Replacing traditional finance has never been an option on Wall Street. Instead, it's about having a parallel world where capital, risk, and return can be restructured more flexibly in a programmable way.
Article by: Chloe
Article source: ChainCatcher
For years, tokenization has been positioned as a bridge for cryptocurrencies to reach Wall Street. Putting government bonds on the blockchain, issuing tokenized funds, and digitizing stocks all point to the same logic: as long as assets are on the blockchain, institutional funds will naturally follow.
But tokenization itself is never the end game. DWF Ventures believes that the key to truly opening up the institutional market is not digitizing assets, but financializing returns.
Since 2025, the total value locked (TVL) in DeFi has surged from approximately $115 billion to over $237 billion. The main driving force behind this surge is no longer purely speculative retail investors, but rather real institutional funds and RWA. Today, institutions are no longer just observing, but are beginning to view DeFi as an infrastructure for deployable capital.
It's fair to say that what Wall Street truly wants to see in DeFi has shifted from "putting assets on the blockchain" to "programmable, reconfigurable, and hedging interest rate risk" fixed-income infrastructure. We can now glimpse this transformation through TVL and RWA data, institutional protocol examples, yield tokenization theory, and the implementation of privacy and compliance measures.
TVL and Institutional Data: Which layer are institutions filling?
In the third quarter of 2025, DeFi's TVL climbed from approximately $115 billion at the beginning of the year to $237 billion, while the number of active on-chain wallets decreased by 22% during the same period. DappRadar data clearly shows that this surge was not driven by retail investors, but by institutional funds with "high amounts and low frequency".
The most crucial element in this structure is RWA: as of the end of March 2026, the total value of RWA had reached $27.5 billion, a more than 2.4-fold increase compared to $8 billion in March 2025. These assets are primarily used by institutions as collateral for stablecoin loans through protocols such as Aave Horizon, Maple Finance, and Centrifuge, forming a re-collateralization flywheel within an "on-chain repo (with buyback protocol)".
Taking Aave Horizon as an example, its RWA market had accumulated approximately $540 million in assets by the end of 2025, including stablecoins such as Superstate's USCC, RLUSD, and Aave's GHO, as well as multiple US Treasury assets (such as VBILL), with an annualized yield of approximately 4-6%. This type of structure is essentially an "institutional version of a money market fund": the front end consists of tokenized government bonds and notes, the back end is a stablecoin liquidity pool, and smart contracts automatically handle interest payments, refinancing, and liquidation.
From "Holding" to "Operating": Are Institutions Playing with On-Chain Repos or Fixed Income?
In the traditional fixed-income market, bonds are not just tools for holding and collecting interest; they are used for repos (with repurchase agreements), re-collateralization, splitting, and embedding in structured products, forming a flywheel of capital efficiency. DeFi in 2025 has begun to replicate this logic.
Maple Finance's TVL surged from $297 million in 2025 to over $3.1 billion, and even approached $3.3 billion at times. The main driver was institutions entering the RWA lending market and tokenizing private and corporate loans for "off-exchange" stablecoin lending and refinancing.
Centrifuge focuses on transforming SME loans, trade finance, and accounts receivable into on-chain assets. To date, its ecosystem manages over $1 billion in TVL and has successfully developed multiple diversified asset pools, extending from private lending to highly liquid U.S. Treasury bonds.
At the same time, Centrifuge has also deeply integrated with top DeFi protocols, such as Sky (formerly MakerDAO). Through its partnership with Centrifuge, MakerDAO can invest its reserves in loans to real businesses, providing substantial yield support for the stablecoin DAI. There is also Aave, where the two have jointly created a dedicated RWA marketplace, allowing institutional investors who have passed KYC to use Centrifuge's asset certificates as collateral to achieve cross-protocol liquidity circulation.
Yield tokenization and yield trading markets: Can interest rate risk be hedged?
If you were to draw a diagram of the Wall Street fixed income market, you would see several key modules: principal and interest can be separated (e.g., zero-coupon bonds, stripped coupons), interest rate risk can be traded and hedged independently, and liquidity and compliance can be separated, yet connected through middleware.
