What does DeFi that Wall Street wants look like?

Author: Chloe, ChainCatcher

For years, tokenization has been positioned as the bridge from crypto to Wall Street. The logic behind everything—from putting government bonds on-chain, issuing tokenized funds, and digitizing stocks—is the same: once assets are 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 digitizing assets, but financializing yield.

Since 2025, DeFi’s total value locked (TVL) has climbed from around $115 billion to more than $237 billion. The main driver behind this shift is no longer purely speculative retail demand, but real institutional capital and RWA. Today, institutions are no longer just watching; they’re beginning to treat DeFi as infrastructure for deployable capital.

In other words, the DeFi Wall Street truly wants has shifted from “putting assets on-chain” to “fixed-income infrastructure that is programmable, composable, and capable of hedging interest-rate risk.” Now we can glimpse that this transformation has already taken place—from TVL and RWA data, examples of institutional protocols, the theory of yield tokenization, and the ways privacy and compliance are actually 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 fell by 22%. DappRadar’s data makes it clear: it wasn’t retail traders driving this surge, but “high-amount, low-frequency” institutional capital.

In this structure, RWA is the most critical component. As of the end of March 2026, the total value of RWAs had reached $27.5 billion. Compared with $8 billion in March 2025, it has grown more than 2.4x in one year. These assets are mainly supported by protocols such as Aave Horizon, Maple Finance, and Centrifuge, which institutions treat as collateral for stablecoin loans—forming a “chain-based repo (repurchase agreement)” re-collateralization flywheel.

Taking Aave Horizon as an example, its RWA market had accumulated about $540 million in assets by the end of 2025. This includes stablecoins such as Superstate’s USCC, RLUSD, and Aave’s GHO, as well as several US Treasury asset offerings (such as VBILL). The annualized yield is roughly in the 4%–6% range. This kind of structure is essentially an “institutional version of a money market fund”: the front end is tokenized treasuries and notes, the back end is a stablecoin liquidity pool, and in between 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 to collect interest; they’re also used in repos (repurchase agreements), re-collateralization, splitting, and embedding into structured products—forming a capital-efficiency flywheel. In 2025, DeFi has begun replicating this logic.

Maple Finance saw its TVL jump from $297 million in 2025 all the way to more than $3.1 billion, and in some periods it was even close to $3.3 billion. The primary 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 converting 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 has successfully opened multiple diversified asset pools, extending from private credit to highly liquid U.S. Treasury instruments.

At the same time, Centrifuge is deeply integrated with top DeFi protocols. For instance, Sky (formerly MakerDAO): through its partnership with Centrifuge, MakerDAO can invest its reserves into real-world SME loan assets, providing tangible yield support for the stablecoin DAI. There’s also Aave: the two teamed up to build a dedicated RWA market, allowing KYC’d institutional investors to use Centrifuge asset certificates as collateral and achieve cross-protocol liquidity circulation.

Yield Tokenization and the Yield Trading Market: Can interest-rate risk be hedged?

If we draw Wall Street’s fixed-income market as an architecture diagram, we’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 still 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.” It splits a yield-bearing asset into “principal token PT (Principal Token)” and “yield token YT (Yield Token),” and uses 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. For example, Pendle Finance uses a purpose-built Yield AMM whose price curve adjusts over time (via a time decay factor), ensuring that the PT price returns to its redemption value at maturity. These mechanisms allow market participants to allocate liquidity according to their risk preferences—for example, fixed-rate seekers buy PT, and yield speculators buy YT.

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

Two Major Real-World Headaches: Privacy and Compliance

However, even if DeFi’s TVL has surpassed $10 billion and institutional capital is flowing in at scale, it’s still blocked by two key dilemmas: privacy and compliance.

First dilemma: On-chain holdings are transparent, and settlement points are exposed

On mainstream public chains, every transaction and wallet holding is visible to the outside world. This is extremely risky for institutions. Trading strategies, leverage levels, and liquidation points could be fully掌握 by counterparties—and even targeted through intentional shorting and liquidation. Once there is a liquidity squeeze or price volatility, malicious actors can place orders targeting specific addresses to amplify losses. This is one of the reasons institutional capital is unwilling to fully commit to DeFi.

Here, zero-knowledge proofs may be the key solution. In other words, let institutions prove to regulators that they are legitimate, but without leaking information 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 built into the protocol itself

Another red line for institutions is that compliance isn’t an after-the-fact patch; it must be natively embedded. 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 at the “front-end entry” or with intermediaries—not directly written into protocol logic.

What institutions expect is: KYC and sanctions screening should no longer be “users upload ID proof, then rely purely on trust,” but instead be a module or middleware that can verify identity and sanctions lists on-chain without exposing complete data. Also, audit and regulatory requirements should be directly written as “verifiable rules.” For example: a trade must be executable only under certain compliance conditions, and an address’s exposure cannot 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,” 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 Look Like for Wall Street?

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

Replacing traditional finance is never an option on the table for Wall Street. Instead, it’s about enabling a parallel world where capital, risk, and returns can be reorganized more flexibly in a programmable way.