Woofun AI reports that Andreessen Horowitz, through an analysis by Christian Carvolth and Pyrs Carvolth compiled by Saoirse for Foresight News, has dismantled the prevailing narrative that DeFi and TradFi will inevitably converge into a unified hybrid system. The firm argues that the widely accepted vision of permissionless liquidity integrating with institutional distribution channels to replace legacy systems is largely unfounded. Instead of a merger, the trajectory points toward a divergence where TradFi adopts blockchain technology solely to optimize existing operations, driven by cost advantages rather than an ideological embrace of decentralization.

This selective adoption means financial institutions will incorporate only those DeFi components that fit within their strict operational constraints while discarding elements that conflict with their control mechanisms. The result is not a fusion of the two worlds but the emergence of a new category: programmable financial infrastructure built on blockchain yet optimized specifically for the limitations of institutional operations. Even as regulatory frameworks like the CLARITY Act mature and potentially lower barriers for institutions to access permissionless systems, the fundamental risk-on attitude of TradFi will not change overnight.

Institutions evaluate technologies based on four immutable factors: cost, risk, control capabilities, and suitability for business needs. This reality implies that the crypto industry faces two distinct opportunities rather than a single path forward. The first opportunity lies in helping institutions implement the infrastructure they can currently use, validating technical feasibility through foundational components like atomic settlement, programmable currencies, and tokenized collateral. The second opportunity involves continuously developing an open, native crypto-based financial system that remains outside the current scope of institutional acceptance.

These two paths do not compete; they can develop side by side, with open networks generating foundational modules and market models that are later adopted by institutions. If both paths mature, integration will occur naturally through increasing shared use of the same underlying infrastructure, not through one side completely replacing the other.

The decision-making logic of TradFi is governed by a strict dual-condition framework: a technological component must improve costs, risks, or business distribution, and it must remain compatible with existing control mechanisms and accountability systems. Features such as open access, anonymity, and tamper-proof execution, while satisfying the first criterion of efficiency, consistently fail to meet the second requirement of institutional control.

Consequently, institutions' technology choices follow clear patterns that developers can utilize as guidelines for product design. If a feature creates value only by weakening institutional control, it will likely be modified or rejected regardless of its technical elegance. This standard can be tested against several foundational technologies. Atomic settlement eliminates the time gap between transactions and final liquidation, reduces counterparty risk, and frees up collateral reserved by institutions for pending settlements.

Shared ledgers address one of the biggest hidden costs in back-office operations—reconciliation—making it significantly easier to handle. Programmable currencies support coupon payments, margin call notifications, and automated execution of corporate tasks, eliminating the need for manual instructions. The curve algorithms of automatic market makers (AMM), once stripped of their permissionless framework, can serve as pricing engines for on-chain foreign exchange and tokenized money market fund net values.

Each of these technologies can improve financial performance, reduce operational risks and expenses, without requiring institutions to accept decentralization. Therefore, the nature of projects like JPMorgan's development of permissioned blockchains for institutional deposits, or BlackRock and Franklin Templeton's launch of tokenized money market funds, must be understood correctly.

These are not attempts by companies to explore DeFi; they are using blockchain to carry out existing businesses—interbank settlements, fund inflows and outflows, and distribution of interest-bearing products—simply by upgrading their underlying technical architecture. Such applications make full use of blockchain's features—programmability, transparency, atomic settlement—but deliberately abandon the core characteristics of native DeFi: open access, anonymity, and trustless execution.

This is not a compromise but a deliberate architectural choice that reflects the industry's long-term direction.

It is a fundamental mistake to view the institutional market as merely a larger sales channel for existing DeFi infrastructure, as institutions evaluate protocols differently from native crypto users. When selecting software suppliers and infrastructure partners, they focus on operational risks, compliance controls, and long-term ownership of core systems, adhering strictly to internal standards. Thus, success in the DeFi ecosystem does not guarantee acceptance by institutional clients. Companies rarely purchase the "technically optimal" products; instead, they prefer solutions that best fit their existing business processes, risk models, and procurement procedures.

Any technology entering an environment with strict regulation, strong risk management, and aversion to liability disputes will be reshaped by those conditions. The internet gave rise to enterprise firewalls and private intranets; cloud computing led to private clouds, virtual private clouds, and FedRAMP compliance systems; the same is happening now with artificial intelligence through local deployment, data localization requirements, and model governance standards. Blockchain is no exception. Technological restructuring primarily occurs along two dimensions.

On the compliance aspect, KYC, anti-money laundering, sanctions screening, qualified investor identification, and regulatory reporting requirements leave little room for negotiation for most institutions. Permissionless systems cannot inherently accommodate such rules. Institutions must have the ability to freeze assets, roll back transactions, and identify counterparties. DeFi was not designed around these needs, and compatibility often requires major architectural changes.

While things might improve in the future—for example, the CLARITY Act could help institutions access permissionless systems while meeting regulatory requirements—most institutions currently assess blockchain infrastructure based on control capabilities, accountability mechanisms, and operational risks. On the business value realization aspect, institutions adopt blockchain not because they worship permissionlessness, but because it can reduce costs, minimize reconciliation efforts, open up new distribution channels, and strengthen customer relationships.

Product value propositions must focus on these commercial metrics; otherwise, it is difficult to pass corporate procurement approvals.

