Talk of institutional adoption of DeFi has been picking up pace in the last couple of years, but whereas before, the main conversations focused on matters of regulation, these days greater emphasis is being placed on infrastructure. And rightly so, in my opinion.
It is certainly true that institutional actors prefer as much legal clarity as possible when engaging with financial instruments and systems of any kind. But it’s not enough to simply assume that once governments introduce clearer rules, banks and asset managers will instantly move on-chain with no hassle. In practice, it doesn’t quite work that way.
As things stand now, regulatory initiatives like the CLARITY Act in the United States, alongside the SEC’s work on an innovation exemption for tokenized securities and the rapid growth of tokenized real-world assets (RWAs), are creating an environment where TradFi institutions have less and less reason to ignore blockchain. Both the rules and the utility are becoming more understandable.
But whether blockchain infrastructure itself is actually ready for these players is the big question. Most DeFi protocols were never foundationally designed to support regulated financial markets in the first place, so adjusting their architecture for this ongoing shift is the real challenge.
The Problem Isn’t Decentralization — It’s Missing Infrastructure
The first generation of DeFi was built for a permissionless world where every participant was treated equally. Anyone could connect a wallet, trade, borrow assets, or provide liquidity — all without revealing their identity or proving their eligibility. That openness became one of crypto’s greatest innovations, allowing developers to build financial products that anyone could access.
But institutions don’t function like that. Banks, brokers, asset issuers and other organizations like that operate within legal frameworks that became firmly established way before crypto and DeFi came along. They have obligations (compliance, reporting, investor protection, etc.) that do not allow them to freely interact with today’s DeFi protocols because the underlying infrastructure simply lacks many of the mechanisms they need.
Today, the vast majority of tokens follow identical standards. Whether a token represents governance rights, a stablecoin, a money market instrument, or eventually a tokenized bond, protocols often treat them in nearly the same way. In reality, different financial assets come with completely different rules.
Some assets may need jurisdiction-based restrictions, or follow a specific redemption process, or have particular ownership requirements. And trying to represent all of these instruments with identical behavior would only create limitations and inefficiencies. With tokenized assets growing in popularity and becoming more diverse, protocols also need to evolve and adopt new approaches that fit those individualized requirements.
Compliance Doesn’t Have to Be the Enemy of DeFi
One concern we can often hear bouncing around in the industry is that adding compliance mechanisms would somehow destroy decentralization. I don’t think that’s necessarily true — the greater mistake here is limiting your perspective and assuming that every protocol has to work under the exact same rules.
Permissionless finance has its place, and it’s not going anywhere now. But if the goal is to bring regulated assets on-chain, protocols need more than that. They need the ability to support additional layers of TradFi logic without sacrificing the advantages that come with blockchain.
If nothing else, protocols should definitely be able to recognize different categories of participants and support assets whose transfer rules differ from those of a standard ERC-20 token.
Traditional finance has spent decades building operational frameworks around different market participants and asset classes. And while DeFi doesn’t need to copy those systems entirely, it can certainly learn from them. Protocols could accommodate a much broader range of financial products while still preserving the openness that made decentralized finance valuable in the first place.
In fact, some of the necessary tools and building blocks for that shift already exist. The ERC-3643 standard, for example, allows tokens to enforce compliance rules directly at the token level. Every transfer gets automatically checked against a registry of approved holders, meaning the token itself enforces the rules instead of relying on an exchange or website to block unauthorized users. At the same time, the issuer retains control over who qualifies to hold the asset, while the enforcement remains transparent and embedded in code.
In my opinion, adding such capabilities makes DeFi more flexible rather than less, as some fear. And it is a much more promising direction of development than simply trying to bolt TradFi compliance onto DeFi rails as is.
What DeFi Can’t Afford to Lose
Admittedly, though, there is a certain amount of risk in trying to make DeFi institutional-ready. That risk can be neatly summarized in the popular concern that we could end up simply rebuilding TradFi on blockchain rails, which would be missing the point.
Adjusting DeFi for the realities of TradFi assets does not — and should not — mean removing everything that makes decentralized finance different. Of far greater value here is adding the infrastructure that regulated participants need while preserving the properties that make decentralized systems useful in the first place.
One of the biggest advantages of blockchain is its relative simplicity: financial operations can happen through software instead of going through layers and layers of intermediaries. If, upon becoming more institutional, DeFi demands that users navigate a whole new operational system for every asset and protocol, it would mean that we’re moving in the wrong direction.
Then there is also DeFi’s non-custodial infrastructure, which I think traditional financial institutions still underestimate the importance of. For those organizations, relying on trusted intermediaries is normal, but from the perspective of regular users, it is not always desirable: people want to be able to control their assets themselves.
They don’t want their ability to access or move their money to depend entirely on a specific bank, which can at any point issue a unilateral decision they don’t agree with but can’t do anything about. Offering users more freedom in that regard is one of the core ideas behind DeFi, and institutional adoption shouldn’t mean giving it up.
Finally, the biggest advantage blockchain can offer is composability. Once more RWAs become tokenized and move on-chain, they will need to be equally usable across different apps and protocols. If every bank launches its own permissioned network and every institutional product functions in an isolated fashion, then we’ve just created a more complicated version of the existing system. We have not really solved the problems that are already there.
The ability to connect different pieces of financial infrastructure is one of the most interesting things blockchain brings to finance, and as I see it, it should be fully leveraged.
TradFi and Crypto Both Have Something to Learn
This is where I think the conversation needs to become more balanced. Institutional players need to understand why decentralization matters beyond simply ideological preferences. Having more direct control over your assets and not being permanently dependent on a particular institution can be a tangible financial advantage.
And on the flip side of that coin, crypto needs to accept the more realistic parts of what institutional users actually need. This industry has spent years building products primarily for a crypto-native audience, and while that has produced some genuinely innovative infrastructure, it has also resulted in a lot of products whose growth depends on speculation rather than solving a real financial problem. We don’t need to look far beyond memecoins to see proof of this.
That old way of doing this can’t carry the industry indefinitely: if DeFi wants to become part of the broader financial system on a truly global scale, it needs to build for a broader audience. For people who may not particularly care about the next hot crypto topic, but who are concerned whether the infrastructure they’re using is reliable, compliant and genuinely useful.
That means the next generation of DeFi will likely have noticeably more rules and more distinctions between specific kinds of users and assets. Some parts of the ecosystem will require jurisdictional restrictions and compliance mechanisms that people are not used to thinking of now. But that change won’t mean that DeFi has somehow failed. It will only mean that the financial ecosystem has taken in the best elements from both sides.
TradFi has decades of experience dealing with regulated markets, different asset classes, investor categories, and jurisdictional requirements. DeFi has shown that financial infrastructure can be programmable, composable, non-custodial, and accessible through open protocols.
Neither side has the complete answer, so the opportunity to combine the strengths of both is where the real value of this transition lies.