What Kind of DeFi Does Wall Street Want?

Original Author: Chloe, ChainCatcher

For years, tokenization has been positioned as the bridge connecting cryptocurrency to Wall Street. The underlying logic behind putting treasury bonds on-chain, issuing tokenized funds, and digitizing stocks has consistently pointed to one idea: once assets are on-chain, institutional capital will naturally follow.

However, tokenization itself has never been the endgame. DWF Ventures believes that the true key to unlocking the institutional market is not the digitization of assets, but the financialization of yield.

Since 2025, the Total Value Locked (TVL) in DeFi has surged from approximately $115 billion to over $237 billion at its peak. The primary driver behind this growth is no longer purely speculative retail investors, but real institutional capital and RWA. Institutions are no longer just watching from the sidelines; they are beginning to view DeFi as infrastructure for deployable capital.

It can be said that the DeFi Wall Street truly wants to see has shifted from "putting assets on-chain" to a fixed-income infrastructure that is "programmable, recomposable, and capable of hedging interest rate risk." Today, we can observe this transformation already underway 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 around $115 billion at the start of the year to $237 billion, while the number of active on-chain wallets decreased by 22% over the same period. DappRadar data clearly shows that this wave of growth was driven not by retail investors, but by "high-value, low-frequency" institutional capital.

Within this structure, RWA is the most crucial component: as of the end of March 2026, the total value of RWA had reached $27.5 billion, representing 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 approximately $540 million in assets by the end of 2025. This includes stablecoins like Superstate's USCC, RLUSD, and Aave's GHO, as well as various US Treasury assets (e.g., VBILL), with annualized yields ranging between 4-6%. This structure essentially functions as an "institutional version of a money market fund": the front end consists of tokenized treasuries 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 merely tools for holding and collecting interest. They are used in repos (repurchase agreements), re-collateralized, split, and embedded into structured products, forming a flywheel of capital efficiency. By 2025, DeFi had already begun replicating this logic.

Maple Finance's TVL in 2025 skyrocketed from $297 million to over $3.1 billion, approaching $3.3 billion at times. The main driver was institutions entering the RWA lending market, tokenizing private and corporate loans for "off-exchange" stablecoin lending and refinancing.

Centrifuge focuses on converting loans for small and medium-sized enterprises (SMEs), 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 Treasuries.

Simultaneously, Centrifuge has deeply integrated with top-tier DeFi protocols. For instance, Sky (formerly MakerDAO): through its collaboration with Centrifuge, MakerDAO can invest its reserves in real-world business loans, providing tangible yield support for the stablecoin DAI. There's also Aave: the two have jointly built a dedicated RWA market, allowing KYC-verified institutional investors to use Centrifuge's asset certificates as collateral, enabling cross-protocol liquidity circulation.

Yield Tokenization and Yield Trading Markets: Can Interest Rate Risk Be Hedged?

If we were to map the architecture of Wall Street's fixed-income market, we 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, an arXiv paper titled "Split the Yield, Share the Risk: Pricing, Hedging and Fixed rates in DeFi" 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. Taking 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 integrated 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; it can be adjusted by directly trading "yield tokens" on-chain, enabling instant and transparent interest rate risk hedging and significantly improving capital efficiency.

Two Major Real-World Challenges: Privacy and Compliance

However, even as DeFi's TVL surpasses tens of billions of dollars, the large-scale inflow of institutional capital remains hindered by two key challenges: privacy and compliance.

First Challenge: Transparent Holdings on Public Chains, Liquidation Points Exposed

On mainstream public chains, every transaction and address holding is publicly visible, posing an extremely high risk for institutions. Trading strategies, leverage levels, and liquidation points could be completely exposed to counterparties, potentially leading to targeted shorting and liquidation. In the event of a liquidity crunch or price volatility, malicious actors could place orders against specific addresses, amplifying losses. This is one reason why institutional capital is hesitant to fully commit to DeFi.

Here, zero-knowledge proofs (ZKPs) may hold the key as a potential solution. They would allow institutions to prove their legitimacy to regulators without leaking information to the public. Specifically, regulators could verify that an institution meets regulatory requirements, while other market participants cannot see the institution's complete holdings or liquidation points. This is the privacy layer Wall Street truly desires—not "complete anonymity," but "meeting compliance requirements without disclosing trade secrets."

Second Challenge: KYC, Sanctions Screening, and Auditing Must Be Embedded in the Protocol Itself

Another red line for institutions is that compliance cannot be an afterthought; it must be natively built-in. In traditional finance, KYC, sanctions screening, and audit requirements are already embedded in settlement systems and trading workflows. However, in many DeFi protocols, these checks still reside at the "front-end gateway" or with "intermediary institutions," rather than being directly encoded into the protocol logic.

Institutions expect: KYC and sanctions screening to move beyond "users uploading identification and relying on trust," to a module or middleware that can verify identity and sanctions lists on-chain without exposing complete data. Furthermore, audit and regulatory requirements could be directly written as "verifiable rules," for example: a transaction can only execute under certain compliance conditions, or an address's exposure must not exceed a specific limit.

In its November 2025 report "Tokenization of Financial Assets," IOSCO explicitly emphasized the need to establish "verifiable compliance rules" and "transparent yet 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 Does the DeFi That Wall Street Wants Look Like?

Returning to the initial question, what does the DeFi that Wall Street wants look like? First, it is 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 architecture, it must precisely replicate the interest rate decomposition and hedging logic of traditional fixed-income markets, achieving risk modularization. Third, regarding compliance and security, it must embed "verifiable compliance" and "programmatic risk control" into the protocol's foundation through zero-knowledge proofs, striking a balance between privacy and regulation.

Replacing traditional finance was never on Wall Street's agenda. Instead, it's about creating a parallel world where capital, risk, and returns can be more flexibly and programmatically restructured.