TradFi has never wanted decentralization.

Written by: Christian, Pyrs Carvolth, a16z

Translated by: Saoirse, Foresight News

A nearly conclusive future scenario circulates within the crypto community: decentralized finance (DeFi) and traditional finance (TradFi) are merging, with permissionless liquidity connecting institutional distribution channels, ultimately giving birth to a sophisticated mixed system that combines the strengths of both, replacing the old system.

This vision sounds desirable, but it is generally not feasible.

The closer truth is: as long as blockchain can help traditional finance optimize existing business, they will adopt this technology. This is not because traditional finance has embraced the idea of decentralization, but because blockchain offers highly attractive cost advantages—this technology can effectively reduce costs, optimize settlement processes, and expand business channels, while further consolidating their control over customers.

This means that various financial institutions will not integrate with DeFi. On the contrary, they will selectively adopt DeFi technology components that align with their operational constraints, discarding those that are incompatible, and redesigning DeFi around their own needs. The final product will neither be traditional finance nor current DeFi. We are witnessing the rise of a new track: programmable financial infrastructure built on the foundational blockchain, optimized for institutional business constraints.

As regulatory frameworks gradually mature, the industry landscape may change. Bills like the CLARITY Act may lower the thresholds for institutions to directly access permissionless systems in the future. However, even if legal regulations loosen restrictions, the risk appetite of traditional finance will not shift overnight. Institutions evaluate technology based on four main dimensions: cost, risk, control capability, and business adaptability, which means that the crypto industry faces two major opportunities, rather than just one path.

The first opportunity: to help institutions implement the current infrastructure they can adopt. Each foundational component adopted by institutions—atomic settlement, programmable currency, tokenized collateral, etc.—validates technological feasibility and co-builds a universal underlying network, bringing real funds and trading volumes onto the chain.

The second opportunity: to continue building a financial system based on an open, native crypto framework that is currently not accepted by institutions.

The two tracks do not have to be competitive; they can develop in parallel. When operated properly, they can empower each other. Open networks and ecosystems continuously generate various foundational modules, market models, and innovative achievements, which institutions will subsequently adopt. If both paths mature, integration will naturally occur: one side will not completely replace the other, but both will increasingly share the same foundational infrastructures.

The Real Logic of Traditional Finance

Traditional finance will adopt a technological component only when two conditions are simultaneously satisfied: on one hand, it can optimize costs, risks, or business distribution; on the other, it must be compatible with control mechanisms and accountability systems. The traits discarded by institutions—open access, anonymity, immutable execution methods—though satisfying the first standard, fail to meet the second. Therefore, institutions' technology choices exhibit clear patterns, and developers can use these patterns as benchmarks for product design. In other words, if a function can only create value by weakening institutional control, no matter how elegantly designed, it will almost always be redesigned or outright rejected.

We validate this standard with several foundational technologies. Atomic settlement eliminates the time lag between trade and final settlement, mitigates counterparty risk, and releases collateral funds reserved for trades awaiting clearance. Shared ledgers can address one of the largest hidden costs in the back office: reconciliation work, ensuring tedious reconciliations are no longer a challenge. Programmable currency supports coupon payments, additional margin notices, and enterprise-related operations executed automatically by code, freeing up a series of manual instructions. The curve algorithm of automated market makers (AMM), once stripped of its permissionless shell, can be used as a pricing engine for on-chain foreign exchange and net asset values of tokenized money market funds.

Each of these technologies can improve profit and loss statement data, reduce operational risks and associated expenses, without needing institutional agreement on the concept of decentralization. Therefore, we should clearly recognize the essence of projects like J.P. Morgan building permissioned blockchains for institutional deposits and BlackRock and Franklin Templeton launching tokenized money market funds: these companies are not dabbling in DeFi. They are leveraging blockchain to conduct businesses they were already engaged in—interbank settlements, fund subscriptions and redemptions, distribution of interest-generating products, simply upgrading the underlying technology architecture. These applications fully utilize the characteristics of blockchain technology (programmability, transparency, atomic settlement), yet deliberately abandon the traits inherent to native DeFi: open access, anonymity, and trustless execution.

