Author: a16z Crypto

Translated by: Deep Tide TechFlow

Deep Tide Guide: Many people think that traditional finance will embrace DeFi, and the two will ultimately 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 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.

A nearly classic future narrative is circulating in the crypto industry: DeFi and traditional finance will merge, with permissionless liquidity meeting institutional distribution capabilities, ultimately giving birth to some elegant hybrid that combines the strengths of both—a new system replacing the old one.

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

A more honest version is: as long as blockchain can make existing traditional financial operations better, it will adopt it. Not because it embraces decentralization, but because it is a compelling cost-saving story—this technology just 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 and discarding those that do not; they are reconfiguring DeFi around institutional needs. The result is unlikely to resemble traditional finance or today’s DeFi. We are beginning to see the emergence of a new category that builds on blockchain tracks but is optimized for institutional constraints: programmable financial infrastructure.

As regulatory frameworks mature, this dynamic may evolve. Legislation like the CLARITY Act may ultimately make it easier for institutions to access permissionless systems directly. 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 match—this is why this presents two opportunities for the industry, not one.

The first opportunity is to help institutions adopt the infrastructure they are already prepared for today. Every primitive adopted by institutions—from atomic settlement to programmable currencies to tokenized collateral—is validating the technology, building shared tracks, and bringing real transaction volumes 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 coexist 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, integration will happen naturally—not because one system completely replaces the other, but because both become increasingly reliant on the same underlying infrastructure.

What Traditional Finance is Actually Doing

Traditional finance adopts a primitive that needs to meet two conditions simultaneously: improve cost, risk, or distribution and remain compatible with control and accountability. The primitives discarded by institutions—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 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 trading and finality, eliminates counterparty risk, and frees up collateral parked for unsettled trades. Shared ledgers turn the biggest hidden back-office cost—reconciliation—into a task that doesn’t need to be done. Programmable currency enables coupon payments, margin calls, and corporate actions to operate as code rather than a series of manual instructions. AMM curve mathematics, stripped of the permissionless shell, reemerges as a pricing engine for on-chain foreign exchange and tokenized currency market net values.

Each of these improves the numbers on the P&L or eliminates an operational risk and its associated costs, but none of them require institutions to believe in decentralization. So we need to accurately describe what JP Morgan's institutional deposit permissioned blockchain or BlackRock’s and Franklin Templeton’s tokenized money market funds are doing: they are not enterprises testing DeFi. They are using blockchain to do what they are already doing—settling interbank payments, managing fund subscriptions, distributing interest-bearing instruments—but with better pipelines. These deployments leverage the technical attributes of blockchain (programmability, transparency, atomic settlement) and deliberately discard the attributes that enable native DeFi to operate (open access, pseudonymity, and trustless execution).

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

Different Buyers, Different Rules

Assuming institutional adoption is just a larger distribution channel for existing DeFi infrastructure would be a mistake. Institutions evaluate protocols differently than crypto-native users do. When institutions consider software vendors, infrastructure partners, operational risk, compliance controls, and long-term ownership of key systems, they follow standard operating procedures. The result is that success in DeFi will not automatically translate into success within institutions.

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

Any technology entering a highly regulated, risk-managed, and liability-shy institutional environment will be shaped by that environment. The internet saw this happen (corporate firewalls, private intranets). Cloud computing has seen this happen (private clouds, VPCs, FedRAMP). AI is experiencing this (on-premises, data residency requirements, model governance). Blockchain is no different.

The reconfiguration occurs along two axes:

Compliance: KYC, AML, sanctions screening, investor qualification, and regulatory reporting requirements are non-negotiable for most institutions. Permissionless systems are inherently ill-suited 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 significant architectural changes. This may evolve; for example, CLARITY might 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 do not adopt blockchain because they believe permissionlessness is a principle. They adopt it because it can compress costs, reduce reconciliation friction, create new distribution channels, or deepen their customer relationships. The value proposition must be articulated in these terms; otherwise, it will not pass procurement.

Stablecoins may be the clearest example. Banks, payment providers, and fintech companies increasingly see them as useful settlement infrastructure because they allow dollars to flow faster across networks and geographical regions. But few embrace the broader philosophy of permissionless finance. They adopt programmable dollars because they are useful, not because they are trying to reconstruct the financial system around the principles of DeFi.

The evolution of Circle is an apt illustration. Arc reflects how blockchain infrastructure is increasingly being packaged for institutional buyers: with an emphasis on compliance, operational control, trusted counterparties, and integration into existing workflows, rather than permissionless access and composability. The value proposition is not for permissionlessness itself, but rather faster settlement, global reach, and improved capital efficiency delivered in a form that institutions can actually adopt.

Even organizations like SWIFT are increasingly framing blockchain through this lens. Their efforts on tokenized asset interoperability are not trying to replace existing financial institutions. They are trying to improve how existing institutions coordinate with each other using the SWIFT network. This pattern recurs: blockchain adoption strengthens established financial networks rather than 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 forgo one opportunity for another. At the corporate level, trying to pursue both simultaneously would be a mistake.

Institutional adoption and open networks can mutually 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. Customer, distribution models, product requirements, and success metrics will often be entirely different.

This does not mean one opportunity is better than another. It simply means founders should be clear about which market they are serving and recognize the underlying track that connects them: public chains as a neutral settlement layer.

Working with institutions and building an adjacent financial system are not contradictory. If done right, each adds value to the other. The permissioned layer brings volume, legitimacy, and capital; the open layer continues to produce primitives, markets, and innovations that will be adopted by the permissioned layer next. When integration comes, it happens on the tracks—not through one system yielding to another.

Public chains may become an increasingly important settlement track, even as 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 adjusting existing products.

Consider networks like Canton. They do not adjust existing DeFi infrastructure but are designed specifically 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 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 focusing on making it easier for institutions and asset issuers to use them. 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 is a model of institutions selectively adopting existing crypto infrastructure while packaging it in a way that meets their own requirements for control, compliance, and distribution.

This new category is tailored to institutional constraints. It draws nutrients from DeFi but operates in a more permissioned and compliant manner, thus inevitably being different from anything that exists today.

Some teams, like Morpho, have already successfully adjusted crypto-native infrastructure for institutional use cases. But builders should not mistake this for a default playbook. Institutions are a unique customer base with unique requirements. In many cases, designing for these requirements from the start will prove more effective than adjusting products originally built for open networks.

The Opportunity to Continue Building in DeFi

The innovations institutions are adopting today do not originate from within banks, asset management firms, or existing financial infrastructure. They emerge from open networks where builders can freely 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 typically 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 management companies, we risk mistaking one 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. Enduring companies will be those that remain clear about who they are building for. Institutional adoption may be a big opportunity, but it is not simply an extension of DeFi. Success in one market does not guarantee success in another.

If you are building for institutions, fully embrace it. Do not assume the crypto-native appeal will automatically translate into corporate adoption. Understand your customers, comprehend the purchasing process, and deliberately build around institutional requirements.

If you are building for open networks, continue to do so. Do not abandon your vision merely because institutions are today’s loudest buyers.

Remember: these are complementary, not competitive. One is adjusting, commercializing, and scaling proven innovation. The other is discovering them. One version of this technology will almost certainly become part of the financial pipeline of existing traditional financial 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 of the primitives that will shape tomorrow’s institutional infrastructure may first emerge there.

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.