases, but founders shouldn’t treat that as the default playbook. Institutions are an independent customer segment with unique needs. In many cases, designing from the beginning around those needs will be more effective than adapting products that were originally built for open networks.

Opportunities to keep building in DeFi

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

This distinction is crucial. Institutions aren’t the primary source of innovation in this industry; permissioned layers are often downstream of open layers.

This leads to a more important strategic judgment: if the whole industry is busy selling to banks and asset management companies, we might mistakenly treat one large customer segment as the entire opportunity. TradFi is an important customer, but it’s not the only customer.

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

If you’re building for institutions, commit fully. Don’t assume that success in crypto-native markets automatically brings adoption by enterprise customers. Learn your customers, understand the procurement process, and consciously design around institutional needs.

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

Remember this: these two paths are complementary, not competitive. One is responsible for taking proven innovations, adapting them, commercializing them, and scaling them; the other is responsible for discovering those innovations.

Some version of this technology will almost certainly become part of the financial pipelines in existing TradFi systems, but that isn’t the only future being built. Open networks remain the industry’s most important testing ground and source of innovation, where many of the components that tomorrow’s institutional infrastructure will rely on are likely to be born first.

TradFi isn’t adopting DeFi. It’s selectively adopting the parts that fit its own model.

Founders’ opportunities aren’t about chasing every market at once; they’re about thinking through which market you’re building for—and then executing accordingly. The future may indeed run on top of institutional infrastructure, but the most important innovations will still keep coming from open networks.