This is not a compromise, but an active architectural choice, indicating the industry's long-term direction.

Different Clients Follow Different Rules

It is a major misconception to think that the institutional market is merely a larger sales channel for existing DeFi infrastructure. The perspective from which institutions evaluate protocols is vastly different from that of native crypto users. When institutions select software vendors and infrastructure partners, they focus on operational risks, compliance control, and long-term ownership of core systems, strictly adhering to internal standard processes. Therefore, success in the DeFi ecosystem does not automatically translate to recognition from institutional clients.

Enterprises rarely purchase "technologically optimal" products; they tend to choose solutions that best fit existing business processes, risk models, and procurement procedures.

Any technology entering a highly regulated, risk-averse institutional environment will be reshaped by that environment. The internet gave rise to corporate firewalls and private intranets; cloud computing led to private clouds, virtual private clouds, and FedRAMP compliance systems; artificial intelligence is currently undergoing a similar process: local deployments, data residency requirements, model governance regulations. Blockchain will be no exception.

Technical restructuring primarily advances along two dimensions:

1. Compliance Aspect: KYC, anti-money laundering, sanctions list screening, accredited investor identification, regulatory reporting requirements leave little room for negotiation for most institutions. Permissionless systems are inherently incompatible with these rules. Institutions must have the authority to freeze assets, roll back transactions, and identify trading counterparts. DeFi was not originally designed around these demands; achieving compatibility often requires large-scale architectural adjustments. Future situations may improve; for example, the CLARITY Act is expected to help institutions access permissionless systems while meeting regulatory requirements. But at present, for the vast majority of institutions evaluating blockchain infrastructure, the primary considerations are control capability, accountability mechanisms, and operational risk.
2. Enterprise Value Implementation Aspect: This point is often underestimated. Institutions adopt blockchain not as an ideology of permissionlessness; instead, blockchain can reduce costs, mitigate reconciliation friction, open new distribution channels, and deepen customer bonds. Product value descriptions must be based on these commercial metrics, or it will be difficult to pass enterprise procurement approvals.

Stablecoins are the most typical example. Banks, payment service providers, and fintech companies increasingly view stablecoins as a quality settlement infrastructure, facilitating the rapid flow of US dollars across networks and regions. However, almost no institution accepts the entire idea behind permissionless finance. They use programmable dollars only because of their practical value, with no intention of reconstructing the financial system according to DeFi ideals.

The development history of Circle is a perfect case. Its Arc product clearly demonstrates that blockchain infrastructure is being repackaged for institutions: focusing on compliance, operational control, trusted trading counterparts, and integration with traditional business systems, rather than permissionless access and composability. Its value proposition is not merely the pursuit of permissionlessness, but the delivery of capabilities that institutions can apply: faster settlements, global coverage, and higher capital efficiency.

Even SWIFT has begun to view blockchain through this lens. They are promoting the interoperability of tokenized assets, with the goal not to replace existing financial institutions, but to optimize how institutions collaborate based on the SWIFT network. Patterns are recurring: the goal of institutions gathering around blockchain is to solidify mature financial networks, not to supplant them.

Mature technologies tend to tread this path when penetrating large, existing markets.

Two Major Opportunities for Developers

From an industry perspective, pursuing one track while abandoning another will result in significant missed opportunities; from a startup perspective, attempting to run both tracks in parallel is equally high-risk.

At the ecosystem level, the institutional business track and the open network track can mutually empower each other. However, for the vast majority of teams, the essence of the two is entirely different. Developing for institutions requires familiarity with procurement processes, compliance systems, control solutions, channel partners, and lengthy sales cycles; developing for the open network necessitates continuous optimization around developer ecosystems, liquidity, composability, and network effects. The target customers, promotion models, product needs, and assessment criteria for these two types of business are typically worlds apart.

