What does DeFi look like that Wall Street wants?

Author: Chloe, ChainCatcher

For years, tokenization has been positioned as the bridge for cryptocurrencies to Wall Street. The logic behind putting government bonds on-chain, issuing tokenized funds, and digitizing stocks all points to one conclusion: as long as assets are on-chain, institutional funds will naturally follow.

However, tokenization itself has never been the endgame. DWF Ventures believes that the key to unlocking the institutional market is not the digitization of assets, but the financialization of yields.

Since 2025, the total value locked (TVL) in DeFi has surged from about $115 billion to over $237 billion, driven primarily not by pure speculation from retail investors, but by real institutional funds and RWA. Today, institutions are no longer just observing; they are starting to view DeFi as an infrastructure for deploying capital.

It can be said that what Wall Street truly wants to see in DeFi has shifted from "putting assets on-chain" to "programmable, reconfigurable, and hedging interest rate risks" fixed income infrastructure. We can now glimpse this transformation through TVL and RWA data, examples of institutional protocols, theories of yield tokenization, 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 rose from about $115 billion at the beginning of the year to $237 billion, while the number of active wallets on-chain decreased by 22% during the same period. DappRadar data clearly shows that this wave of growth is driven not by retail investors, but by "high-value, low-frequency" institutional funds.

In this structure, the most critical aspect is RWA: as of the end of March 2026, the total value of RWA reached $27.5 billion, up from $8 billion in March 2025, growing more than 2.4 times in one year. These assets are primarily used as collateral for stablecoin loans by institutions through protocols like Aave Horizon, Maple Finance, and Centrifuge, forming a "repo on-chain" refinancing flywheel.

Taking Aave Horizon as an example, its RWA market had accumulated about $540 million in asset size by the end of 2025, including stablecoins like Superstate's USCC, RLUSD, and Aave's GHO, as well as various US Treasury assets (such as VBILL), with annualized yields ranging from 4% to 6%. This structure is essentially an "institutional version of a money market fund": the front end consists of tokenized government bonds and bills, the back end is a stablecoin liquidity pool, and the middle is handled automatically by smart contracts for interest payments, refinancing, and liquidation.

From "Holding" to "Operating": Are Institutions Playing On-chain Repo or Fixed Income?

In the traditional fixed income market, bonds are not just tools for holding and collecting interest; they can be used for repo, re-collateralization, splitting, and embedding into structured products, forming a flywheel of capital efficiency. DeFi in 2025 has begun to replicate this logic.

Maple Finance's TVL soared from $297 million in 2025 to over $3.1 billion, with some periods even approaching $3.3 billion, primarily driven by institutions entering the RWA loan market, tokenizing private loans and corporate loans for "over-the-counter" stablecoin lending and refinancing.

Centrifuge focuses on converting SME loans, trade financing, and accounts receivable into on-chain assets. To date, its ecosystem has managed over $1 billion in TVL and successfully developed multiple diversified asset pools, extending from private credit to highly liquid US Treasury bonds.

At the same time, Centrifuge has deeply integrated with top DeFi protocols, such as Sky (formerly MakerDAO). Through collaboration with Centrifuge, MakerDAO can invest its reserves in real enterprise loans, providing substantial yield support for the stablecoin DAI; and with Aave, the two have jointly created a dedicated RWA market, allowing KYC-compliant institutional investors to use Centrifuge's asset tokens as collateral, achieving cross-protocol liquidity cycles.

Yield Tokenization and Yield Trading Market: Can Interest Rate Risks Be Hedged?

If we were to diagram Wall Street's fixed income market, we would see several key modules: principal and interest can be separated (e.g., zero-coupon bonds, stripped coupons), interest rate risks can be independently traded and hedged, and liquidity and compliance can be separated but 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": breaking down yield assets into "Principal Tokens (PT)" and "Yield Tokens (YT)", and using SDE (stochastic differential equations) and no-arbitrage frameworks to price and hedge interest rate risks.

This design has already been implemented in some protocols. For example, Pendle Finance uses a specially designed Yield AMM, whose price curve adjusts over time (time decay factor), ensuring that PT prices return to their redemption value at maturity, and these mechanisms allow market participants to allocate liquidity based on risk preferences (e.g., fixed-rate demanders buy PT, yield speculators buy YT).

For institutions, this means that yield structures can be "modularized," directly fitting into traditional asset allocation models (e.g., duration, DV01, interest rate risk contribution); interest rate risks can no longer only be hedged using off-chain futures or IRS, but can be directly traded on-chain using "yield tokens" for immediate and transparent interest rate risk hedging, significantly enhancing capital efficiency.

Two Major Dilemmas in Reality: Privacy and Compliance

However, even with DeFi's TVL surpassing $10 billion, the large-scale inflow of institutional funds is still stuck in two key dilemmas: privacy and compliance.

First Dilemma: Public Chain Holdings Are Transparent, Liquidation Points Are Exposed

On mainstream public chains, every transaction and address holding is visible to the outside world, which poses a high risk for institutions. Trading strategies, leverage levels, and liquidation points can be fully grasped by counterparties, potentially targeted for short selling and liquidation. In the event of a liquidity crunch or price volatility, malicious actors can place orders against specific addresses, amplifying losses, which is one reason institutional funds are reluctant to fully commit to DeFi.

Here, zero-knowledge proofs may become a key solution. This would allow institutions to prove their legitimacy to regulators without disclosing information externally. Specifically, regulators can verify that institutions meet regulatory requirements, while other market participants cannot see the institutions' complete holdings and liquidation points. This is the privacy layer that Wall Street truly desires—not "complete anonymity," but rather "meeting compliance requirements without disclosing trade secrets."

Second Dilemma: KYC, Sanction Screening, and Audits Must Be Embedded in the Protocol Itself

Another red line for institutions is that compliance is not an afterthought but a native built-in feature. In traditional finance, KYC, sanction screening, and audit requirements have long been embedded in settlement systems and trading processes, but in many DeFi protocols, these checks still remain at the "front-end entry" or "intermediary level," rather than being directly written into the protocol logic.

What institutions expect is that KYC and sanction screening are no longer "users uploading identification, relying solely on trust," but rather a module or middleware that can verify identity and sanction lists on-chain without exposing complete data; and that audit and regulatory requirements can also be directly written as "verifiable rules," for example: 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," allowing KYC, AML, sanction screening, and regulatory reporting to be directly embedded in the protocol layer, rather than relying on external tools or after-the-fact patches.

Conclusion: What Does Wall Street Want DeFi to Look Like?

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 integrate with global compliance infrastructure, building an institutional-grade moat; second, in terms of yield structure, the ability to accurately replicate the interest rate disaggregation and hedging logic of traditional fixed income markets, achieving risk modularization; third, in compliance and security, embedding "verifiable compliance" and "programmatic risk control" into the protocol's underlying layer through zero-knowledge proofs, achieving a balance between privacy and regulation.

Replacing traditional finance has never been an option for Wall Street; rather, it is about being able to flexibly restructure capital, risk, and returns in a programmable way in a parallel world.