Answer Box: Traditional financial institutions are selectively adopting blockchain technology for cost reduction and efficiency gains—such as atomic settlement and programmable money—while discarding DeFi principles like open access and pseudonymity, according to a16z Crypto. This trend is giving rise to a new category of regulated, permissioned "programmable financial infrastructure" that runs parallel to open DeFi networks. The venture firm argues that institutional adoption will not lead to a fusion with DeFi, but rather a bifurcation into two distinct opportunities: building for institutions today and continuing to develop open networks for the future.
The Reality of Institutional Blockchain Adoption
A common narrative in crypto envisions a future where DeFi and traditional finance merge into an elegant hybrid, combining permissionless liquidity with institutional distribution. a16z Crypto dismisses this as largely incorrect. The more honest version, the firm says, is that institutions will use blockchain technology only when it improves their existing business—cutting costs, settling faster, or tightening control over customer relationships—not because they embrace decentralization.
Institutions are not fusing with DeFi; they are selectively picking components that fit their operational constraints and discarding those that don't. The result is a new category: programmable financial infrastructure built on blockchain rails but optimized for institutional requirements. This includes features like atomic settlement, shared ledgers that eliminate reconciliation, and programmable money for automated payments and margin calls—all without requiring trust in decentralized governance.
Different Buyers, Different Rules
Mistaking institutional adoption for a larger distribution channel for existing DeFi would be an error, according to a16z. Institutions evaluate protocols through a lens of cost, risk, control, and operational fit, not through the lens of decentralization. Successful DeFi projects do not automatically succeed in the institutional market. Enterprises rarely buy the "best" technology; they buy what fits their existing workflows, risk models, and procurement processes.
Compliance requirements—KYC, AML, sanctions screening, investor accreditation, and regulatory reporting—are non-negotiable for most institutions. Permissionless systems are not natively compatible, so institutions need the ability to freeze assets, reverse transactions, and identify counterparties. Meanwhile, the value proposition must be expressed in terms of cost compression, reduced reconciliation friction, new distribution channels, or deeper customer relationship embedding.
Stablecoins provide a clear example. Banks, payment providers, and fintechs increasingly use them as efficient settlement infrastructure for faster cross-border dollar movement, but few embrace the broader philosophy of permissionless finance. Circle's evolution into Arc reflects how blockchain infrastructure is being packaged for institutional buyers: emphasizing compliance, operational control, and integration into existing workflows over open access and composability.
Two Opportunities for Builders
a16z argues that the industry faces two distinct opportunities, not one. The first is helping institutions adopt the infrastructure they are ready for today—each primitive from atomic settlement to tokenized collateral validates the technology and brings real volume and capital on-chain. The second is continuing to build open, crypto-native financial systems that institutions are not yet ready to use.
These are not competing bets. They can and should coexist, each enhancing the other. Open networks and ecosystems will continue to produce the primitives, markets, and innovations that institutions eventually adopt. If both succeed, fusion will happen naturally—not because one system replaces the other, but because both increasingly rely on the same underlying infrastructure: public blockchains as neutral settlement layers.
For teams, however, pursuing both simultaneously is likely a mistake. 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 fundamentally different.
Building Programmable Financial Infrastructure
When building for this new category, teams can either construct from scratch or adapt existing products. Networks like Canton are designed from the ground up around institutional requirements for privacy, compliance, and controlled interoperability. In contrast, projects like Morpho take the opposite approach: rather than abandoning DeFi primitives, they focus on making them easier for institutions and asset issuers to use. For example, Apollo's ACRED fund uses Morpho for on-chain lending, pairing DeFi-native lending primitives with institutional-grade distribution, compliance, and fund structure.
The key is that this new category is tailored for institutional constraints. It draws from DeFi but operates in a more permissioned, compliant manner, making it necessarily different from what exists today. Builders should not assume that adapting crypto-native infrastructure for institutions is the default playbook; in many cases, designing from scratch for institutional requirements will prove more effective.
The Continued Opportunity in DeFi
The innovations institutions are adopting today did not originate inside banks or asset managers. They emerged from open networks where builders freely experiment with new market structures, coordination mechanisms, and financial primitives. Institutions are not the primary source of innovation; the permissioned layer typically sits downstream of the open layer.
a16z warns against mistaking a large buyer category for the entire opportunity. Traditional finance is an important customer, but not the only one. Building for institutional requirements is a legitimate and valuable pursuit, but it is only one lane, not the whole road. Companies that endure will be those that clearly understand who they are building for.
If you are building for institutions, fully embrace it—don't assume crypto-native appeal will automatically translate into enterprise adoption. If you are building for open networks, continue doing so; don't abandon your vision just because institutions are the loudest buyers today. These are complementary, not competitive. One adjusts, commercializes, and scales proven innovations; the other discovers them. The open network remains the industry's most important source of experimentation and innovation, and many of the primitives that will shape tomorrow's institutional infrastructure will first appear there.