This does not imply that one track is superior to another. Founders should clearly identify the market they serve; the intersection of the two tracks lies in the foundational infrastructure: public chains as neutral settlement layers.

Collaborating with institutions and building supporting financial systems does not conflict. When properly laid out, they can add value to each other: the permissioned track brings transaction volumes, industry credibility, and capital; the open track continuously produces innovative components that can later be applied in the permissioned track. The true future integration will occur in the underlying settlement network, rather than one system compromising with another.

Even as upper-layer applications gradually move towards permissioning, public chains will still become increasingly important as a general settlement foundation.

Two Routes to Building Programmable Financial Infrastructure

If you want to stake a claim in this emerging track, developers have two paths: building a new system from scratch or adapting existing products. Take networks like Canton as an example: they do not modify existing DeFi code but design from the ground up around the institutional demands of privacy, compliance, and controllable interoperability. The goal is not to guide banks into the DeFi ecosystem, but to leverage blockchain for multi-party collaboration while retaining the governance authority, data confidentiality, and operational control required by institutions.

Not all institutional businesses need to be developed from scratch. Morpho chose an entirely opposite route: it did not abandon foundational DeFi components but continued to optimize its product, lowering the access threshold for institutions and asset issuers. For instance, Apollo's ACRED fund integrates Morpho into its on-chain lending strategy, pairing the native DeFi lending module with institutional-level distribution, compliance frameworks, and fund structures. The final form is neither purely DeFi nor a completely independent institutional closed system. Institutions selectively adopt existing crypto infrastructure, while repackaging it according to their control, compliance, and distribution requirements.

This entirely new track caters specifically to institutional constraints, drawing from DeFi technologies, but functioning under stronger permission and compliance frameworks, inherently distinguishing it from current native DeFi.

Some teams like Morpho successfully adapt native crypto products for institutional scenarios. However, developers should not treat this path as the standard answer. Institutions are completely independent customer groups in terms of needs. In most scenarios, designing products to meet institutional requirements from the outset is far more efficient than modifying products initially aimed at the open network.

Opportunities Continuing to Deepen in DeFi

Currently, the various innovations adopted by institutions did not initially originate from banks, asset management companies, or traditional financial infrastructures. They all stem from open networks—where developers can freely experiment with new market structures, collaboration mechanisms, and financial foundational modules.

This is crucial. Institutions are not the source of industry innovation; the permissioned track often acts as a downstream recipient of the innovations from open networks.

This leads to a key strategic conclusion: if the entire industry overly focuses on selling products to banks and asset management, it will fall into a cognitive error—equating one type of major client with the entire market. Traditional finance is an important client, but it is not the only market.

Creating products for institutional needs is reasonable and immensely valuable, but this is just one track, not the entirety of the industry's paths. Teams that can sustain long-term existence will clearly identify their target audience. The institutional business space is vast, but it cannot be simply viewed as an extension of DeFi. Success in one market does not guarantee replication in another.

If you choose to develop for institutions, dive in wholeheartedly. Do not assume that the current enthusiasm for the native crypto market will automatically translate into enterprise client orders. Gain a deep understanding of your clients, navigate the procurement process thoroughly, and plan product development around institutional needs.

If you opt to deepen your focus on the open network, please persist. Do not abandon your original vision just because institutions are currently the most financially powerful buyers.

Remember: the two tracks complement each other rather than compete. One path is responsible for adapting, commercializing, and scaling mature innovations; the other path focuses on the ongoing exploration of innovation. Blockchain technology is almost destined to become a foundational component of the existing traditional financial system, but this is not the only future taking shape. Open networks remain the most important soil for experimentation and innovation in the industry, and many foundational modules supporting institutional infrastructure will emerge here first.

Traditional finance will not embrace a complete DeFi system, but will selectively choose technologies that fit its business model. The opportunity in front of developers is not to chase all markets simultaneously, but to identify their own track and execute it effectively. The future financial infrastructure may be led by institutional systems, but many key innovations will continue to emerge from open networks.