DeFi vs. TradFi: Institutions and Industrial Organization

Abstract

This paper analyzes the institutional and organizational differences between traditional finance and decentralized finance (DeFi), with a focus on public, permissionless blockchains. In traditional markets, intermediaries provide custody, authentication, settlement, and regulatory compliance. By contrast, the option of self-custody and open access on blockchains fundamentally reshapes the organization of financial services and challenges the foundations of current regulatory approaches. These structural differences alter trading, lending, and derivatives markets while introducing risks such as smart contract failures and infrastructure concentration. At the same time, DeFi's openness reduces entry barriers, improves transparency and access, and fosters competition and efficiency. Because self-custody removes intermediaries as enforcement points, regulation cannot simply extend existing frameworks. I conclude with policy recommendations emphasizing self-custody rights, privacy protection, adaptive regulation, and integration pathways for traditional intermediaries.