a16z: Traditional finance doesn't want DeFi, only wants the blockchain infrastructure layer
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a16z: Traditional finance doesn't want DeFi, only wants the blockchain infrastructure layer
If both succeed, fusion will happen naturally.
Navigating Web3 tides with focused insightsAuthor: a16z Crypto
Compiled by: TechFlow
TechFlow Editor's Note: Many people assume traditional finance will embrace DeFi, and the two will eventually merge into some elegant hybrid. The truth is harsher: Wall Street only wants to use blockchain to reduce costs, improve efficiency, and seize customer relationships, but it will never give up control. This is not a compromise, but a carefully designed architectural choice, and it is spawning a new category—programmable financial infrastructure.
A nearly classic future narrative circulates within the crypto industry: DeFi and traditional finance will merge, permissionless liquidity meets institutional distribution capabilities, eventually giving birth to some elegant hybrid, combining the best of both—new systems replacing old systems.
This is a reassuring story. But it is basically wrong.
A more honest version is: as long as blockchain can make traditional finance's existing business better, it will use it. Not because it embraces decentralization, but because this is a compelling cost-reduction story—this technology happens to cut costs, improve settlement, expand distribution, and tighten its control over customer relationships.
This means institutions are not merging with DeFi. Instead, they are selectively using parts of DeFi that fit their operational constraints, discarding those that do not; they are reconfiguring DeFi around institutional needs. The result is unlikely to look like traditional finance, nor like today's DeFi. We are beginning to see the emergence of a new category, built on blockchain rails, but optimized for institutional constraints: programmable financial infrastructure.
As regulatory frameworks mature, this dynamic may evolve. Legislation like the CLARITY Act may eventually make it easier for institutions to access permissionless systems directly. But regardless of what becomes legally possible, traditional finance's risk posture will not reset overnight. Institutions will still adopt technology through the lens of cost, risk, control, and operational fit—which is why this brings two opportunities to the industry, not one.
The first opportunity is to help institutions adopt the infrastructure they are ready for today. Every primitive adopted by institutions—from atomic settlement to programmable money to tokenized collateral—is validating the technology, building shared rails, and pulling real transaction volume and capital on-chain.
The second opportunity is to continue building open, crypto-native financial systems that institutions are not yet ready to use.
These are not competing bets. They can and should exist in parallel, and if done well, each will enhance the other. Open networks and ecosystems will continue to produce primitives, markets, and innovations that institutions will eventually adopt. If both succeed, convergence will happen naturally—not because one system completely replaces the other, but because both increasingly rely on the same underlying infrastructure.
What Traditional Finance Is Actually Doing
For traditional finance to adopt a primitive, it needs to satisfy two things simultaneously: improve cost, risk, or distribution, and remain compatible with control and accountability. Primitives discarded by institutions—open access, pseudonymity, immutable execution—pass the first test but not the second. This is why the adoption pattern is predictable rather than arbitrary, and why builders can treat it as a design test. That is to say, if a feature can only deliver value by removing institutional control, no matter how elegant it is, it will almost certainly be reshaped or rejected.
Let's test some primitives. Atomic settlement compresses the gap between transaction and finality, eliminates counterparty risk, and releases collateral parked by institutions for unsettled transactions. Shared ledgers turn the backend's biggest hidden cost—reconciliation—into something that doesn't need to be done. Programmable money allows coupon payments, margin calls, and corporate actions to run as code, rather than a series of manual instructions. AMM curve mathematics, stripped of its permissionless shell, reappears as a pricing engine for on-chain forex and tokenized money market net asset values.
Each improves numbers on the income statement or eliminates an operational risk and its associated costs, but none require institutions to believe in decentralization. So let's be precise about what is happening with JPMorgan's institutional deposit permissioned blockchain, or BlackRock and Franklin Templeton's tokenized money market funds: these are not enterprises testing DeFi. They are using blockchain to do what they are already doing—settling interbank payments, managing fund subscriptions, distributing yield-bearing instruments—but with better plumbing. These deployments use the technical properties of blockchain (programmability, transparency, atomic settlement) and deliberately discard the properties that make native DeFi work (open access, pseudonymity, and trustless execution).
This is not a failure or a compromise. This is a deliberate architectural choice, and it tells us a lot about where this is heading.
Different Buyers, Different Rules
It would be a mistake to assume institutional adoption is just a larger distribution channel for existing DeFi infrastructure. Institutions evaluate protocols differently than crypto-native users. When institutions consider software vendors, infrastructure partners, operational risk, compliance controls, and long-term ownership of critical systems, they follow standard operating procedures. The result is that success in DeFi does not automatically translate to success in institutions.
Enterprises rarely buy the "best" technology. They buy the technology that best fits existing workflows, risk models, and procurement processes, etc.
Any technology entering a highly regulated, risk-managed, liability-averse institutional environment will be shaped by that environment. This happened with the internet (corporate firewalls, private intranets). This happened with cloud computing (private clouds, VPCs, FedRAMP). This is happening with AI (on-premise deployment, data residency requirements, model governance). Blockchain is no different.
Reconfiguration happens along two axes:
Compliance: KYC, AML, sanctions screening, investor accreditation, and regulatory reporting requirements are non-negotiable for most institutions. Permissionless systems are not natively adapted to these requirements. Institutions need the ability to freeze assets, revoke transactions, and identify counterparties. DeFi was not originally designed around these requirements, and adapting to them often requires meaningful architectural changes. This may evolve. For example, CLARITY may make it easier for institutions to access permissionless systems while meeting regulatory requirements. But today, most institutions must evaluate blockchain infrastructure through the lens of control, accountability, and operational risk.
