Author: a16z Crypto
Translation: Jiahuan, ChainCatcher
In the crypto industry, there is a vision of the future that has almost become the standard answer: DeFi and TradFi converge, where permissionless liquidity meets institutional distribution capabilities, ultimately giving birth to an elegant hybrid that combines the strengths of both, replacing the old system with a new one.
This story sounds reassuring, but it is essentially wrong.
A more honest version is: traditional finance will use blockchain as long as it allows existing businesses to perform better. Not because they have embraced decentralization, but because the cost-benefit calculation works out. This technology just happens to reduce costs, improve settlement, expand distribution, and allow institutions to tighten their grip on client relationships.
This means institutions are not 'converging' with DeFi. They are merely selecting parts of DeFi that fit their operational constraints, discarding what doesn't, 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 that runs on blockchain rails but is optimized for institutional constraints.
As regulatory frameworks mature, this landscape may change. Legislation like the CLARITY Act might make it easier for institutions to directly connect to permissionless systems in the future. But regardless of how open the legal landscape becomes, the risk appetite of traditional finance will not reset overnight. Institutions evaluate technology based on cost, risk, control, and operational fit. This is precisely why there are two opportunities in front of the industry, not one.
The first opportunity is to help institutions adopt the infrastructure they are ready to accept today. Each component institutions adopt, whether atomic settlement, programmable money, or tokenized collateral, validates the technology, refines the shared rails, and brings real trading volume and capital on-chain.
The second opportunity is to continue building the open, crypto-native financial system that institutions aren't yet ready to use.
These two paths are not mutually exclusive. They can exist in parallel and, if executed well, can reinforce each other. Open networks will continuously produce new components, markets, and innovations that institutions will eventually adopt. If both succeed, convergence will happen naturally: not through one side consuming the other, but by both increasingly relying on the same underlying infrastructure.
What Exactly Is Traditional Finance Doing?
For traditional finance to adopt a component, it must meet two conditions simultaneously: 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 immutable execution, pass the first hurdle but fail the second.
Therefore, the adoption pattern of institutions is predictable, not random. Entrepreneurs can treat it as a design test. In other words, if the value of a feature can only be realized by stripping away institutional control, no matter how ingeniously it is designed, it is almost destined to be modified or rejected.
Let's run a few components through this test. Atomic settlement eliminates the time lag between execution and final settlement, removes counterparty risk, and frees up collateral that institutions must hold for unsettled trades. Shared ledgers turn reconciliation, the largest hidden cost in back-office operations, into a trivial matter.
Programmable money allows coupon payments, margin calls, and corporate actions to be executed automatically in code, no longer relying on a series of manual instructions. Stripped of its permissionless shell, the curve mathematics of an AMM becomes a pricing engine for on-chain forex and tokenized money market fund valuations.
Each of these components can improve a number on the P&L statement or eliminate an operational risk and its cost, but none require institutions to believe in decentralization.
So let's be clear: projects like J.P. Morgan's permissioned chain for institutional deposits, BlackRock's and Franklin Templeton's tokenized money market funds are not experiments in DeFi. They are using blockchain to do what they already do—like interbank payment settlement, fund subscription management, distribution of yield-bearing instruments—just with better plumbing.
These deployments use the technical attributes of blockchain: programmability, transparency, atomic settlement. Simultaneously, they deliberately discard the attributes that make native DeFi work: open access, anonymity, trustless execution.
This is not a failure or a compromise. It is a deliberate architectural choice, and it clearly tells us the direction things are headed.
Different Buyers, Different Rules
It is a mistake to think that institutional adoption is simply opening up a larger distribution channel for existing DeFi infrastructure. Institutions evaluate protocols completely differently from crypto-native users. In their eyes, this is selecting software vendors and infrastructure partners, assessing operational risk, compliance controls, and the long-term stewardship of critical systems, all according to their own standard procedures. As a result, success in DeFi cannot be automatically exchanged for success in the institutional market.
Corporations rarely buy the best technology. They buy the technology that best fits existing workflows, risk models, procurement processes, and other practical constraints.
Any technology entering a heavily regulated, risk-averse, and liability-phobic institutional environment is reshaped by that environment. The internet experienced this (corporate firewalls, intranets), cloud computing experienced this (private clouds, VPCs, FedRAMP certifications), AI is experiencing it now (on-premises deployment, data residency requirements, model governance). Blockchain will be no exception.
This reshaping unfolds along two axes:
The first is compliance. KYC, AML, sanctions screening, investor accreditation, regulatory reporting—these are non-negotiable for most institutions. Permissionless systems inherently do not support these requirements. Institutions need the ability to freeze assets, reverse transactions, and identify counterparties.
DeFi was not designed with these in mind, and meeting them often requires significant architectural changes. This may loosen in the future; for example, the CLARITY Act might allow institutions to connect to permissionless systems while meeting regulatory requirements. But today, most institutions evaluating blockchain infrastructure still focus on control, accountability, and operational risk.
The second axis is enterprise value delivery, often underestimated. Institutions adopt blockchain not because they believe in permissionless principles, but because it can reduce costs, minimize reconciliation friction, open new distribution channels, or embed them deeper into client relationships. The value proposition must be expressed in this language, otherwise it won't even pass the procurement stage.
