a16z Crypto: Traditional Finance Wants Blockchain but Not DeFi

Author: a16z Crypto

Translation: Jiahuan, ChainCatcher

In the crypto industry, there is a vision for the future that has almost become the standard answer: DeFi and TradFi will converge. Permissionless liquidity meets institutional distribution capabilities, ultimately giving birth to an elegant hybrid that combines the strengths of both, and the new system replaces the old.

This story sounds reassuring, but it is essentially wrong.

A more honest version is: Traditional finance will use blockchain as long as it allows them to do their existing business better. Not because they embrace decentralization, but because the cost-benefit analysis works out. This technology happens to cut costs, improve settlement, expand distribution, and allow institutions to tighten their grip on client relationships.

This means institutions are not "merging" with DeFi. They are simply picking out the parts of DeFi that fit within their operational constraints, discarding those that don't, and reassembling them according to institutional requirements. The end product will neither look like 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 access permissionless systems in the future. But no matter how open the legal framework becomes, traditional finance's risk appetite won't reset overnight. Institutions evaluate technology based on cost, risk, control, and operational fit. That's precisely why the industry faces two opportunities, not one.

The first opportunity is to help institutions adopt the infrastructure they are ready to accept today. Every component an institution adopts, whether it's atomic settlement, programmable money, or tokenized collateral, validates the technology, improves 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 ready to use yet.

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

What Is Traditional Finance Really Doing?

For traditional finance to adopt a component, it must satisfy two conditions simultaneously: it must improve cost, risk, or distribution, and it must not disrupt 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 pattern of institutional adoption is predictable, not random, and entrepreneurs can use it as a design test. In other words, if a feature's value can only be realized by stripping institutions of control, then no matter how brilliantly designed, it will almost certainly be modified or rejected.

Let's run a few components through this test. Atomic settlement eliminates the time gap between execution and final settlement, removes counterparty risk, and frees up collateral institutions lock up for unsettled trades. A shared ledger turns the biggest hidden cost in back-office operations, reconciliation, into a trivial task.

Programmable money allows coupon payments, margin calls, and corporate actions to be executed automatically as code, rather than relying on a chain of manual instructions. The curve mathematics of AMMs, stripped of their permissionless shell, become pricing engines for on-chain foreign exchange and tokenized money market fund NAVs.

Each of these components improves a number on the P&L statement or eliminates an operational risk and its associated cost, yet none requires institutions to believe in decentralization.

So we must be clear: JPMorgan's permissioned chain for institutional deposits, BlackRock and Franklin Templeton's tokenized money market funds—these projects are not corporate experiments with DeFi. They are using blockchain to do what they already do: interbank payment and settlement, fund subscription management, distributing yield-bearing instruments, but with better plumbing.

These deployments utilize blockchain's technical attributes: programmability, transparency, atomic settlement. At the same time, they deliberately discard the attributes that make native DeFi work: open access, anonymity, trustless execution.

This is not failure or compromise. It is a deliberate architectural choice, and it clearly indicates the direction we are heading.

Different Buyers, Different Rules

Assuming institutional adoption is simply opening a larger distribution channel for existing DeFi infrastructure would be a mistake. The way institutions evaluate protocols is completely different from crypto-native users. In the eyes of institutions, this is selecting software vendors and infrastructure partners, considering operational risk, compliance controls, and long-term ownership of critical systems, all according to their standard processes. As a result, success in DeFi does not automatically translate to success in the institutional market.

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

Any technology entering a heavily regulated, risk-averse, and extremely liability-conscious institutional environment will be reshaped by that environment. The internet experienced this (corporate firewalls, intranets), cloud computing experienced this (private clouds, VPCs, FedRAMP certifications), AI is experiencing it (on-prem 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 the vast majority of institutions. Permissionless systems are inherently incompatible with 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 access permissionless systems while meeting regulatory requirements. But today, most institutions evaluate blockchain infrastructure based 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 cuts costs, reduces reconciliation friction, opens new distribution channels, or deepens their customer relationships. The value proposition must be articulated in this language, otherwise it won't get past the procurement stage.

Stablecoins are perhaps the clearest example. Banks, payment companies, and fintechs are increasingly using them as useful settlement infrastructure because they allow dollars to move faster across networks and geographies. But few are embracing the ideology of permissionless finance. They are adopting programmable dollars because they are useful, not because they want to rebuild the financial system on DeFi principles.

Circle's evolution is illustrative. 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's not selling permissionless itself, but faster settlement, global reach, and higher capital efficiency, delivered in a form institutions can actually use.

Even organizations like SWIFT are increasingly viewing blockchain from this angle. Its experiments in tokenized asset interoperability aren't about replacing existing financial institutions but enabling them to collaborate better via the SWIFT network. The same pattern repeats: blockchain adoption strengthens existing financial networks, rather than replacing them.

This is how powerful technologies evolve when they encounter massive, mature markets.

Two Opportunities for Entrepreneurs

At the industry level, it's a mistake for everyone to abandon one opportunity and 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. Building for institutions requires understanding procurement, compliance, internal controls, channel partners, and long sales cycles. Building for open networks requires optimizing around developers, liquidity, composability, and network effects.

The customer, distribution, product requirements, and measures of success are often completely different.

This isn't to say one opportunity is better. It simply requires founders to be clear about which market they are serving, while remembering what connects them is the common underlying rail: public blockchains as neutral settlement layers.

Working with institutions and building a parallel financial system are not contradictory. When done well, they can amplify each other's value. The permissioned layer brings trading volume, legitimacy, and capital; the open layer continuously produces components for the permissioned layer to adopt next. If convergence comes, it will happen at the rail level, not through one side surrendering to the other.

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

Building for Programmable Financial Infrastructure

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

Consider networks like Canton. Instead of adapting ready-made DeFi infrastructure, it is designed from the ground up around institutional requirements for privacy, compliance, and controlled interoperability. Its goal is not to pull banks into DeFi, but to leverage blockchain-based collaboration mechanisms while preserving the governance, confidentiality, and operational control institutions demand.

But successful institutional strategies don't always have to start from scratch. Morpho takes the opposite approach. Rather than discarding its DeFi components, it focuses on making them more accessible to 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, 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 built for institutional constraints. It draws sustenance from DeFi but operates in a more permissioned, compliant manner, making it 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 customer group with unique needs. In many cases, designing for those needs from the outset will be more effective than retrofitting products originally built for open networks.

The Opportunity to Continue Building in DeFi

None of the innovations institutions are adopting today originated within 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 primitives.

This distinction is crucial. 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 to banks and asset managers, we risk mistaking one large customer segment for the entire opportunity. TradFi is an important customer, but not the only one.

Designing for institutional needs is a legitimate and valuable path, but it's just one lane, not the entire highway. The companies that will endure are those that remain clear about 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, commit fully. Don't assume that achievements in the crypto-native market will automatically win over enterprise customers. Understand the client, master the procurement process, and design consciously around institutional requirements.

If you are building for open networks, keep doing it. Don't 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 proven innovations; the other is responsible for discovering those innovations.

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

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

The entrepreneur's opportunity lies not in chasing all markets simultaneously, but in being clear about which market they are building for and executing accordingly. The future may indeed run on institutional infrastructure, but the most important innovations within it will continue to flow from open networks.