DeFi Growth and Challenges

Even as the cryptoasset ecosystem grows and market capitalizations remain near all-time highs, one subset of the crypto ecosystem is still looking to recover from the excitement of 2021 and 2022: decentralized finance (DeFi). This may come as a surprise to some crypto-native investors, as the total value locked (TVL) in DeFi 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 an overall shift in policy directives and investor sentiment. Ironically, the growth in deposits in the DeFi sector continues to trend toward centralization, with three key players dominating the space.

Major Players

• Aave possesses a TVL of more than $68 billion, making it the largest DeFi lending protocol. It employs a pool-based lending protocol and launched an institutional platform in August to attract larger investors.
• Morpho and JustLend round out the top players in the DeFi landscape, but both have significantly lower TVLs and more limited offerings. Despite record levels of deposits and positive trends, institutional adoption of DeFi continues to lag.

Institutional Insight

JPMorgan, one of the most innovative traditional finance (TradFi) banks through its Kinexys (formerly Onyx) suite of on-chain products and services, has noted disappointing progress for both DeFi and tokenized assets among institutions in the TradFi space. Notably, the bulk of growth in DeFi has come from retail and crypto-native institutions.

Reasons DeFi Needs Better Regulation

1. Cross-chain Interoperability and Valuations

One common issue stalling wider utilization of DeFi is cross-chain interoperability and liquidity. Differences in token valuations across chains, including stablecoins, highlight the need for standardized and improved traceability and transparency. Additionally, institutions require confidence that transactions can occur as seamlessly as they do with current payment solutions.

2. Assurance and Enforceability of Smart Contracts

The evolving standards and best practices related to auditing and assurance of blockchain and smart contracts continue to pose obstacles for institutional adoption. In 2025 alone, cybercriminals stole over $2 billion, marking a 77% increase from 2024. Trust in smart contracts is vital for regulatory approval and institutional buy-in, yet current transparency and auditability standards remain in development.

3. Scale and Reliability

Despite nearly $200 billion in TVL, DeFi remains a small fraction of the overall financial market. JP Morgan Chase reported a daily payment processing volume of $10 trillion. For DeFi to scale and meet customer demand, it must improve reliability and address potential vulnerabilities in smart contracts. Collaboration with TradFi and improved regulatory standards, such as KYC and AML safeguards, are essential for attracting institutional investment.

In summary, while DeFi continues to grow, significant work is required to attract institutional buy-in and ensure the infrastructure is ready.