Even as the cryptoasset ecosystem grows, market capitalizations remain almost all time and TradeFi institutions remain a range of products and services, one subset of the crypto ecosystem is still looking for 2021 and 2022 excitement: decentralized financing. This can be a surprise for some crypto-native investors, because the total value has risen to a new record of $ 130 billion according to Defillama research. These deposits, placed and managed in a blockchain or Defi protocol, have been more than doubled since April and reflect the overall shift in both policy guidelines and investor sentiment. Ironically, the growth and deposits in the Defi sector trend remain in the direction of centralization, with three (3) players who dominate the space.
Aave has a TVL of more than $ 68 billion, the largest of each Defi-Leen protocol, uses a Pool-based credit protocol and launched an institutional platform with which larger investors can participate. Morpho and JustLend round the top players in the Defi landscape, but both have considerably lower TVLs and – in some cases – more limited offers. Despite these record levels of deposits and positive racon wind, institutional acceptance and the use of Defi are left behind.
JPMorgan, itself one of the most innovative Tradfi banks via its Kinexys (formerly Onyx) Suite of On-Chain products and services, recently noticed the disappointing progress for both Defi and Tokenized assets by institutions in the Tradfi room. The majority of the activity and growth in Defi in particular comes from retail and/or crypto-native institutions.
Let’s look at a few reasons why Defi, despite its growth and record deposits, still needs better regulations.
Cross-chain interoperability and ratings
A common problem that continues to block a broader use of Defi in broader parts of the economy-Zowel crypto-native as Tradfi are issues related to interoperability and liquidity between multiple chains. Although the most common manifestation of this takes on the form of different ratings for some tokens when they are analyzed over chains, and this includes valuations for stablecoins, there are other problems that Defi has to tackle. Firstly, the traceability and transparency of transactions, tokens and tokenized assets while moving on chains is something that needs to be standardized and improved to obtain more institutional acceptance.
Although consumers have been the most important factors of this recent increase in Defi TVL, institutions of all types of absolute confidence must have that transactions, payments and confirmations can take place as seamlessly as it occurs using current payment rails and options. Just like how Bitcoin has achieved and maintained higher price levels, achieved policy victories and has generated an increased interest rate as soon as companies such as BlackRock entered the space via Spot ETF products, Defi Tradfi companies will need to embrace deficiest options to generate similar growth.
Certainty and enforceability of smart contracts
A continuous issue in the wider cryptoasset ecosystem, not limited to the Defi room, is the still evolving standards and best practices related to auditing and certainty associated with blockchain, cryptoassets and the smart contracts that have used a lot of the layer 2, web 3 and more innovative use cases. With cyber criminals who have already stolen more than $ 2 billion in 2025, according to Defillama, an increase of 77% compared to 2024, the weaknesses of the Defi -Ecosystem remain lucrative for hackers and other criminal elements.
Although the smart contract space has certainly evolved substantially since initially introduced, with many organizations that use these applications, the fact that the standards, transparency and auditability of smart contracts are a work in progress. This status offers various obstacles for institutional acceptance of Defi. First, if organizations cannot trust smart contracts – or at least trust that problems can be solved in time – customers and supervisors will not be on board either. Secondly, especially for listed organizations, if auditability, record assessment and traceability remain questions, authorities such as the SEC (even under the new pro-Crypto regime) will hesitate to approve related projects.
In short, the very smart contracts that Power Defi continue to prove at the most important level continue to prove a point of weakness.
Scale and reliability
Last but not least, the Defi sector – even with almost $ 200 billion in total value – remains a miniscule group of the total credit market and financial ecosystem. For contextual purposes, JP Morgan Chase reported the daily volume of payment processing of $ 10 trillion in a recent release of profit. Crypto and crypto-adjacent products and services have experienced considerable growth, acceptance and acceptance since the last bear market starts due to the collapse of FTX, but are still for all purposes of the financial world.
To tackle this, in addition to the points mentioned above, are directly related to the ability of Defi protocols to scale up to meet the demand of the customer and to tackle the reliability, reversibility and potential hackability of smart contracts that underlie the protocols. A crucial part of this process will contain both the processing of the financial sector of the Tradfi and improving mechanisms mandated by regulatory trade such as KYC and AML guarantees. Since the policy continues to run and produce tail winds versus headwind, it is reasonable to assume that this will take place, but investors and policy makers must remain careful before the widespread use is that the Defi infrastructure has not yet been prepared.
Defi continues to grow, but the work remains to attract institutional buy-in.
