The DeFi Big Bang: Navigating the Mainstream Merger - Preet Harquissandas

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4 days ago
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Motivation

Decentralised finance (DeFi) has evolved from a niche blockchain initiative into a significant force that is transforming the flow of money. Initially, it attracted only cryptocurrency enthusiasts, but it now garners attention from major entities, including investment banks and sovereign wealth funds. As reported by Precedence Research (2025), the global DeFi market is projected to rise from USD 32.36 billion in 2025 to USD 1.56 trillion by 2034, reflecting an astonishing 53.8% compound annual growth rate (CAGR).

This swift expansion prompts a crucial inquiry: Is it possible for DeFi to safely integrate into mainstream finance, or will the lack of regulation heighten systemic risk?

Research Questions

How is DeFi moving from a speculative experiment to a key part of financial markets?
What effects does institutional adoption and tokenization have for traditional players?
How can regulation, governance, and interoperability change to support secure mainstream growth?

Section 1 – Context: The Growth Curve

DeFi is quickly evolving from hype to a solid foundation. In 2020, DeFi protocols had around USD 15 billion in total value locked (TVL). By 2024, that number surpassed USD 120 billion, according to Chainalysis and DefiLlama. Institutional participation makes up nearly two-thirds of transaction volume now, which shows the sector’s maturity.

DeFi’s rapid growth is driven by three main factors:

Tokenisation of real-world assets (RWAs), including private credit and real estate.
Smart contract automation, which reduces friction and settlement delays.
Institutional liquidity, as traditional players use blockchain for treasury, settlement, and collateral management.

The question now isn’t whether DeFi will remain, but how it will coexist with traditional finance.

Section 2 - Theories & Rhetoric: From Hype to Hybridisation

Two contrasting narratives define the DeFi debate. Optimists view it as the next step in finance: open, programmable, and borderless. They point to efficiency gains, as DeFi settlements happen in seconds compared to days in traditional systems. They also highlight that it improves access for unbanked populations.

Sceptics, on the other hand, warn of weaknesses. They mention risks like smart contract exploits, governance capture, and regulatory arbitrage. The Oliver Wyman (2023) report states that “institutional DeFi can reshape capital markets, but only if compliance and governance frameworks evolve in parallel.”

The trend is clear: institutional players are taking over from retail users. Between 2021 and 2025, the share of institutional participation is expected to rise from 10% to 65%, while retail participation decreases. This indicates a move from speculative activities to organized financial operations that follow regulations.

From a theoretical view, DeFi shows both disintermediation and re-intermediation. It eliminates banks as middlemen but introduces new protocol intermediaries such as DAOs, validators, and oracle providers. The power dynamics change, but intermediation continues in different ways.

Section 3 - Alternatives & Regional Case Study: Europe & the UK

The EU and UK are exploring ways to connect innovation and regulation. The Markets in Crypto-Assets (MiCA) framework provides legal clarity for tokenized assets. At the same time, the FCA’s Digital Securities Sandbox is examining blockchain-based settlement systems. Meanwhile, large institutions like HSBC and Société Générale have issued tokenized bonds. This shows a mix of DeFi and TradFi models.

As shown above, stablecoins and real estate account for over half of tokenised asset value in 2025. This indicates investor interest in on-chain stability and tangible collateral. The UK’s early regulatory clarity could help it become a centre for compliant DeFi, as long as consumer protection and AML frameworks develop alongside it.

Section 4 - Challenges & Risks

DeFi’s growth has important implications:

Regulatory ambiguity, the classification of DeFi protocols as securities or utilities is still unclear.
Smart-contract vulnerabilities, in 2024, more than USD 1.3 billion was lost to protocol exploits.
Liquidity fragmentation, cross-chain interoperability is still in its early stages.
Governance capture, large holders in protocol voting threaten decentralization.

Oliver Wyman argues that “scaling DeFi safely will require modular architectures that combine decentralized settlement with regulated oversight.” In short, the road to institutional DeFi depends on compliance.

Section 5 - Outlook & Strategic Implications

Between 2025 and 2028, expect a hybrid phase. Major banks will test tokenised treasuries and securities. DeFi protocols will develop permissioned layers for regulated capital. Real-world assets will create the next trillion-dollar tokenised market. By 2030, DeFi could create a parallel financial system that processes global liquidity at internet speed, as long as safeguards and audits keep pace.

For existing players, the path forward is clear:

Collaborate with DeFi platforms or risk losing out; this partnership is becoming essential
Invest in tokenisation infrastructure such as custody, data, and compliance.
Embrace modular regulation to allow controlled decentralisation with on-chain transparency.

Conclusion

DeFi’s move from being a fringe innovation to a key part of finance is real, but it is fragile. Its success depends not just on blockchain code, but also on trust, regulation, and interoperability. The next decade won’t see DeFi replacing traditional finance; instead, we will see traditional finance becoming DeFi-enabled. Those who grasp this change early will shape the new global financial landscape.

Bibliography

Shaw, J. (2025). Top 4 Trends Set to Disrupt the Financial Services Industry in 2025. | Kadence. [online] Kadence.com. Available at: https://kadence.com/en-us/knowledge/top-4-trends-set-to-disrupt-the-financial-services-industry-in-2025/
Ho, M. (2023). How Decentralized Finance Can Reshape Capital Markets. [online] www.oliverwyman.com. Available at: https://www.oliverwyman.com/our-expertise/insights/2023/apr/decentralized-finance-reshape-capital-markets.html.
Intelligence, M. (2025). Decentralized Finance (DeFi) Market Size & Share Analysis - Industry Research Report - Growth Trends. [online] www.mordorintelligence.com. Available at: https://www.mordorintelligence.com/industry-reports/decentralized-finance-defi-market.
Team, C. (2025). The Chainalysis 2025 Global Adoption Index. [online] Chainalysis. Available at: https://www.chainalysis.com/blog/2025-global-crypto-adoption-index/
Jakub Dziadkowiec (2025). DeFi in 2025: Trends, Challenges, and What’s Next for Q2. [online] BeInCrypto. Available at: https://beincrypto.com/defi-2025-trends-challenges-q2/.