What does DeFi that Wall Street wants look like?

Author: Chloe, ChainCatcher

For years, tokenization has been positioned as the bridge that takes crypto to Wall Street. The logic behind putting government bonds on-chain, issuing tokenized funds, and digitizing stocks has all pointed in the same direction: as long as the assets are on-chain, institutional money will naturally follow.

But tokenization itself has never been the endgame. DWF Ventures believes that the real key to unlocking the institutional market is not digitizing assets, but financializing returns.

Since 2025, the total value locked (TVL) in DeFi has climbed from around $115 billion at one point to over $237 billion. The main driving force behind this is no longer pure speculative retail interest, but real institutional capital and RWA. Today, institutions are no longer just watching from the sidelines—they’re starting to see DeFi as infrastructure for deployable capital.

You could say that the DeFi Wall Street truly wants has shifted from “putting assets on-chain” to “fixed-income infrastructure that’s programmable, composable, and able to hedge interest-rate risk.” Now we can already glimpse that this transformation has taken place—from TVL and RWA data, institutional protocol examples, the theory of tokenizing yield, and the way privacy and compliance are being implemented.

TVL and Institutional Data: Which layer are institutions filling?

In Q3 2025, DeFi’s TVL rose from about $115 billion at the beginning of the year to $237 billion, while the number of active on-chain wallets during the same period fell by 22%. DappRadar data clearly shows that it wasn’t retail users driving this surge, but “high-value, low-frequency” institutional capital.

In this structure, the most crucial is RWA: as of the end of March 2026, the total value of RWAs reached $27.5 billion. Compared with $8 billion in March 2025, that’s more than a 2.4x increase within a year. These assets are mainly used as collateral for stablecoin loans by institutions through protocols such as Aave Horizon, Maple Finance, and Centrifuge—forming a redepositing flywheel of “on-chain repo (repurchase agreements).”

Taking Aave Horizon as an example, its RWA market had already accumulated about $540 million in asset size by the end of 2025. It includes stablecoins such as Superstate’s USCC, RLUSD, and Aave’s GHO, as well as multiple U.S. Treasury asset holdings (e.g., VBILL), with an annualized return rate of roughly 4%–6%. In practice, this structure is essentially an “institutional money market fund”: the front end is tokenized treasuries and notes, the back end is a stablecoin liquidity pool, and smart contracts automatically handle interest payments, refinancing, and settlement in between.

From “holding” to “operating”: Are institutions playing on-chain repo or fixed income?

In traditional fixed-income markets, bonds are not just instruments for earning interest by holding—they’re also used for repo (repurchase agreements), re-collateralization, splitting, and embedding into structured products, creating a flywheel of capital efficiency. DeFi in 2025 has started to replicate this logic.

Maple Finance’s TVL jumped from $297 million in 2025 to more than $3.1 billion, and in some periods it was even close to $3.3 billion. The main driver was institutions entering the RWA lending market: after tokenizing private loans and corporate loans, they were used for “off-balance-sheet” stablecoin lending and refinancing.

Centrifuge, meanwhile, focuses on converting SME (small- and medium-sized enterprise) loans, trade financing, and accounts receivable into on-chain assets. To date, its ecosystem has managed more than $1 billion in TVL and has successfully opened up multiple diversified asset pools, extending from private credit into highly liquid U.S. Treasury assets.

At the same time, Centrifuge is also deeply integrated with top DeFi protocols. For example, Sky (formerly MakerDAO). Through collaboration with Centrifuge, MakerDAO can invest its reserves into real-world enterprise loan assets, providing real yield support for the stablecoin DAI. There’s also Aave: the two have teamed up to build a dedicated RWA market, enabling KYC-compliant institutional investors to use Centrifuge’s asset certificates as collateral, achieving a cross-protocol liquidity loop.

Tokenizing Yield and Building Yield Trading Markets: Can interest-rate risk be hedged?

If you draw Wall Street’s fixed-income market as an architecture diagram, you’ll 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 they can still be connected through middleware.

In May 2025, an arXiv paper titled “Split the Yield, Share the Risk: Pricing, Hedging and Fixed rates in DeFi” for the first time proposed a formal framework for “yield tokenization”: splitting yield-bearing assets into “Principal Tokens (PT)” and “Yield Tokens (YT),” and using SDEs (stochastic differential equations) and an arbitrage-free 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. Its price curve adjusts over time (via a time-decay factor), ensuring that the PT price reverts to its redemption value at maturity. These mechanisms allow market participants to allocate liquidity according to their risk preferences—e.g., fixed-rate seekers buy PT, while yield speculators buy YT.

For institutions, this means yield structures can be “modularized,” directly plugged into traditional asset allocation models (e.g., duration over the holding period, DV01, interest-rate risk contribution). Interest-rate risk is no longer limited to hedging via off-chain futures or IRS—now it can be traded directly on-chain as “yield tokens,” completing interest-rate risk hedging instantly and transparently, greatly improving capital efficiency.

Two Major Real-World Bottlenecks: Privacy and Compliance

However, even if DeFi’s TVL surpasses $10 billion and institutional capital flows in at scale, it’s still constrained by two key bottlenecks: privacy and compliance.

First bottleneck: Public chain holdings are transparent, and settlement points are exposed

On mainstream public chains, every transaction and address holding is visible to everyone, which is extremely risky for institutions. Trading strategies, leverage levels, and liquidation points could be fully known by counterparties—and even be specifically targeted for shorting and liquidation. If a liquidity squeeze or price volatility occurs, malicious actors can place orders targeting specific addresses to magnify losses. This is one of the reasons institutional capital is still hesitant to fully commit to DeFi.

Here, zero-knowledge proofs may be a promising solution. The idea is to let institutions prove their legitimacy to regulators without leaking information to the public. Specifically, regulators can verify that an institution complies with regulatory requirements, while other market participants cannot see the institution’s complete holdings or liquidation points. This is the privacy layer Wall Street truly wants—not “complete anonymity,” but “meeting compliance requirements without exposing trade secrets.”

Second bottleneck: KYC, sanctions screening, and audits must be embedded into the protocol itself

Another institutional red line is that compliance must not be an after-the-fact patch; it must be natively built in. In traditional finance, KYC, sanctions screening, and audit requirements have long been embedded into settlement systems and trading workflows. But in many DeFi protocols, these checks still remain in the “front-end entry” or “intermediary entities,” rather than being directly written into protocol logic.

What institutions expect is: KYC and sanctions screening should no longer be “users upload ID proof, then rely on trust,” but rather a module or middleware that can verify identities and sanctions lists on-chain without exposing complete data. And audit and regulatory requirements can also be written directly as “verifiable rules.” For example: a particular transaction must only be executed if it satisfies certain compliance conditions; a particular address’s exposure must not exceed a specified limit.

In its November 2025 report “Tokenization of Financial Assets,” IOSCO explicitly emphasizes 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, instead of relying on external tools or after-the-fact patches.

Conclusion: What does the DeFi Wall Street wants look like?

Returning to the original question: what does DeFi that Wall Street wants look like? First, it’s a more advanced system for asset settlement and services—able to seamlessly plug into global compliance infrastructure, building institutional-grade moats. Second, in yield architecture, it can precisely replicate the interest-rate decomposition and hedging logic of traditional fixed-income markets, achieving risk modularization. Third, on compliance and security, it embeds “verifiable compliance” and “programmatic risk controls” into the protocol’s underlying layer through zero-knowledge proofs—achieving a balance between privacy and regulation.

Replacing traditional finance is never on Wall Street’s options menu. Instead, it exists in another parallel world—restructuring capital, risk, and returns in a more flexible, programmable way.