a16z: Traditional Finance Doesn't Want DeFi, It Just Wants the Blockchain Infrastructure Layer

Original Author: a16z Crypto

Original Translation: Deep Tide TechFlow

Introduction: Many people believe 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 capture customer relationships, but it will never give up control. This is not a compromise, but a carefully designed architectural choice that is giving birth to a new category—programmable financial infrastructure.

In the crypto industry, there is a near-classic future narrative: DeFi and traditional finance will converge, permissionless liquidity meeting institutional distribution capabilities, eventually yielding an elegant hybrid combining the best of both—the new system replacing the old.

This is a comforting story. But it is largely wrong.

A more honest version is: As long as blockchain can make existing traditional finance operations better, it will be used. This is not because of embracing decentralization, but because it presents 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 integrating with DeFi. Instead, they are selectively using parts of DeFi that fit their operational constraints and discarding those that don't; they are reconfiguring DeFi around institutional needs. The result is unlikely to look like traditional finance, nor 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 could eventually make it easier for institutions to directly access permissionless systems. But regardless of what becomes legally possible, traditional finance's risk posture won't reset overnight. Institutions will still adopt technology through the lens of cost, risk, control, and operational fit—which is why this presents the industry with two opportunities, not one.

The first opportunity is to help institutions adopt the infrastructure they are ready for today. Every primitive institutions adopt—from atomic settlement to programmable money to tokenized collateral—validates the technology, builds 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 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 the 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, two things must be true simultaneously: it improves cost, risk, or distribution, and it is compatible with control and accountability. The primitives institutions discard—open access, pseudonymity, immutable execution—pass the first test but fail the second. This is why adoption patterns are predictable rather than arbitrary, and why builders can treat it as a design test. That is, if a feature only delivers value by removing institutional control, no matter how elegant, it will almost certainly be reshaped or rejected.

Let's test some primitives. Atomic settlement compresses the gap between trade and finality, eliminating counterparty risk and freeing up collateral that institutions park for unsettled trades. Shared ledgers turn the biggest hidden cost of back offices—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 as a chain of manual instructions. The math of AMM curves, stripped of its permissionless shell, reappears as a pricing engine for on-chain foreign exchange and net asset value of tokenized money market funds.

Each one improves the bottom line or eliminates an operational risk and its associated cost, but none require institutions to trust decentralization. So we must be precise about what is happening with JPMorgan's permissioned institutional deposit blockchain, or BlackRock and Franklin Templeton's tokenized money market funds: these are not corporate experiments with DeFi. They are using blockchain to do what they already do—settle interbank payments, manage fund subscriptions, distribute yield-bearing instruments—but with better plumbing. These deployments use blockchain's technical properties (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. It is a deliberate architectural choice, and it tells us a lot about where this is heading.

Different Buyers, Different Rules

Assuming that institutional adoption is just a larger distribution channel for existing DeFi infrastructure would be a mistake. 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. As a result, success in DeFi does not automatically translate to success with institutions.

Companies rarely buy the "best" technology. They buy the technology that best fits existing workflows, risk models, procurement processes, and more.

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). It happened with cloud computing (private clouds, VPCs, FedRAMP). It’s happening with AI (on-premise deployment, data residency requirements, model governance). Blockchain is no different.

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 natively suited to these requirements. Institutions need the ability to freeze assets, reverse 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 instance, 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 lens of control, accountability, and operational risk.

Enterprise Value Delivery. This axis is often underestimated. Institutions don't adopt blockchain because they believe in permissionlessness as a principle. They adopt it because it can compress costs, reduce reconciliation friction, create new distribution channels, or enable them to embed themselves more deeply in customer relationships. The value proposition must be expressed in these terms, or it won't pass procurement.

Stablecoins are perhaps the clearest example. Banks, payment providers, and fintechs increasingly view them as useful settlement infrastructure because they allow dollars to move faster across networks and geographies. 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 fitting illustration. 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 permissionlessness itself. It is 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 about trying to replace existing financial institutions. They are about improving how existing institutions use the SWIFT network to coordinate with each other. The 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, it would be a mistake to try to pursue both simultaneously.

Institutional adoption and open networks can reinforce 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. The customers, distribution models, product requirements, and success metrics are often entirely different.

This doesn't mean one opportunity is better than the other. It simply means founders should be clear about which market they are serving and recognize that what unites them is the layer below: the public chain as a neutral settlement layer.

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 volume, legitimacy, and capital; the open layer continues to produce the 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. Instead of adapting existing DeFi infrastructure, they are specifically designed around institutional requirements for privacy, compliance, and controlled interoperability. The goal is not to bring banks into DeFi. It's to use blockchain-based coordination while retaining the governance, confidentiality, and operational control that institutions need.

Not every successful institutional strategy requires a rebuild from scratch. For example, Morpho is taking the opposite approach. Rather than abandoning its DeFi primitives, Morpho focuses 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 completely isolated institutional stack. It's a model where institutions selectively adopt existing crypto infrastructure while packaging it in a way that aligns with 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 manner, and therefore is necessarily 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 playbook. Institutions are a distinct customer set with unique requirements. In many cases, designing for these requirements from the outset will prove more effective than adapting products originally built for open networks.

The Opportunity to Keep Building in DeFi

The innovations that institutions are adopting today did not originate inside banks, asset managers, 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 becomes too focused on selling to banks and asset managers, 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 one lane, not the whole road. The 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 merely an extension of DeFi. Success in one market does not guarantee success in the other.

If you are building for institutions, embrace it fully. Don't assume that crypto-native appeal will automatically translate into enterprise adoption. Understand the customer, understand the buying process, and build deliberately around institutional requirements.

If you are building for open networks, continue doing so. Don't abandon your vision just because institutions are the loudest buyers in the market today.

Remember: these are complementary, not competing. One adapts, commercializes, and scales proven innovations. The other discovers them. One version of this technology will almost certainly become part of the financial plumbing of the existing traditional financial system. But that is not the only future being built. Open networks remain the industry's most important source of experimentation and innovation, and many of the primitives that will shape tomorrow's institutional infrastructure will likely first appear there.

Traditional finance is not adopting DeFi. It is selectively adopting the parts that fit its model. The opportunity for builders is not to chase every market, 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.