a16z Crypto: Traditional finance wants blockchain, not DeFi

Author: a16z Crypto

Compiled by: Jiahua, ChainCatcher

In the crypto industry, there is a vision of the future that has almost become the standard answer: DeFi and TradFi are merging, permissionless liquidity meets institutional distribution capabilities, ultimately giving birth to an elegant hybrid that combines the strengths of both, with the new system replacing the old one.

This story sounds reassuring, but it is fundamentally wrong.

A more honest version is: as long as blockchain can help existing businesses perform better, traditional finance will adopt it. Not because they embrace decentralization, but because the cost-benefit analysis makes sense. This technology just happens to compress costs, improve settlement, expand distribution, and allow institutions to tighten their grip on customer relationships.

This means that institutions are not "merging" with DeFi. They are simply picking out parts of DeFi that fit their operational constraints, discarding the incompatible parts, and reassembling them according to institutional requirements. The final product will neither resemble traditional finance nor today's DeFi. We are witnessing the emergence of a new category: programmable financial infrastructure optimized for institutional constraints while running on blockchain rails.

As regulatory frameworks mature, this landscape may change. Legislation like the CLARITY Act may make it easier for institutions to directly access permissionless systems in the future. But regardless of how open the legal landscape becomes, traditional finance's risk appetite will not reset overnight. Institutions evaluate technology based on cost, risk, control, and operational fit. For this reason, there are two opportunities in front of the industry, not one.

The first opportunity is to help institutions utilize the infrastructure they are ready to adopt today. Each component adopted by institutions, whether it is atomic settlement, programmable currency, or tokenized collateral, validates the technology, improves shared rails, and brings real transaction volume and capital onto the chain.

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

These two paths are not mutually exclusive. They can coexist and, if done well, will enhance each other. Open networks will continuously produce new components, markets, and innovations, which institutions will eventually adopt. If both sides succeed, integration will happen naturally: not through one side swallowing the other, but through both sides increasingly relying on the same underlying infrastructure.

What Traditional Finance Is Really Doing

When traditional finance adopts a component, it needs to meet two conditions: first, it must improve cost, risk, or distribution; second, it must not undermine control and accountability mechanisms. The components discarded by institutions, such as open access, anonymity, and tamper-proof execution, can pass the first hurdle but fail the second.

Thus, the adoption model of institutions is predictable, not random, and entrepreneurs can treat it as a design test. In other words, if the value of a feature can only be realized by depriving institutions of control, then no matter how cleverly designed it is, it is almost destined to be modified or rejected.

Let's run a few components through this test. Atomic settlement eliminates the time gap between trade execution and final settlement, smooths out counterparty risk, and frees up collateral that institutions hold for unsettled trades. Shared ledgers turn the biggest hidden cost in the backend, which is reconciliation, into a trivial matter.

Programmable currency allows interest payments, margin calls, and corporate actions to be executed automatically in code, no longer relying on a series of manual instructions. The mathematical curves of AMM, stripped of their permissionless shell, transform into pricing engines for on-chain foreign exchange and tokenized money market fund net asset values.

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

So let's be clear: JPMorgan's permissioned chain for institutional deposits, BlackRock and Franklin Templeton's tokenized money market funds, these projects are not companies testing the waters of DeFi. They are using blockchain to do what they were already doing, such as interbank payment settlement, fund subscription management, and distribution of interest-bearing instruments, just through a better pipeline.

These deployments utilize the technical attributes of blockchain: programmability, transparency, atomic settlement. At the same time, they deliberately discard the attributes that enable native DeFi to operate: open access, anonymity, and trustless execution.

This is not a failure, nor is it a compromise. It is a thoughtful architectural choice, and it clearly tells us which direction things are heading.

Different Buyers, Different Rules

If one thinks that institutional adoption is merely opening a larger distribution channel for existing DeFi infrastructure, that would be a mistake. Institutions evaluate protocols in a completely different way than crypto-native users. From the institutional perspective, this is about selecting software vendors and infrastructure partners, considering operational risks, compliance controls, and the long-term ownership of critical systems, all following their standard processes. The result is that success in DeFi cannot automatically translate into success in the institutional market.

Companies rarely purchase the best technology. They buy technology that fits their existing workflows, risk models, procurement processes, and other practical conditions.

Any technology entering a heavily regulated, risk-averse institutional environment will be reshaped by that environment. The internet went through this (corporate firewalls, intranets), cloud computing went through this (private clouds, VPCs, FedRAMP certification), and AI is currently experiencing this (on-premises 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 qualification verification, regulatory reporting—these are non-negotiable for the vast majority of institutions. Permissionless systems inherently do not support these requirements. Institutions need the ability to freeze assets, reverse transactions, and identify counterparties.

DeFi did not consider these from the outset, and meeting them often means significant architectural changes. This may loosen in the future, as legislation like the CLARITY Act might allow institutions to access permissionless systems while meeting regulatory requirements. But today, most institutions still evaluate blockchain infrastructure based on control, accountability, and operational risk.

The second axis 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 allow them to embed more deeply into customer relationships. The value proposition must be expressed in this language; otherwise, it won't even pass the procurement stage.

