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a16z: Traditional Finance Doesn't Want DeFi, Just Blockchain as a Foundational Layer

a16z crypto

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If both succeed, a merger will naturally occur.

Original Title: TradFi doesn't want DeFi. It wants blockchain.
Original Source: a16z Crypto
Original Translation: DeepTech TechFlow

DeepTech Summary: Many people believe that traditional finance will embrace DeFi, and the two will eventually merge into some elegant hybrid. The truth is much more brutal: Wall Street only wants to use blockchain to reduce costs, increase efficiency, leverage customer relationships, but will never relinquish control. This is not a compromise, but a carefully crafted architectural choice that is giving rise to a new category — programmable financial infrastructure.

Within the crypto industry, there is an almost classic future narrative: DeFi and traditional finance will merge, permissionless liquidity will meet institutional distribution capabilities, and ultimately give birth to some elegant hybrid, combining the strengths of both — a new system replacing the old.

This is a comforting story. But it's mostly wrong.

A more honest version is: as long as blockchain can make traditional finance's existing businesses better, it will be used. Not because it embraces decentralization, but because it's a compelling cost reduction story — this technology happens to reduce costs, improve settlement, expand distribution, and tighten its control over customer relationships.

This means that institutions are not merging with DeFi. Instead, they are selectively using the parts of DeFi that fit their operational constraints, discarding those that do not; they are reshaping DeFi around institutional needs. The result is unlikely to look like traditional finance or today's DeFi. We are starting to see the emergence of a new category, built on the blockchain track but optimized for institutional constraints: programmable financial infrastructure.

As the regulatory framework matures, this dynamic may evolve. Legislation like the CLARITY Act may eventually make it easier for institutions to directly access permissionless systems. But no matter what becomes legally possible, the risk posture of traditional finance will not reset overnight. Institutions will still adopt technology through the lens of cost, risk, control, and operational fit — which is why this presents two opportunities to the industry, not one.

The first opportunity is to help institutions adopt the infrastructure they are already ready for today. Every primitive that institutions adopt — from atomic settlement to programmable money to tokenized collateral — is validating this technology, building shared rails, and bringing real transaction volume and capital onto the chain.

The second opportunity is to continue building open, crypto-native financial systems that institutions are not yet ready to use.

This is not a zero-sum bet. They can and should coexist, and if done well, each will enhance the other. Open networks and ecosystems will continue to produce primitives, markets, and innovations that institutions will ultimately adopt. If both succeed, convergence will happen naturally—not because one system completely displaces the other, but because both increasingly rely on the same underlying infrastructure.

What Traditional Finance is Actually Doing

Traditional finance adopts a primitive that needs to satisfy two things at once: improve cost, risk, or distribution, and remain compatible with control and accountability. Primitives discarded by institutions—open access, pseudonymity, immutable execution—have passed the first test but not the second. That’s why adoption patterns are predictable rather than arbitrary and why builders can design them as tests. That is to say, if a feature only delivers 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 unlocks collateral held by institutions for unsettled trades. Shared ledgers turn the backend’s largest hidden cost—reconciliation—into a non-event. Programmable money allows interest payments, margin calls, and corporate actions to run as code rather than a string of manual instructions. AMM curve math, stripped of its unnecessary shell, reemerges as the pricing engine for on-chain FX and tokenized money market net asset value.

Each has improved the numbers on the balance sheet or eliminated an operating risk and its associated costs, but none requires institutions to trust decentralization. So, we must be precise about what's happening with JPMorgan's institutional deposit blockchain or BlackRock, Franklin Templeton’s tokenized money market funds: these are not enterprises dipping a toe into DeFi. They are using blockchain to do what they were already doing—settling interbank payments, managing fund redemptions, distributing interest-bearing instruments—but through a better conduit. These deployments leverage the technical properties of blockchain (programmability, transparency, atomic settlement) and deliberately discard the attributes that underpin native DeFi operations (open access, pseudonymity, and trustless execution).

This is not a failure or compromise. It is a deliberate architectural choice that tells us a lot about where this is headed.

Different Buyers, Different Rules

Assuming institutions adopting are just a larger distribution channel for existing DeFi infrastructure would be a mistake. Institutions evaluate protocols differently from crypto-native users. When institutions consider software vendors, infrastructure partners, operational risks, 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 what best fits their existing workflows, risk models, and procurement processes.

Any technology entering a highly regulated, risk-managed, liability-sensitive institutional environment is shaped by that environment. This has happened with the Internet (enterprise firewalls, intranets), with cloud computing (private clouds, VPCs, FedRAMP), and is happening with AI (on-premises deployments, data residency requirements, model governance). Blockchain is no different.