Stablecoins serve as a perfect example of this repackaging of infrastructure for commercial value. Banks, payment service providers, and fintech companies increasingly view stablecoins as excellent settlement infrastructure, enabling rapid cross-network and cross-regional flow of dollars.

However, few institutions embrace the entire philosophy behind permissionless finance. They use programmable dollars because of their practical value, not because they intend to rebuild the financial system according to DeFi principles. Circle's development journey is a great illustration of this trend. Its Arc product clearly shows how blockchain infrastructure is being repackaged for institutions, emphasizing compliance, operational control, trusted counterparties, and integration with traditional business systems—not open access and composability.

Its value proposition is not to pursue permissionlessness outright, but to deliver capabilities that institutions can actually use: faster settlement, global coverage, and higher capital efficiency. Even SWIFT is adopting this mindset toward blockchain. By promoting interoperability of tokenized assets, its goal is not to replace existing financial institutions but to optimize how they collaborate through the SWIFT network. The pattern is clear: institutions adopt blockchain to strengthen existing financial networks, not to replace them. This is the path taken whenever mature technologies penetrate large existing markets.

From an industry perspective, if everyone focuses on one path and abandons the other, significant opportunities will be lost, yet from a startup perspective, trying to pursue both paths simultaneously carries high risks. At the ecosystem level, the institutional business track and the open network track can empower each other, but for most teams, these are fundamentally different businesses. Developing for institutions requires familiarity with procurement processes, compliance systems, control strategies, channel partners, and lengthy sales cycles.

Developing for open networks requires continuous optimization around developer ecosystems, liquidity, composability, and network effects. The target customers, marketing strategies, product requirements, and evaluation criteria for these two types of business are usually very different. This does not mean one path is superior to the other; founders should clearly define the market they serve. The intersection of the two paths lies in underlying infrastructure: public chains serve as neutral settlement layers.

Collaborating with institutions to build complementary financial systems does not conflict with each other. With proper planning, they can enhance each other: the licensed track brings transaction volume, industry credibility, and capital; the open track continuously generates innovative components that are later adopted by the licensed track. True integration will occur at the underlying settlement network level, not through one system compromising to another. Even as upper-layer applications become more licensed, public chains will remain increasingly important as universal settlement foundations.

If developers want to enter this emerging field, they have two options: build a new system from scratch or transform existing products. Take networks like Canton as an example: they do not modify existing DeFi code but design from the ground up based on institutions' needs for privacy, compliance, and controllable interoperability. Their goal is not to draw banks into the DeFi ecosystem but to use blockchain for multi-party collaboration while preserving the governance rights, data confidentiality, and operational control that institutions require. Not all institutional services need to be developed from scratch.

Morpho chose a different approach: it did not abandon DeFi's underlying components but continued to optimize products to lower the entry barrier for institutions and asset issuers. For example, Apollo's ACRED fund incorporates Morpho into its on-chain lending strategy, combining native DeFi lending modules with institutional-level distribution, compliance frameworks, and fund structures. The resulting system is neither purely DeFi nor a completely isolated institutional system. Institutions selectively adopt existing crypto infrastructure and repackage it according to their own control, compliance, and distribution requirements.

This new track is tailored to institutional constraints, drawing on DeFi technology but operating under stricter licensing and compliance frameworks, thus differing naturally from current native DeFi. Some teams, like Morpho, have successfully adapted native crypto products for institutional use. But developers should not treat this as the standard solution. Institutions are a group with completely independent needs. In most cases, designing products from the start according to institutional requirements is far more efficient than modifying products originally developed for open networks.

The various innovations currently adopted by institutions did not originate in banks, asset management firms, or traditional financial infrastructure; they all came from open networks where developers can freely experiment with new market structures, collaboration mechanisms, and financial building blocks. This is crucial. Institutions are not the source of industry innovation; the licensed track is often the downstream recipient of innovations from open networks.

This leads to a key strategic conclusion: if the entire industry becomes overly focused on selling products to banks and asset managers, it will make a cognitive error—equating one type of major client with the entire market. Traditional finance is an important client, but it is by no means the only market. Developing products for institutional needs is reasonable and highly valuable, but it is just one path, not the entire solution for the industry. Teams that can sustain themselves will clearly identify their target audience.

The institutional market is vast, but it should not be simply seen as an extension of DeFi. Success in one market does not mean it can be replicated in another. If you choose to develop for institutions, commit fully to it. Do not assume that the popularity of the native crypto market will automatically translate into corporate client orders. Understand your clients deeply, grasp their procurement processes, and develop products systematically based on their needs. If you choose to focus on open networks, stick with it.

Do not give up your original vision just because institutions are currently the most financially powerful buyers. Remember: the two paths complement each other rather than competing. One path is responsible for adapting, commercializing, and scaling mature innovations; the other path is responsible for continuous innovation exploration. Blockchain technology is almost destined to become a foundational component of existing traditional financial systems, but it is not the only future being shaped.

Open networks remain the industry's most important testing and innovation ground, where many of the foundational modules that will support institutional infrastructure in the future will first emerge. Traditional finance will not adopt a complete DeFi system but will only pick out technologies that fit its business model. The opportunity for developers is not to chase all markets at once but to find their own path and act accordingly. In the future, financial infrastructure may be dominated by institutional systems, but many key innovations will still continue to emerge from open networks.