What does DeFi that Wall Street wants look like?

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Author: Chloe, ChainCatcher

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

But tokenization itself has never been the endgame. DWF Ventures believes the real key to unlocking the institutional market is not to digitize assets, but to financialize the yield.

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

You could say that DeFi—the kind Wall Street truly wants—has shifted from “put assets on-chain” to “fixed-income infrastructure that is programmable, composable, and able to hedge interest-rate risk.” Now we can already glimpse that this transformation has taken place, drawing from TVL and RWA data, institutional protocol examples, yield tokenization theory, and the practical implementation of privacy and compliance.

TVL and institutional data: which layer are institutions filling?

In Q3 2025, DeFi’s TVL climbed from about $115 billion at the start of the year to $237 billion, while the number of active wallets on-chain during the same period actually fell by 22%. DappRadar data makes it clear: driving this surge was not retail, but institutional capital described as “high-value, low-frequency.”

Within this structure, the most critical element is RWA. As of the end of March 2026, the total value of RWA reached $27.5 billion. Compared with $8 billion in March 2025, it grew by more than 2.4x within a year. These assets are mainly used as collateral by institutions for stablecoin loans through protocols such as Aave Horizon, Maple Finance, and Centrifuge, forming a “on-chain repo (repurchase agreement)” re-collateralization loop.

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, along with multiple U.S. Treasury asset offerings (e.g., VBILL), with annualized yields roughly in the 4%–6% range. This kind of setup is essentially an “institutional version of money market funds”: the front end is tokenized Treasuries and notes, the back end is a stablecoin liquidity pool, and the middle is handled automatically by smart contracts—paying interest, refinancing, and settling.

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

In traditional fixed-income markets, bonds are not just tools for holding to earn yield. They’re used for repo, re-collateralization, splitting, and embedding into structured products, creating a capital-efficiency flywheel. DeFi in 2025 has begun replicating this logic.

Maple Finance saw its TVL surge in 2025 from $297 million to over $3.1 billion, and at times even approached $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-balance-sheet” stablecoin borrowing and refinancing.

Centrifuge focuses on turning loans to 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 multiple diversified asset pools, extending from private credit to highly liquid U.S. Treasuries.

At the same time, Centrifuge is also deeply integrated with top DeFi protocols. For example, Sky (formerly MakerDAO). Through its collaboration with Centrifuge, MakerDAO can invest its reserves into real-world SME loan assets, providing real yield support for the stablecoin DAI. There’s also Aave: the two teams together built a dedicated RWA market, enabling KYC’d institutional investors to use Centrifuge’s asset instruments as collateral and achieve liquidity circulation across protocols.

Yield tokenization and the yield trading market: can interest-rate risk be hedged?

If you draw Wall Street’s fixed-income markets as an architecture diagram, you’ll see a few 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 too—but 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” first proposed a formal framework for “yield tokenization”: splitting a yield-bearing asset into “principal tokens (PT)” and “yield tokens (YT),” and pricing and hedging interest-rate risk using SDEs (stochastic differential equations) and an arbitrage-free framework.

This design has already been implemented in some protocols. For instance, Pendle Finance uses a specially designed Yield AMM. Its price curve adjusts over time (via a time-decay factor), ensuring the PT price returns to its redemption value at maturity. These mechanisms allow market participants to allocate liquidity based on their risk preferences (e.g., fixed-rate buyers buy PT, yield speculators buy YT).

For institutions, this means yield structures can be “modularized” and directly slotted into traditional asset allocation models (for example, duration over a holding period, DV01, and interest-rate risk contribution). Interest-rate risk is no longer only hedgeable using off-chain futures or IRS; instead, it can be traded directly on-chain using “yield tokens,” allowing interest-rate risk hedging to be completed instantly and transparently—greatly improving capital efficiency.

Two real-world dilemmas: privacy and compliance

However, even if DeFi’s TVL surpasses $10 billion, the large inflow of institutional capital still gets stuck behind two key dilemmas: privacy and compliance.

First dilemma: public-chain positions are transparent—settlement points are exposed

On mainstream public chains, every transaction and every address’s holdings are visible to the outside world. This is extremely high risk for institutions. Trading strategies, leverage levels, and liquidation points could be fully known by counterparties, and even targeted shorting and liquidations could be carried out deliberately. Once a liquidity squeeze or price volatility occurs, bad actors can place orders against specific addresses and amplify losses—one of the reasons institutional capital is still unwilling to fully commit to DeFi.

Here, zero-knowledge proofs may offer a potential key solution. That means institutions can prove to regulators that they are legitimate, while keeping information from being leaked publicly. Specifically, regulators can verify that an institution complies with regulatory requirements, while other market participants cannot see the institution’s complete holdings and liquidation points. This is the privacy layer Wall Street truly wants—not “complete anonymity,” but “meeting compliance requirements without disclosing trade secrets.”

Second dilemma: KYC, sanctions screening, and audits must be embedded directly in the protocol

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

What institutions expect is that KYC and sanctions screening are no longer “users upload identification proof, then rely on trust alone.” Instead, it should be a module or middleware that can verify identities and sanctions lists on-chain without exposing complete data. Also, audit and regulatory requirements should be written directly as “verifiable rules”—for example: a certain transaction can only be executed if it satisfies a specific compliance condition; or an address’s exposure cannot exceed some defined 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 started experimenting with “compliance modules,” embedding KYC, AML, sanctions screening, and regulatory reporting directly at 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 the DeFi Wall Street wants look like? First, it’s a more advanced asset settlement and services system that can seamlessly integrate with global compliance infrastructure, building institutional-grade moats. Second, in terms of yield architecture, it can precisely replicate the interest-rate decomposition and hedging logic of traditional fixed-income markets, achieving modular risk management. Third, on compliance and safety, by embedding “verifiable compliance” and “programmable risk controls” at the protocol’s underlying layer through zero-knowledge proofs, it achieves a balance between privacy and regulation.

Displacing traditional finance has never been among Wall Street’s options; instead, it’s to enable—with an additional parallel world—more flexible, programmable reorganization of capital, risk, and returns.