A reconfiguration occurs along two axes:

Compliance: KYC, AML, sanctions screening, investor accreditation, and regulatory reporting requirements are non-negotiable for most institutions. Permissionless systems are not native to these requirements. Institutions need the ability to freeze assets, reverse transactions, and identify counterparties. DeFi was not initially designed around these requirements, and adapting to them often requires significant architectural changes. This may evolve; for example, CLARITY could make it easier for institutions to access permissionless systems while meeting regulatory requirements. But today, most institutions must evaluate blockchain infrastructure through the lenses of control, accountability, and operational risk.

Enterprise value delivery. This axis is often underestimated. Institutions adopt blockchain not because they believe permissionlessness is a principle. They adopt it because it can cut costs, reduce reconciliation friction, create new distribution channels, or enable deeper customer embedding. The value proposition must be articulated in these terms, or it won't pass through procurement.

Stablecoins may be the clearest example. Banks, payment providers, and fintechs increasingly view them as useful settlement infrastructure because they can facilitate faster movement of dollars across networks and geographies. But few are embracing the broader philosophy of permissionless finance. They adopt programmable dollars because they are useful, not because they are attempting to rebuild the financial system around DeFi principles.

Circle’s evolution is a fitting illustration. Arc reflects how blockchain infrastructure is increasingly packaged for institutional buyers: emphasizing compliance, operational controls, trusted counterparties, and integration into existing workflows rather than permissionless access and composability. The value proposition is not for permissionlessness itself. It is for faster settlement, global reach, and improved capital efficiency delivered in forms institutions can actually adopt.

Even organizations like SWIFT are increasingly framing blockchain through this lens. Their efforts in tokenized asset interoperability are not about replacing existing financial institutions. They are about improving how existing institutions use the SWIFT network to coordinate with each other. This pattern repeats: blockchain adoption strengthens established financial networks rather than replacing them.

This is the evolution path when powerful technology meets a large established market.

Two Opportunities for Builders

At the industry level, it would be a mistake for everyone to give up one opportunity for another. At the company level, attempting to pursue both at the same time would be a mistake.

Institutions adopting an open network can strengthen each other at the ecosystem level. But for most teams, they are still fundamentally different businesses. Building for institutions requires understanding procurement, compliance, control, channel partners, and long sales cycles. Building for an open network 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 that what underlies them is the track below: a public chain as a neutral settlement layer.

Collaborating 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 continuously outputs primitives for the permissioned layer to adopt next. Fusion happens opportunistically, occurring on the track—not by one system surrendering to the other.

Public chains may become increasingly critical settlement rails even as the applications built on top of them become more 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 tweaking 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 governance, confidentiality, and operational control that institutions need.

Not every successful institutional strategy needs to be built 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 instance, 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 fully isolated institutional stack. It's a pattern of institutions selectively adopting existing crypto infrastructure while packaging it in ways that align with their own requirements for control, compliance, and distribution.

This new asset class is tailored for institutional constraints. It draws inspiration from DeFi but operates in a more permissioned and regulatory-friendly manner, therefore inevitably different from what exists today.

Some teams, like Morpho, have successfully tailored the crypto-native infrastructure for institutional use cases. However, builders should not mistake this as the default playbook. Institutions are a unique customer base with distinct requirements. In many cases, designing for these requirements from the outset will prove more effective than retrofitting a product originally built for an open network.

Opportunities to Continue Building in DeFi

The innovation institutions are adopting today did not originate from within banks, asset management firms, or existing financial infrastructure. They have emerged from open networks where builders can freely experiment with new market structures, coordination mechanisms, and financial primitives.

This distinction is crucial. Institutions are not the primary source of industry innovation: permissioned layers often sit downstream from open layers.

This brings us to a more critical strategic point: if our industry becomes too focused on selling to banks and asset management firms, we risk mistaking one large buyer category for the entire opportunity. Traditional finance is an important client. 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 entire road. Sustainable companies will be those that maintain a clear-eyed view of who they are building for. Institutional adoption may be a significant opportunity, but it is not merely 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 that the appeal of crypto-native will automatically translate into enterprise adoption. Understand the customer, comprehend the buying process, and intentionally build around institutional requirements.

If you are building for open networks, continue to do so. Do not abandon your vision just because institutions are the loudest buyers in the market today.

Remember: these are complementary, not competitive. One refines, commercializes, and scales proven innovations. The other discovers them. A version of this technology is almost certain to become part of the financial rails of the existing traditional financial system. But that is not the only future being built. Open networks remain the industry's most crucial source of experimentation and innovation, with many of the primitives shaping tomorrow's institutional infrastructure likely to emerge there first.

Traditional finance is not adopting DeFi. It is selectively adopting parts that align with its model. The opportunity for builders is not a singular pursuit of every market but understanding which one they are building for. And executing accordingly. The future might indeed run on institutional infrastructure, but many of its most critical innovations will continue to emerge from open networks.