What does DeFi that Wall Street wants look like?

Author: Chloe, ChainCatcher

For years, tokenization has been positioned as the bridge between cryptocurrency and Wall Street. The logic behind everything—putting government bonds on-chain, issuing tokenized funds, digitizing stocks—has always pointed to the same idea: once assets are put on-chain, institutional capital will naturally follow.

But tokenization itself was never the endgame. DWF Ventures believes the real key to unlocking the institutional market isn’t digitalizing assets—it’s financializing their yield.

Since 2025, DeFi’s total value locked (TVL) has climbed from roughly $115 billion at one point to over $237 billion. The main driving force behind this shift is no longer purely speculative retail demand, but real, institutional capital—and RWA. Today, institutions are no longer just waiting; they’re starting to treat DeFi as infrastructure for deployable capital.

You could say the DeFi Wall Street truly wants has shifted from “putting assets on-chain” to “a fixed-income backbone that’s programmable, composable, and able to hedge interest-rate risk.” Now we can already glimpse that this transition has taken place—from TVL and RWA data, institutional protocol examples, the theory of yield tokenization, and the ways 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 start of the year to $237 billion, while the number of active on-chain wallets in the same period actually fell by 22%. DappRadar data makes it clear: what’s driving this surge isn’t retail, but “high-value, low-frequency” institutional capital.

In this structure, the most critical component 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 supplied through protocols such as Aave Horizon, Maple Finance, and Centrifuge, where institutions treat them as collateral for stablecoin loans—forming a “chain-based repo (repurchase agreement)”-style re-collateralization flywheel.

Taking Aave Horizon as an example, by the end of 2025 its RWA market had already accumulated roughly $540 million in asset size. This includes stablecoins such as Superstate’s USCC and RLUSD, as well as Aave’s GHO, along with various U.S. Treasury assets (such as VBILL). Annualized yields are roughly in the 4%–6% range. In essence, this is an “institutional version of a money market fund”: on the front end are tokenized treasuries and notes; on the back end are stablecoin liquidity pools; and in the middle, smart contracts automatically handle interest payments, refinancing, and settlement.

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

In traditional fixed-income markets, bonds are not only tools for holding and collecting interest. They’re also used for repo (repurchase agreements), re-collateralization, splitting, and embedding into structured products—forming a capital-efficiency flywheel. DeFi in 2025 has begun to replicate this logic.

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

Centrifuge, meanwhile, focuses on converting loans for small and medium-sized enterprises (SMEs), trade finance, and accounts receivable into on-chain assets. To date, its ecosystem has managed more than $1 billion in TVL, and it has successfully opened up multiple diversified asset pools—from private credit to highly liquid U.S. Treasuries.

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

Yield tokenization and yield trading markets: Can interest-rate risk be hedged?

If you map Wall Street’s fixed-income market into an architecture diagram, you’d see several key modules: principal and interest can be separated (e.g., zero-coupon bonds, stripped coupons), interest-rate risk can be traded independently and hedged, and liquidity and compliance can be separated—yet still connected via middleware.

In May 2025, an arXiv paper titled “Split the Yield, Share the Risk: Pricing, Hedging and Fixed rates in DeFi” first formally proposed the framework for “yield tokenization”: splitting yield-bearing assets into “principal tokens (PT)” and “yield tokens (YT),” and pricing and hedging interest-rate risk using SDEs (stochastic differential equations) and a no-arbitrage framework.

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). This ensures the PT price reverts to its redemption value at maturity. These mechanisms also allow market participants to allocate liquidity based on their risk preferences—for instance, fixed-rate buyers purchase PT, while yield speculators buy YT.

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

Two real-world dilemmas: privacy and compliance

However, even if DeFi’s TVL surpasses $10 billion and institutional capital flows in at scale, it still gets stuck on two key dilemmas: privacy and compliance.

First dilemma: public-chain positions are transparent, so liquidation points are exposed

On mainstream public chains, every transaction and every address’s holdings are visible to everyone. For institutions, this is extremely risky. Their trading strategies, leverage levels, and liquidation points could be fully understood by counterparties—and even targeted for malicious shorting and liquidations. Once a liquidity squeeze or price volatility occurs, bad actors can place orders against specific addresses to magnify losses. This is one of the reasons institutions are reluctant to fully commit their capital to DeFi.

Here, zero-knowledge proofs may be a possible key solution. The idea is to let institutions prove to regulators that they’re legitimate, without disclosing information to the public. Specifically, regulators can verify that institutions meet regulatory requirements, while other market participants can’t see the institutions’ complete holdings or liquidation points. This is the privacy layer Wall Street truly wants—not “fully anonymous,” but “meeting compliance requirements without leaking trade secrets.”

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

Another red line for institutions is that compliance isn’t a patch after the fact—it’s natively built in. In traditional finance, KYC, sanctions screening, and audit requirements have long been embedded into settlement systems and trading processes. But in many DeFi protocols, these checks still remain at the “front-end entry” or handled by intermediaries, rather than written directly into protocol logic.

What institutions expect is: KYC and sanctions screening shouldn’t be “users uploading ID proof, then relying on trust.” Instead, they should be a module or middleware that verifies identity and sanctions lists on-chain, without exposing complete data. And auditing and regulatory requirements should also be written as “verifiable rules”—for example, certain trades can only be executed if they satisfy compliance conditions, and a given address’s exposure cannot exceed a specified limit.

In its November 2025 report titled 《Tokenization of Financial Assets》, IOSCO explicitly emphasized the need to establish “verifiable compliance rules” on DLT (distributed ledger technology) and a “transparent but controlled audit path.” 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 after-the-fact patches.

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

Returning to the original question—what does DeFi that Wall Street wants look like? First, a more advanced asset settlement and service system that can seamlessly plug into global compliance infrastructure, building an institutional-grade moat. Second, in terms of 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, by using zero-knowledge proofs to embed “verifiable compliance” and “procedural risk controls” into the protocol’s underlying layer, achieving a balance between privacy and regulation.

Replacing traditional finance is never on Wall Street’s options list; instead, it can add a parallel world where capital, risk, and returns are reconfigured more flexibly in a programmable way.