Enterprise value delivery. This axis is often underestimated. Institutions adopt blockchain not because they believe permissionless is a principle. They adopt it because it can compress costs, reduce reconciliation friction, create new distribution channels, or allow them to embed deeper into customer relationships. The value proposition must be expressed in these terms, otherwise it cannot pass procurement.
Stablecoins are perhaps the clearest example. Banks, payment providers, and fintech companies increasingly view them as useful settlement infrastructure because they allow dollars to flow faster across networks and geographic regions. But few embrace the broader philosophy of permissionless finance. They adopt programmable dollars because they are useful, not because they are trying to rebuild the financial system around DeFi principles.
Circle's evolution is a apt example. Arc reflects how blockchain infrastructure is increasingly being packaged for institutional buyers: emphasizing compliance, operational control, trusted counterparties, and integration into existing workflows, rather than permissionless access and composability. The value proposition is not for permissionless itself. But rather faster settlement, global reach, and improved capital efficiency, delivered in a form institutions can actually adopt.
Even organizations like SWIFT are increasingly framing blockchain through this lens. Their efforts in tokenized asset interoperability are not attempting to replace existing financial institutions. They are attempting to improve how existing institutions coordinate with each other using the SWIFT network. This pattern repeats: blockchain adoption is strengthening established financial networks, not replacing them.
This is how powerful technology evolves when it meets large established markets.
Two Opportunities for Builders
At the industry level, it would be a mistake for everyone to abandon one opportunity for the other. At the company level, attempting to pursue both simultaneously will be a mistake.
Institutional adoption and open networks can enhance each other at the ecosystem level. But for most teams, they remain fundamentally different businesses. Building for institutions requires understanding procurement, compliance, control, channel partners, and long sales cycles. Building for open networks requires optimizing for developers, liquidity, composability, and network effects. Customers, distribution models, product requirements, and success metrics are often completely different.
This does not mean one opportunity is better than the other. It just means founders should clearly know which market they are serving, and realize what unites them is the rails below: public chains as neutral settlement layers.
Working with institutions and building an adjacent financial system are not contradictory. If done right, each makes the other more valuable. The permissioned layer brings transaction volume, legitimacy, and capital; the open layer continues to produce primitives that the permissioned layer will adopt next. When convergence comes, it happens on the rails—not through one system surrendering to the other.
Public chains may become increasingly important settlement rails, even as the applications built on top of them become increasingly permissioned.
Building for Programmable Financial Infrastructure
When building for this new programmable financial infrastructure, there are two approaches to consider: building from scratch or adapting existing products.
Consider networks like Canton. They are not adapting existing DeFi infrastructure, but are specifically designed around institutional requirements for privacy, compliance, and controlled interoperability. The goal is not to bring banks into DeFi. But to use blockchain-based coordination while retaining the governance, confidentiality, and operational control institutions need.
Not every successful institutional strategy requires rebuilding from scratch. For example, Morpho is taking the opposite approach. Morpho has not abandoned its DeFi primitives, but is focused on making them easier for institutions and asset issuers to use. For example, Apollo's ACRED fund uses Morpho as part of its on-chain lending strategy, pairing DeFi-native lending primitives with institutional-grade distribution, compliance, and fund structures. The result is neither pure DeFi nor a completely isolated institutional stack. This is a pattern where institutions selectively adopt existing crypto infrastructure, while packaging it in a way that fits their own requirements for control, compliance, and distribution.
This new category is tailored for institutional constraints. It draws nourishment from DeFi, but operates in a more permissioned, more compliant way, so it is inevitably different from what exists today.
Some teams, like Morpho, have successfully adapted crypto-native infrastructure for institutional use cases. But builders should not mistake this for the default script. Institutions are a unique customer base with unique requirements. In many cases, designing for these requirements from the start will prove more effective than adapting products initially built for open networks.
The Opportunity to Continue Building in DeFi
The innovations institutions are adopting today did not originate within banks, asset management companies, or existing financial infrastructure. They emerged from open networks, where builders are free to experiment with new market structures, coordination mechanisms, and financial primitives.
This distinction is important. Institutions are not the primary source of industry innovation: the permissioned layer is usually downstream of the open layer.
This brings us to a more important strategic point: if our industry focuses too much on selling to banks and asset management companies, we risk mistaking a large buyer category for the entire opportunity. Traditional finance is an important customer. But it is not the only one.
Designing for institutional requirements is a legitimate and valuable pursuit, but it is just one lane, not the whole road. Companies that will endure are those that remain clear-eyed about who they are building for. Institutional adoption may be a big opportunity, but it is not just an extension of DeFi. Success in one market does not guarantee success in another.
If you are building for institutions, embrace it fully. Do not assume crypto-native appeal will automatically translate to enterprise adoption. Understand the customer, understand the buying process, and build intentionally around institutional requirements.
If you are building for open networks, continue doing so. Do not abandon your vision simply because institutions are the loudest buyers in the market today.
Remember: these are complementary, not competitive. One adapts, commercializes, and scales proven innovations. The other discovers them. A version of this technology will almost certainly become part of the financial plumbing of existing traditional finance systems. But that is not the only future being built. Open networks remain the industry's most important source of experimentation and innovation, and many primitives shaping tomorrow's institutional infrastructure may appear there first.
Traditional finance is not adopting DeFi. It is selectively adopting parts that fit its model. The opportunity for builders is not to chase every market at once, but to understand which one they are building for. And execute accordingly. The future may indeed run on institutional infrastructure, but many of its most important innovations will continue to emerge from open networks.
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