Author: Chloe, ChainCatcher
For years, tokenization has been positioned as the bridge for cryptocurrencies to reach Wall Street. The logic behind putting treasury bonds on-chain, issuing tokenized funds, and digitizing stocks has always pointed to one idea: once assets are on-chain, institutional capital will naturally follow.
But tokenization itself has never been the endgame. DWF Ventures believes that the real key to unlocking the institutional market is not digitizing assets, but financializing yield.
Since 2025, the Total Value Locked (TVL) in DeFi has climbed from approximately $115 billion to over $237 billion. The main driver behind this is no longer purely speculative retail investors, but real institutional capital and Real-World Assets (RWA). Institutions are no longer just watching; they are starting to see DeFi as infrastructure for deploying capital.
It can be said that the DeFi Wall Street truly wants to see has shifted from "putting assets on-chain" to a "programmable, recomposable, interest-rate-risk-hedgeable" fixed-income infrastructure. Today, we can glimpse this transformation through TVL and RWA data, institutional protocol examples, yield tokenization theory, and the implementation of privacy and compliance.
TVL and Institutional Data: Which Layer Are Institutions Filling?
In Q3 2025, DeFi's TVL climbed from about $115 billion at the start of the year to $237 billion. Meanwhile, the number of active wallets on-chain decreased by 22% in the same period. DappRadar data clearly shows that the push behind this rally is not from retail investors, but from "high-value, low-frequency" institutional capital.
In this structure, the most crucial part is RWA: As of the end of March 2026, the total value of RWA had reached $27.5 billion, a growth of over 2.4 times compared to $8 billion in March 2025. These assets are primarily used by institutions as collateral for stablecoin loans through protocols like Aave Horizon, Maple Finance, and Centrifuge, forming an "on-chain repo (repurchase agreement)" re-collateralization flywheel.
Taking Aave Horizon as an example, its RWA market had accumulated an asset size of about $540 million by the end of 2025. This includes stablecoins like Superstate's USCC, RLUSD, and Aave's GHO, as well as various US Treasury assets (like VBILL), with annualized yields ranging between 4-6%. This structure is essentially an "institutional version of a money market fund": the front end consists of tokenized treasury bonds and bills, the back end is a stablecoin liquidity pool, and smart contracts automatically handle interest payments, refinancing, and liquidation in the middle.
From "Holding" to "Operating": Are Institutions Playing On-Chain Repo or Fixed Income?
In the traditional fixed income market, bonds are not just tools for holding and collecting interest; they are used for repo (repurchase agreements), re-collateralization, splitting, and embedding into structured products, forming a flywheel of capital efficiency. By 2025, DeFi had begun replicating this logic.
Maple Finance's TVL surged from $297 million in 2025 to over $3.1 billion, at times approaching $3.3 billion. The main driver was institutions entering the RWA lending market, tokenizing private loans and corporate loans for "over-the-counter" stablecoin lending and refinancing.
Centrifuge, on the other hand, focuses on converting Small and Medium Enterprise (SME) loans, trade finance, and accounts receivable into on-chain assets. To date, its ecosystem manages over $1 billion in TVL and has successfully developed multiple diversified asset pools, extending from private credit to highly liquid US Treasury bonds.
Simultaneously, Centrifuge has also integrated deeply with top DeFi protocols, such as Sky (formerly MakerDAO). Through its collaboration with Centrifuge, MakerDAO can invest its reserves in real-world enterprise loans, providing substantial yield support for the stablecoin DAI. There's also Aave; the two joined forces to create a dedicated RWA market, allowing KYCed institutional investors to use Centrifuge's asset tokens as collateral, achieving cross-protocol liquidity cycles.
Yield Tokenization and Yield Trading Markets: Can Interest Rate Risk Be Hedged?
If you were to map the structure of Wall Street's fixed income market, you would see several key modules: principal and interest can be separated (e.g., zero-coupon bonds, stripped coupons), interest rate risk can be independently traded and hedged, and liquidity and compliance can be separated but reconnected through middleware.