Stablecoins are perhaps the clearest example. Banks, payment companies, and fintechs increasingly see them as useful settlement infrastructure because they enable dollars to move faster across networks and geographies. But few have truly embraced the philosophy of permissionless finance. They are adopting programmable dollars because they are useful, not because they want to rebuild the financial system according to DeFi principles.
Circle's evolution is telling. The launch of its Arc network reflects how blockchain infrastructure is being packaged for institutional buyers: emphasizing compliance, operational control, trusted counterparties, and integration with existing workflows, not permissionless access and composability.
It sells not permissionlessness itself, but faster settlement, global reach, and higher capital efficiency, delivered in a form institutions can actually use.
Even organizations like SWIFT increasingly view blockchain from this angle. Its various experiments in tokenized asset interoperability are not about replacing existing financial institutions, but about helping them collaborate better through the SWIFT network. The same pattern repeats: blockchain adoption reinforces existing financial networks rather than replacing them.
This has always been the evolution when powerful technology meets massive, mature markets.
Two Opportunities for Entrepreneurs
At the industry level, it is a mistake for everyone to abandon one opportunity to crowd into the other. At the company level, trying to capture both is also a mistake.
Institutional adoption and open networks can reinforce each other at the ecosystem level, but for the vast majority of teams, these are two fundamentally different businesses. Serving institutions requires understanding procurement, compliance, internal controls, channel partners, and long sales cycles. Building for open networks requires optimizing for developers, liquidity, composability, and network effects.
Who the customer is, how distribution works, what the product must satisfy, and how success is measured are often completely different on the two sides.
This is not to say one opportunity is better. It merely requires founders to be clear about which market they are serving, while remembering that what connects the two is the common underlying rail: public blockchains as neutral settlement layers.
Working with institutions and building a parallel financial system are not conflicting. If done well, they can amplify each other's value. The permissioned layer brings transaction volume, legitimacy, and capital; the open layer continuously produces components that the permissioned layer will adopt next. If convergence arrives, it will happen at the rail level, not through one side surrendering to the other.
The status of public blockchains as settlement rails may become increasingly important, even if the applications running on them become more permissioned.
Building for Programmable Financial Infrastructure
To build for this new programmable financial infrastructure, there are two paths: build from scratch, or adapt existing products.
First, consider networks like Canton. It doesn't adapt existing DeFi infrastructure but is designed from the ground up around institutional requirements for privacy, compliance, and controlled interoperability. Its goal isn't to bring banks into DeFi, but to enable blockchain-based collaboration while preserving the governance, confidentiality, and operational control that institutions demand.
But successful institutional strategies don't always have to start over. Morpho takes the opposite route. Instead of abandoning its DeFi components, it focuses on making these components more usable for institutions and asset issuers.
For example, Apollo's ACRED fund incorporates Morpho into its on-chain lending strategy, pairing a DeFi-native lending component with institutional-grade distribution, compliance, and fund structure.
The final form is neither pure DeFi nor a completely isolated institutional tech stack. Instead, it's 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 built specifically for institutional constraints. It draws nourishment from DeFi but operates in a more permissioned, compliant manner, and thus is necessarily different from anything that exists today.
Teams like Morpho that have successfully adapted crypto-native infrastructure for institutional use cases do exist, but entrepreneurs shouldn't treat this as the default approach. Institutions are a distinct client segment with unique needs. In many cases, designing from the start around these needs will be more effective than retrofitting products originally built for open networks.
The Opportunity to Keep Building in DeFi
None of the innovations that institutions are adopting today were born inside banks, asset managers, or existing financial infrastructure. They all came from open networks, from places where entrepreneurs could freely experiment with new market structures, new collaboration mechanisms, and new financial components.
This distinction is important. Institutions are not the primary source of innovation in this industry; the permissioned layer is often downstream from the open layer.
This leads to a more critical strategic judgment: if the entire industry rushes to sell things to banks and asset managers, we risk mistaking one large client segment for the entire opportunity. TradFi is an important client, but not the only one.
Designing for institutional needs is a legitimate and valuable path, but it is just one lane, not the entire highway. Companies that endure are those that are always clear about whom 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 the other.
If you are building for institutions, commit fully. Don't assume that success in the crypto-native market automatically translates to enterprise client adoption. Understand the customer, learn the procurement process, and design consciously around institutional needs.
If you are building for open networks, keep doing it. Don't abandon your vision just because institutions are the loudest buyers in the market at the moment.
Remember: these two paths are complementary, not competitive. One is responsible for adapting, commercializing, and scaling proven innovations; the other is responsible for discovering these innovations.
It is almost certain that some version of this technology will become part of the financial plumbing of the existing TradFi system, but that is not the only future being built. Open networks remain the most important testing ground and source of innovation for this industry, and many of the components that tomorrow's institutional infrastructure will rely on will likely first be born there.
TradFi is not adopting DeFi; it is selectively adopting the parts that fit its own model.
The entrepreneur's opportunity lies not in chasing all markets simultaneously, but in being clear about which market they are truly building for and executing accordingly. The future may indeed run on institutional infrastructure, but its most important innovations will still come continuously from open networks.