Stablecoins may be the clearest example. Banks, payment companies, and fintech firms increasingly view them as useful settlement infrastructure because they enable faster cross-network and cross-border movement of dollars. But very few truly embrace the idea of permissionless finance. They adopt programmable dollars because they are useful, not because they want to reconstruct the financial system according to DeFi principles.

The evolution of Circle illustrates this well. Its launch of the 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.

What it sells is not permissionlessness itself, but faster settlement, global reach, and higher capital efficiency, delivered in a form that institutions can truly use.

Even organizations like SWIFT are increasingly viewing blockchain from this perspective. Its various attempts at tokenized asset interoperability are not aimed at replacing existing financial institutions but at enabling existing institutions to collaborate better through the SWIFT network. The same pattern recurs: blockchain adoption strengthens existing financial networks rather than replacing them.

Powerful technology meets a large, mature market; this is how evolution has always occurred.

Two Opportunities for Entrepreneurs

From an industry perspective, it is a mistake for everyone to abandon one opportunity to chase another. From a company perspective, trying to grasp both is also a mistake.

Institutional adoption and open networks can mutually enhance each other at the ecosystem level, but for the vast majority of teams, these are two fundamentally different businesses. Doing institutional business requires understanding procurement, compliance, internal controls, channel partners, and long sales cycles. Building an open network requires optimizing around developers, liquidity, composability, and network effects.

Who the customers are, how to distribute, what the products need to satisfy, and how success is measured can often be completely different.

This does not mean that one opportunity is better than the other. It simply requires founders to clarify which market they are serving while remembering that the common rail connecting both is the underlying public chain as a neutral settlement layer.

Collaborating with institutions and building a parallel financial system are not conflicting endeavors. If done well, they can amplify each other's value. The permissioned layer brings transaction volume, legitimacy, and capital, while the open layer continuously produces components that the permissioned layer will adopt next. If integration occurs, it will happen at the rail level, not through one side surrendering to the other.

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

Built for Programmable Financial Infrastructure

To build this new programmable financial infrastructure, there are two paths to choose from: starting from scratch or transforming existing products.

First, consider networks like Canton. It did not seek to transform existing DeFi infrastructure but was designed from the outset around institutional requirements for privacy, compliance, and controlled interoperability. Its goal is not to pull banks into DeFi but to use blockchain-based collaborative mechanisms while retaining the governance, confidentiality, and operational control required by institutions.

However, successful institutional strategies do not necessarily require starting over. Morpho has taken the opposite route. It has not abandoned its DeFi components but focuses on making these components easier for institutions and asset issuers to use.

For example, Apollo's ACRED fund has incorporated Morpho into its on-chain lending strategy, combining a DeFi-native lending component with institutional-level distribution, compliance, and fund structures.

The final form is neither pure DeFi nor a completely isolated institutional tech stack, but a model where institutions selectively adopt existing crypto infrastructure and repackage it according to their requirements for control, compliance, and distribution.

This new category is born specifically for institutional constraints. It draws nutrients from DeFi but operates in a more permissioned and compliant manner, thus inevitably differing from anything that currently exists.

Teams like Morpho that successfully transform crypto-native infrastructure into institutional use cases do exist, but entrepreneurs should not treat it as the default approach. Institutions are a distinct customer group with unique needs. In many cases, designing around these needs from the start will be more effective than transforming products originally built for open networks.

The Opportunity to Continue Building in DeFi

The innovations that institutions are adopting today did not originate within banks, asset management companies, or existing financial infrastructures. They all come from open networks, from places where entrepreneurs can freely experiment with new market structures, collaborative mechanisms, and financial components.

This distinction is important. Institutions are not the primary source of innovation in this industry; the permissioned layer often sits downstream of the open layer.

This leads to a more critical strategic judgment: if the entire industry focuses on selling to banks and asset management companies, we risk mistaking a large customer group for the entirety of the opportunity. TradFi is an important customer, but it is not the only customer.

Designing for institutional needs is a legitimate and valuable path, but it is just one lane, not the entire highway. Companies that endure over the long term are those that always know who they are building for. Institutional adoption may be a huge opportunity, but it is not a simple extension of DeFi. Success in one market does not guarantee success in another.

If you are building for institutions, then commit fully. Do not assume that the achievements of the crypto-native market will automatically translate into enterprise customer adoption. Understand your customers, grasp the procurement process, and consciously design around institutional needs.

If you are building for open networks, then continue doing so. Do not abandon your vision just because institutions are the loudest buyers in the current market.

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

A version of this technology will almost certainly become part of the financial pipeline of the existing TradFi system, but that is not the only future being built. Open networks remain the industry's most important testing ground and source of innovation, and many components that tomorrow's institutional infrastructure will rely on are likely to emerge there first.

TradFi is not adopting DeFi; it is selectively adopting parts that fit its own model.

The opportunity for entrepreneurs lies not in chasing all markets simultaneously but in clearly understanding which market they are building for and executing accordingly. The future may indeed run on institutional infrastructure, but the most important innovations will still continuously emerge from open networks.