News14 July, 20263 min read

DeFi spent years waiting for Wall Street. One of the world's largest VC firms says they don't want it

Andreessen Horowitz's crypto arm says institutions want tokenized assets, not financial systems they can't control.

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Crypto has spent years imagining a neat ending in which Wall Street finally embraces decentralized finance, or DeFi, and the two systems merge.

But a16z crypto, the blockchain-investment arm of Andreessen Horowitz, one of Silicon Valley's largest venture capital firms, says that story is probably fantasy.

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"It's a comforting story. It's also mostly wrong," wrote Christian Crowley, a partner on a16z crypto's go-to-market team, and Pyrs Carvolth, the team's business development lead, in a recent blog post.

Andreessen Horowitz (a16z) manages over $100 billion in assets, making it one of the largest venture capital firms in the world.

Crowley and Carvolth argue that traditional financial institutions do want blockchain. They just don't want the open access, pseudonymous users and loss of control that made DeFi different.

"[...] institutions aren't somehow merging with DeFi. Instead, they're selectively using the parts of DeFi that fit within their operating constraints and discarding the parts that do not; they're reconfiguring DeFi around institutional requirements."

Christian Crowley, Pyrs Carvolth

DeFi has had a rough stretch since the notorious Oct. 10 crypto crash and the subsequent failure of Stream Finance, a yield platform whose collapse further rattled confidence in interconnected lending products.
Total value locked across the sector fell from its November 2021 record of $176 billion to about $74.6 billion at press time, erasing $101.4 billion, or 57.6%, since the peak, per data from DefiLlama.

Banks, asset managers and payment companies will likely take the useful parts, such as faster settlement and programmable money and rebuild them around compliance, the authors claim.

That means JPMorgan, the largest U.S. bank, and asset-management giants BlackRock and Franklin Templeton aren't necessarily moving into DeFi when they launch blockchain-based deposits or tokenized funds. For context:

JPMorgan's Kinexys moves tokenized bank deposits on a private, permissioned ledger.
BlackRock's BUIDL is a Treasury-backed fund tokenized by Securitize on Ethereum but restricted to approved investors only.
Franklin Templeton's BENJI represents shares in a regulated government money-market fund recorded on public chains such as Stellar, rather than an open DeFi protocol.

Instead, they are using the technology to improve familiar businesses with cheaper, faster plumbing, the authors wrote.

Still, as a16z crypto argues, public blockchains "may become increasingly important settlement rails, even as the applications built on top of them become progressively more permissioned."

Update, July 15, 6:29 pm UTC: Omid Malekan, a blockchain author and adjunct professor at Columbia Business School, criticized a16z crypto's argument, saying in an X post that the VC giant had retreated from the pro-decentralization position it promoted eight years ago.

Malekan argued that banks favor permissioned networks because they preserve incumbent control rather than replace financial intermediaries, calling much of the institutional push "fake crypto."

"No wonder this industry is in such a low place. Our once fearless leaders are full of doubt and bending the knee to archaic orgs like...SWIFT?," he wrote.

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