The Big Analysis

TBW - Banks and Protocols, The New Architecture of Credit (Oct 2025 - London)

15 Oct 2025 — 2 min read

"Full automation is a myth." Real-world assets need manual pricing and liquidity; a hybrid model merging DeFi's efficiency and TradFi's structure is inevitable.
DeFi won't replace banks but complement them-embedding new rails under traditional infrastructure.
The next evolution isn't DeFi replacing TradFi but embedded DeFi: liquidity and innovation flowing under a regulated surface.

Tokenization opens previously closed markets (bonds, credit) to retail investors.
For banks, it's a way to reach new clients through smaller denominations and fractional ownership.
Retail investors are already comfortable with DeFi and motivated by yield and access, not ideology.
Tokenization could drive a hybrid market where retail liquidity meets institutional credit.

DeFi lending remains overcollateralized, but tokenized assets (funds, treasuries, RWA) are expanding collateral options.
"You always collateralize something": even TradFi loans rely on reputation or access, not only assets.
Growth will come from tokenizing new collateral types, including intangible ones like reputation, while managing the leverage risk they bring.
DeFi and TradFi lending must evolve together: lenders need borrowers, and borrowers need capital, adoption will move in parallel.

Privacy ≠ secrecy. It protects users from front-running, liquidation manipulation, or targeted attacks.
Transparency without control can be dangerous; programmable privacy restores symmetry of information.
For institutions, privacy enables less-collateralized lending and more complex strategies (hedging, structured products).

Trade-off triangle: privacy, user experience, and compliance can't all be perfect at once.
The goal: selective disclosure-delegating the right data to the right counterparties (KYC, AML).
Programmable privacy allows institutions to remain compliant while retaining user control.
Infrastructure remains the main constraint (computational load, latency), but Ethereum's throughput is currently "good enough."

Hybrid markets are emerging: permissioned tokenized funds (e.g. BlackRock) borrowing from permissionless USDC pools.
Institutions like JP Morgan see tokenized collateral as a practical entry point-both for education and adoption.
Real-time settlement on-chain could prevent liquidity crises like in 2008, where ownership took days to trace.
Emma Lovett: "Tokenized collateral may be the killer app that finally brings TradFi on-chain."

Financial professionals thrive on composability: the more asset types exist on-chain, the richer the strategies.
Privacy tech enabling complex logic (beyond zero-knowledge proofs) could attract institutional traders back into DeFi.
DeFi doesn't just solve inefficiencies-it creates new opportunities: tokenization lets issuers recycle balance sheets and fund more projects.
As Bilal put it: "DeFi isn't just solving problems. It's opening new ways to make money."

Expect continued growth in tokenized collateral, hybrid markets, and institutional experimentation with programmable privacy.
The winning model will balance transparency and discretion, innovation and regulation, access and control.
As Michael Bentley concluded: "Progress won't come from full automation-it'll come from better trade-offs."