Even as the cryptoasset ecosystem grows, market capitalizations remain near all-time-highs, and TradFi institutions continue to deploy an array of products and services one subset of the crypto ecosystem is still looking to recover 2021 and 2022 excitement: decentralized finance. This may come as a surprise to some crypto-native investors, as the total value locked has risen to a new record of $130 billion according to research by DeFiLlama. These deposits, placed and managed in a blockchain or DeFi protocol have more than doubled since April, and reflect the overall shift in both policy directives and investor sentiment. Ironically enough the growth and deposits in the DeFi sector continue to trend toward centralization, with three (3) players dominating the space.
Aave possess a TVL of more than $68 billion, which is the largest of any DeFi lending protocol, leverages a pool-based lending protocol, and in August launched an institutional platform allowing larger investors to participate. Morpho and JustLend round out the top players in the DeFi landscape, but both have substantially lower TVL’s and – in some cases – more limited offerings. In spite of these record levels of deposits, and positive tailwinds, institutional adoption and utilization of DeFi continues to lag.
JPMorgan, itself one of the most innovative TradFi banks via its Kinexys (formerly Onyx) suite of on-chain products and services, has recently noted the disappointing progress for both DeFi and tokenized assets by institutions in the TradFi space. Notably, the bulk of the activity and growth in DeFi has come from retail and/or crypto-native institutions.
Let’s take a look at a few reasons why DeFi, despite its growth and record deposits, still needs better regulation.
Cross-chain Interoperability And Valuations
A common issue that continues to stall wider utilization of DeFi across broader areas of the economy – both crypto-native and TradFi – are issues related to interoperability and liquidity across multiple chains. While the most common manifestation of this takes the form of differing valuations for some tokens when analyzed across chains, and this includes valuations for stablecoins, there are other issues that DeFi needs to address. Firstly, the traceability and transparency of transactions, tokens, and tokenized assets as they move across chains is something that will need to be standardized and improved upon to obtain more institutional adoption.
Additionally, although consumers have been the primary drivers of this recent uptick in DeFi TVL, institutions of all kinds need to have absolute confidence that transactions, payments, and confirmations can occur as seamlessly as occur using current payment rails and options. Much like how bitcoin has achieved and maintained higher price levels, obtained policy victories, and generated increased interest once firms like Blackrock entered the space via spot ETF products, DeFi will need TradFi firms to embrace DeFi-first options to generate similar growth.
Assurance And Enforceability Of Smart Contracts
An ongoing issue in the wider cryptoasset ecosystem, not limited to the DeFi space, is the still-evolving standards and best practices related to auditing and assurance connected to blockchain, cryptoassets, and the smart contracts that power many of the Layer 2, Web 3, and more innovative use cases that have deployed in the 2024-2025 timespan. With cybercriminals already having stolen over $2 billion in 2025, according to DeFiLlama, a 77% increase from 2024, the weaknesses of the DeFi ecosystem continue to prove lucrative for hackers and other criminal elements.
While the smart contract space has certainly evolved substantially since initially introduced, with many organizations leveraging these applications, the fact remains that the standards, transparency, and auditability of smart contracts is a work in progress. This status provides several obstacles to institutional adoption of DeFi. First, if organizations cannot trust smart contracts – or at least trust that issues can be remediated in a timely manner – customers and regulators will not be on board either. Secondly, especially for publicly traded organizations, if auditability, record-keeping, and traceability remain questions, bodies such as the SEC (even under the new pro-crypto regime) will be hesitant to approve related projects.
In short, the very smart contracts that power DeFi at the most important level continue to prove a point of weakness.
Scale And Reliability
Last but not least the DeFi sector – even with nearly $200 billion in total value locked – remains a miniscule fraction of the overall lending market and financial ecosystem. For contextual purposes, JP Morgan Chase reported daily payment processing volume of $10 trillion in a recent earnings release. Crypto and crypto-adjacent products and services have experienced significant growth, adoption, and acceptance since the last bear market kicked off by the collapse of FTX, but still are – for all intents and purposes – a fringe component of the financial world.
To address this, in addition to the points raised above, are directly related to the ability of DeFi protocols to scale to meet customer demand as well as addressing the reliability, reversibility, and potential hackability of smart contracts underpinning the protocols. A critical component of this process will entail both working the TradFi financial sector as well as improving regulatory-mandated mechanisms such as KYC and AML safeguards. As policy continues to pivot and produce tailwinds versus headwinds it is reasonable to assume this will occur, but investors and policymakers should remain cautious before pushing for widespread utilization is the DeFi infrastructure is not yet prepared.
DeFi continues to grow, but work remains to attract institutional buy-in.