In May 2025, a paper titled "Split the Yield, Share the Risk: Pricing, Hedging and Fixed rates in DeFi" on arXiv first proposed a formal framework for "yield tokenization": splitting yield-bearing assets into "Principal Tokens (PT)" and "Yield Tokens (YT)", and using SDEs (Stochastic Differential Equations) and a no-arbitrage framework to price and hedge interest rate risk.
This design has already been implemented in some protocols. Take Pendle Finance as an example. Pendle uses a specially designed Yield AMM whose price curve adjusts over time (time decay factor), ensuring the PT price converges to its redemption value at maturity. These mechanisms allow market participants to allocate liquidity based on risk preferences (e.g., fixed-rate seekers buy PT, yield speculators buy YT).
For institutions, this means yield structures can be "modularized" and directly plugged into traditional asset allocation models (e.g., duration, DV01, interest rate risk contribution); interest rate risk no longer needs to be hedged solely with off-chain futures or IRS (Interest Rate Swaps). Instead, it can be adjusted directly on-chain by trading "yield tokens," enabling instant and transparent interest rate risk hedging and significantly improving capital efficiency.
Two Major Real-World Challenges: Privacy and Compliance
Even as DeFi's TVL breaks through tens of billions of dollars, the large-scale inflow of institutional capital is still hindered by two key challenges: privacy and compliance.
First Challenge: Public Chain Holdings Are Transparent, Liquidation Points Are Exposed
On mainstream public chains, every transaction and address's holdings are publicly visible, which poses an extremely high risk for institutions. Trading strategies, leverage levels, and liquidation points can be completely known by counterparties, potentially leading to targeted shorting and liquidation. Once a liquidity crunch or price volatility occurs, malicious actors can place orders targeting specific addresses, amplifying losses. This is one reason institutional capital is hesitant to fully commit to DeFi.
Here, zero-knowledge proofs (ZKPs) may become a key solution. They would allow institutions to prove their legitimacy to regulators without leaking information publicly. Specifically, regulators could verify that an institution complies with regulatory requirements, while other market participants cannot see the institution's complete holdings or liquidation points. This is the privacy layer Wall Street truly wants—not "complete anonymity," but "meeting compliance requirements without disclosing business secrets."
Second Challenge: KYC, Sanctions Screening, and Auditing Must Be Embedded in the Protocol Itself
Another red line for institutions is: compliance is not an afterthought patch, but natively built-in. In traditional finance, KYC, sanctions screening, and audit requirements are already embedded in settlement systems and trading processes. But in many DeFi protocols, these checks still remain at the "front-end gateway" or rely on "intermediary institutions," rather than being written directly into the protocol logic.
What institutions expect is: KYC and sanctions screening are no longer just about "users uploading ID documents, followed by pure trust," but rather a module or middleware that can verify identity and sanctions lists on-chain without exposing complete data; and audit and regulatory requirements can also be directly written as "verifiable rules," e.g., a transaction must execute only under certain compliance conditions, or an address's exposure must not exceed a certain limit.
The IOSCO, in its November 2025 report "Tokenization of Financial Assets," explicitly emphasized the need to establish "verifiable compliance rules" and "transparent but controlled audit trails" on DLT (Distributed Ledger Technology). Some institutional DeFi platforms have begun experimenting with "compliance modules," embedding KYC, AML, sanctions screening, and regulatory reporting directly into the protocol layer, rather than relying on external tools or post-hoc patches.
Conclusion: What Kind of DeFi Does Wall Street Want?
Returning to the initial question, what kind of DeFi does Wall Street want? First, a more advanced asset clearing and servicing system that can seamlessly integrate with global compliance infrastructure, building an institutional-grade moat. Second, in terms of yield structure, the ability to precisely replicate the traditional fixed income market's logic of yield decomposition and hedging, achieving risk modularization. Third, in terms of compliance and security, using zero-knowledge proofs to embed "verifiable compliance" and "programmatic risk control" into the protocol's foundation, achieving a balance between privacy and regulation.
Replacing traditional finance has never been an option for Wall Street. Instead, it's about having an additional parallel world where capital, risk, and returns can be reassembled more flexibly in a programmable way.