In May 2025, an arXiv paper titled "Split the Yield, Share the Risk: Pricing, Hedging and Fixed rates in DeFi" first proposed a formal framework for "yield tokenization": splitting yield assets into "principal tokens (PT)" and "yield tokens (YT)," and using SDE (stochastic differential equations) and a no-arbitrage framework to price and hedge interest rate risk.
This design has already been implemented in some protocols. Taking Pendle Finance as an example, Pendle uses a specially designed Yield AMM whose price curve adjusts over time (time decay factor) to ensure that the price of PT returns to its redemption value at maturity. These mechanisms allow market participants to allocate liquidity according to their risk preferences (e.g., fixed-rate demanders buy PT, yield speculators buy YT).
For institutions, this means that the yield structure can be "modularized" and directly applied to traditional asset allocation models (such as duration, DV01, and interest rate risk contribution); interest rate risk can no longer be hedged only with off-chain futures or IRS, but can be adjusted by trading "yield tokens" directly on-chain, completing interest rate risk hedging instantly and transparently, and greatly improving capital efficiency.
Two major dilemmas in reality: privacy and compliance
However, even though DeFi's total value added (TVL) has surpassed $10 billion, the massive inflow of institutional funds is still hampered by two key dilemmas: privacy and compliance.
The first challenge: Public blockchain holdings are transparent, and liquidation points are readily available.
On mainstream public blockchains, every transaction and address's holdings are publicly visible, posing an extremely high risk to institutions. Trading strategies, leverage levels, and liquidation points can be completely controlled by counterparties, and even targeted for short and liquidation. In the event of a liquidity crunch or price volatility, malicious actors can place orders against specific addresses, amplifying losses. This is one of the reasons why institutional funds are reluctant to fully invest in DeFi.
Zero-knowledge proofs may be a key solution here. This allows institutions to prove their legitimacy to regulators without disclosing information to outsiders. Specifically, regulators can verify compliance, while other market participants cannot see the institution's complete holdings and liquidation points. This is precisely the layer of privacy Wall Street truly desires—not "complete anonymity," but rather "meeting compliance requirements without revealing trade secrets."
The second dilemma: KYC, sanctions screening, and auditing must be embedded in the protocol itself.
Another red line for institutions is that compliance is not an afterthought, but rather something natively built in. In traditional finance, KYC, sanctions screening, and auditing requirements have long been embedded in settlement systems and transaction processes. However, in many DeFi protocols, these checks remain at the "front-end entry point" or "intermediary institution," rather than being directly written into the protocol logic.
The institutions expect that KYC and sanctions screening will no longer be "users upload proof of identity and then rely solely on trust", but rather that a module or middleware can verify identity and sanctions lists on the blockchain without exposing complete data; and that audit and regulatory requirements can be directly written as "verifiable rules", such as: a transaction must be executed under certain compliance conditions, or the exposure of a certain address must not exceed a certain limit.
In its November 2025 report, "Tokenization of Financial Assets," IOSCO explicitly emphasized the need to establish "verifiable compliance rules" and "transparent but controlled audit paths" on DLT (Distributed Ledger Technology). Some institutional DeFi platforms have begun experimenting with "compliance modules," embedding KYC, AML, sanctions screening, and regulatory reporting directly into the protocol layer, rather than relying on external tools or post-hoc patches.
Conclusion: What does DeFi look like that Wall Street wants?
Returning to the initial question, what does Wall Street want DeFi to look like? First, a more advanced asset clearing and service system that can seamlessly connect to global compliant infrastructure, building an institutional-level moat; second, in terms of yield structure, it can accurately replicate the interest rate decomposition and hedging logic of the traditional fixed-income market, achieving modular risk; third, in terms of compliance and security, it can embed "verifiable compliance" and "programmatic risk control" into the underlying protocol through zero-knowledge proofs, achieving a balance between privacy and regulation.
Replacing traditional finance has never been an option on Wall Street. Instead, it's about having a parallel world where capital, risk, and return can be restructured more flexibly in a programmable way.
