How Traditional Finance Principles Can Stabilize DeFi’s Next Chapter

When I made the decision to leave PayPal for Hyperion DeFi, some colleagues viewed it as a risky departure from the safety of traditional finance. I viewed it as a continuation of a career spent navigating, and learning from, structural shifts in financial markets.

The migration of financial activity from centralized intermediaries to decentralized protocols is no longer purely speculative; it reflects a structural shift already underway. The superior efficiency, transparency, and accessibility of blockchain-based infrastructure will eventually win, just as electronic trading displaced open outcry, and just as the internet fundamentally restructured commerce and communication.

But inevitability does not mean immediacy. The path from today’s nascent DeFi ecosystem to tomorrow’s institutional-grade infrastructure requires applying the hard-won lessons of traditional finance. These principles are not constraints on innovation; they are enablers of sustainable growth.

DeFi Has Recovered Post-FTX Collapse

DeFi has evolved from an experimental fringe to a legitimate alternative to centralized financial infrastructure. “DeFi Summer” in 2021 quickly fell into “Crypto Winter” with FTX’s collapse. But since then, new platforms and technologies offering lower fees, faster execution, and accelerated product innovation are gaining traction. Investors and regulators are taking notice.

As one illustrative example of this broader trend, Hyperliquid, a decentralized perpetual exchange and Layer-1 blockchain, is gaining market share versus centralized trading venues, with 24-hour open interest exceeding $9.5 billion and 7-day trading volumes surpassing $40 billion as of January 2026 (Hyperliquid’s Structural Advantages in the DEX Perps Arms Race and the Path to 2026 Institutional Adoption). Able to serve up to ~200,000 transactions per second, with fully permissionless trading, nearly 1 million cumulative users to-date, and the recent launch of commodity, equity, and fixed income markets (plus prediction markets on the horizon), it is impossible for institutions to ignore Hyperliquid’s potentially disruptive force to traditional financial infrastructure.

Hyperliquid is just one of many blockchains and protocols, and CoinGecko reports the Total Value Locked (or “TVL”) across all DeFi exceeding $100B as of January 2026 (Top Blockchains Ranked by Total Value Locked (TVL) | CoinGecko).

But how do we know if these protocols will survive? What prevents another FTX-style liquidity crisis? And how can we, as industry leaders, deploy the benefits of DeFi to create enduring value for our shareholders and society?

Foundations of Market Stability

Sustainable growth in financial markets, regardless of their structure, depends on the same underlying principles: robust risk management, transparent governance, disciplined capital allocation, and alignment between stakeholders. These financial principles have been refined through centuries of financial crises, from “Tulip Mania” in the 1600s and all the booms, bubbles, and busts since. In TradFi, sound financial principles aren’t optional; oftentimes, a company’s survival through a crisis depended on them.

Too often, DeFi platforms and protocols can fall prey to a toxic combination of short-dated thinking, narrow perspectives, and fundamentally unsustainable practices. These can include:

• Prioritizing token-based incentives rather than competitive advantages, attracting temporary liquidity which can evaporate the moment rewards decline.
• “Governance paralysis”, where neither the protocol’s leadership nor its participants can resolve issues that arise.
• Misaligned incentives, asymmetrically rewarding risk-taking behaviors versus operational stability.
• Poor treasury management practices, without enough liquidity or downside planning for when the market turns.
• Inadequate controls which fail to prevent rule-bending and breaking, especially when things go wrong.

When protocols deploy any of these tactics, long-term institutional investors are wise to remain on the sidelines.

A Path Forward for DeFi

I believe DeFi will achieve an escape velocity of institutional adoption once the sector adopts stabilizing mechanisms that traditional markets have developed over decades. Protocols that adopt these lessons today will emerge as the institutional infrastructure of tomorrow. The bridge between Wall Street and DeFi is not a metaphor. It is an infrastructure project that requires expertise from both sides.

Against that backdrop, several areas consistently emerge as priorities for institutional participants:

Collateralization standards, capital reserves, and stress testing. Establish loan-to-value ratios and liquidation mechanisms that function even under extreme volatility. Regularly model protocol behavior under adverse market conditions. You need to be able to survive your reasonable worst day imaginable, and know what comes next.

Smart contract audits. Your code is your lifeblood. You have to treat code vulnerabilities as operational risks requiring continuous monitoring and mitigation. If the market loses credibility in your smart contracts, you’ve likely lost your greatest long-term asset.

Clear governance structures. Define your processes for protocol upgrades, treasury management, and dispute resolution. Institutional investors will have a hard time trusting you with sizeable amounts of money if they don’t know how issues are escalated and resolved.

Financial transparency. Regular disclosure of protocol revenues, expenses, treasury holdings, and key metrics. Institutions are going to be audited, they may ask you for SOC reports or other industry-standard materials, and they may require hefty third-party diligence in order to work with you, so you need to be prepared.

Stakeholder alignment. Design and disclose token distribution schedules and vesting commitments that align founding teams with long-term success. Institutional partners seek assurance that incentives are aligned.

Legal clarity. Be proactive in engaging with regulators to establish compliant frameworks rather than operating in gray areas. There’s no advantage to being behind the ball on this.

Building the Bridge: What DeFi’s Success Looks Like in 2026 and Beyond

The convergence of several trends position 2026 as a potential turning point for institutional DeFi adoption. With crypto-friendly administrations in key markets and clearer regulatory guidance expected from U.S. agencies, including the SEC and CFTC, regulatory uncertainty is diminishing. Meanwhile, regulated custodians are starting to offer institutional-grade security for DeFi access. And, as noted earlier, certain decentralized protocols and platforms such as Hyperliquid are continuing to grow in size and scope.

The convergence of traditional finance principles with DeFi infrastructure represents more than a technological shift. It represents a fundamental reimagining of how financial markets can operate. Success in this transition will be measured not by short-term token price appreciation, but by tangible progress toward institutional adoption and real-world utility.

If we are successful, here is what institutional DeFi adoption can look like:

Public companies holding significant positions in DeFi protocols on their balance sheets, with auditor acceptance and regulatory clarity. Hedge funds, market makers, and proprietary trading firms conducting material volume on decentralized venues. Derivatives on equities, commodities, interest rates, and currencies trading on-chain with comparable liquidity to centralized markets. DeFi protocols engaging constructively with regulators, implementing appropriate risk and control frameworks, and earning the confidence required for broader institutional participation. Seamless integration between blockchain-based settlement and traditional banking infrastructure. And the emergence of best practices, compliance frameworks, and institutional norms adapted for decentralized environments. Meanwhile, society has the benefit of easier access to markets and money-movement, transparent reporting, real-time data, and greater security of assets and investments.

I hope you can join me in believing in this future of DeFi. And if you do, let’s build it together.