Author: a16z Crypto
Compiled by: Jiahuan, ChainCatcher
Within the crypto industry, there is a vision of the future that has become almost a 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, and a new system replaces the old.
This story sounds reassuring, but it is fundamentally wrong.
A more honest version is: Traditional finance will use blockchain as long as it can improve their existing business. Not because they embrace decentralization, but because the cost-benefit calculation works out. This technology just happens to cut costs, improve settlement, expand distribution, and allow institutions to hold onto customer relationships even tighter.
This means institutions are not "converging" with DeFi. They are picking the parts of DeFi that fit their operational constraints, discarding those that do not, and reassembling them according to institutional requirements. The final product will resemble neither 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 may, in the future, make it easier for institutions to directly access permissionless systems. But regardless of how open the legal landscape becomes, traditional finance's risk appetite will not be reset overnight. Institutions evaluate technology always based on cost, risk, control, and operational fit. And precisely because of this, the opportunity facing the industry is twofold, not singular.
The first opportunity is to help institutions adopt the infrastructure they are ready to accept today. Every time an institution adopts a component—be it atomic settlement, programmable money, or tokenized collateral—it validates the technology, refines the shared rails, and brings real transaction volume and capital on-chain.
The second opportunity is to continue building the open, crypto-native financial system that institutions are not yet ready to use.
These two paths are not mutually exclusive. They can coexist in parallel and, if done well, can reinforce each other. Open networks will continue to produce new components, markets, and innovations that institutions will eventually adopt. If both sides succeed, convergence will occur naturally: not through one side swallowing the other, but through both sides increasingly relying on the same underlying infrastructure.
What is Traditional Finance Actually 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. Those components discarded by institutions—such as open access, anonymity, and immutable execution—pass the first test but fail the second.
Therefore, the adoption pattern of institutions is predictable, not random. Entrepreneurs can effectively use it as a design test. In other words, if the value of a feature can only be realized by stripping institutions of control, then no matter how cleverly designed, 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 execution and final settlement, flattens counterparty risk, and frees up collateral that institutions lock up for unsettled trades. Shared ledgers turn the largest 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, no longer relying on a string of manual instructions. Stripped of its permissionless shell, the curve mathematics of AMMs become pricing engines for on-chain foreign exchange and tokenized money market fund NAV.
Each of these components can improve a number on the P&L statement or eliminate an operational risk and its associated 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 corporations experimenting with DeFi. They are using blockchain to do what they already do, such as interbank payment settlement, fund subscription management, and distribution of yield-bearing instruments, just through better pipes.
These deployments use blockchain's technical attributes: programmability, transparency, atomic settlement. Simultaneously, they deliberately discard the attributes that make native DeFi work: open access, anonymity, trustless execution.
This is not failure, nor is it a compromise. It is a deliberate architectural choice, and it clearly tells us the direction things are heading.
Different Buyers, Different Rules
If you think institutional adoption is just opening a larger distribution channel for existing DeFi infrastructure, you are mistaken. Institutions evaluate protocols in a completely different way than crypto-native users. In the eyes of institutions, this is about selecting software vendors and infrastructure partners, considering operational risk, compliance controls, and the long-term ownership of critical systems, all according to their standard processes. The result is that 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 their existing workflows, risk models, procurement processes, and other real-world constraints.
Any technology entering a heavily regulated, risk-averse, and highly liability-conscious institutional environment will be reshaped by that environment. The internet went through this (corporate firewalls, intranets), cloud computing went through it (private clouds, VPCs, FedRAMP certification), and AI is currently 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—for most institutions, these are non-negotiable. 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 major 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 evaluating blockchain infrastructure still look at control, accountability, and operational risk.
The second is enterprise value delivery. This axis is often underestimated. Institutions adopt blockchain not because they believe in permissionless principles, but because it can reduce costs, cut reconciliation friction, open new distribution channels, or embed them deeper into customer relationships. The value proposition must be articulated in this language, otherwise it won't even pass the procurement stage.
Stablecoins might be the clearest example. Banks, payment companies, and fintechs increasingly see them as useful settlement infrastructure because they enable faster movement of dollars across networks and geographies. But few truly embrace the philosophy of permissionless finance. They adopt programmable dollars because they are useful, not because they want to rebuild the financial system on DeFi principles.
The evolution of Circle is quite illustrative. Its launch of the 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 is not selling permissionlessness itself, but rather faster settlement, global reach, and higher capital efficiency, delivered in a form that 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 enabling existing institutions to collaborate better via the SWIFT network. The same pattern repeats: blockchain adoption is reinforcing existing financial networks, not replacing them.
This is how powerful technologies have always evolved when meeting massive, mature markets.
The Two Opportunities Facing Entrepreneurs
At the industry level, it would be 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. Doing business with 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.
Who the customer is, how to distribute, what the product must satisfy, and how success is measured are often completely different on each side.
This is not to say which opportunity is better. It only requires founders to think clearly about which market they are serving, while remembering that what connects the two is the underlying shared rail: public blockchains as neutral settlement layers.
Collaborating with institutions and building a parallel financial system are not contradictory. 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 comes, it will happen at the rail level, not through one side surrendering to the other.
The role of public blockchains as settlement rails may become increasingly important, even as 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: building from scratch, or adapting existing products.
Consider networks like Canton. Instead of adapting ready-made DeFi infrastructure, it 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 leverage blockchain-based collaboration mechanisms while preserving the governance, confidentiality, and operational control demanded by institutions.
But successful institutional strategies don't always have to start from scratch. Morpho takes the opposite route. It hasn't discarded its DeFi components; instead, it focuses on making these components easier for institutions and asset issuers to use.
For example, Apollo's ACRED fund incorporated 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 born specifically for institutional constraints. It draws nourishment from DeFi but operates in a more permissioned, compliant manner, and thus will inevitably differ from anything that exists today.
Teams like Morpho that have successfully adapted crypto-native infrastructure for institutional use cases do exist, but entrepreneurs should not treat this 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 adapting products originally built for open networks.
The Opportunity to Continue Building in DeFi
None of the innovations that institutions are adopting today were born within banks, asset managers, or existing financial infrastructure. They all originated in open networks, where entrepreneurs can 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 of 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 a large customer group 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 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 another.
If you are building for institutions, commit to it wholeheartedly. Do not assume that achievements in the crypto-native market will automatically lead to enterprise customer adoption. Go understand the customer, master the procurement process, and design consciously around institutional needs.
If you are building for open networks, keep going. Do not abandon your vision just because institutions are currently the loudest buyers in the 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.
A version of this technology will almost inevitably 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 of the components that tomorrow's institutional infrastructure will rely on will likely be born there first.
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 thinking clearly about which market they are truly building for, and then executing accordingly. The future may indeed run on institutional infrastructure, but the most important innovations within it will still flow continuously from open networks.
