TradFi Is Moving On-Chain: What DeFi Lending Got Right Early

When "Magic Internet Money" Got Serious

In 2017, I was underwriting commercial credit at JPMorgan—and reading about a technology that could eventually automate parts of how lending works.

Ethereum caught my attention. Not just as an asset, but as infrastructure. Decentralized Finance (DeFi), decentralized protocols. Smart contracts meant code could enforce agreements autonomously—and that code could run on the blockchain through tokenized financial incentives.

Since my background was in finance, I zeroed in on the financial applications. Financial markets run on trust and contract—exactly what smart contracts could enforce through code. The question in the back of my mind was simple: what happens when this gets more sophisticated?

How Lending Actually Works: The Five C's

The cleanest way I've found to explain early DeFi lending is through the traditional underwriting lens: the Five C's of credit.

In banking, a borrower's creditworthiness is determined using the Five C's of Credit:

Character: Your credit history and reliability—your credit score, payment history, and reputation for managing debt.
Capacity: Your ability to repay, measured by cash flow, debt-to-income ratio, and employment stability.
Capital: Your personal investment in the venture—down payment, assets—showing financial commitment.
Collateral: Assets you pledge to secure the loan, reducing lender risk.
Conditions: The loan's purpose, the economy, industry trends, and other external factors.

At JPMorgan, I worked on senior secured lending. Almost all of our lending was secured—we required collateral. But we still underwrote all five C's. We looked at the company's ability to repay through cash flow. We sometimes had personal guarantees from the owners—character on the line. We evaluated the capital they'd invested into the business. And the conditions of the loan were usually straightforward: real estate purchases, working capital, acquisitions. We weren't lending money for high-leverage trading.

The point is: traditional lending involves judgment, process, trust, and intermediaries at every step.

DeFi's Radical Simplification

Now let's compare that to decentralized finance—specifically, protocols like MakerDAO and its stablecoin DAI.

Say you want to borrow $100. In traditional finance, you go to a bank. They check your credit, your income, your history. It's centralized. It's regulated. It takes time. And if you don't have good standing with them? You might not get the loan at all.

Now imagine you don't want to deal with any of that. You just want to borrow $100 through code, in a way that guarantees the protocol will be made whole.

Here's how it works: you deposit ETH as collateral. Let's say you deposit $150 worth of ETH. At MakerDAO's 150% collateralization ratio, you can borrow up to $100 in DAI. If you don't repay and your collateral value drops below the threshold, the protocol liquidates your ETH automatically. No credit check. No relationship. No human in the loop. Just code that enforces the agreement.

Here's the key insight: in DeFi's early days, there was no such thing as credit scores on the blockchain. No social capital. No character assessment. Of the Five C's, you're really only working with one:

Collateral.

Not to mention you're adding protocol risk: smart contract risk, oracle risk, liquidation mechanics, and governance risk.

Why would someone deposit money in the first place? Same reason you'd deposit at a bank: to earn interest. Community members deposit ETH, the protocol lends it out, and depositors earn yield based on the protocol's economics.

That makes early DeFi lending both incredibly primitive and incredibly safe. You can only borrow what you've already secured. It's trustless and self-enforcing—but it's limited.

Still, even in that primitive form, this was a parallel financial system running on code. Once you understand that, the question becomes: what happens when on-chain lending evolves beyond collateral-only?

The Convergence Is Already Here

Fast forward to today, and that question has been answered.

In February 2019, JPMorgan launched JPM Coin on private infrastructure [1]. In November 2025, they launched the USD version—branded JPMD—on Coinbase's Base blockchain, making them the first major bank to issue a dollar-denominated token on a public blockchain [2]. Through their blockchain division Kinexys, JPMorgan now enables institutional clients to send and receive dollars on-chain, 24/7, with near-instant settlement. They've processed over $1.5 trillion in blockchain-based transactions since inception [3].

The regulatory picture has shifted too. In July 2025, President Trump signed the GENIUS Act into law—the first federal stablecoin framework in U.S. history [4]. Banks, credit unions, and nonbanks can now issue stablecoins under clear federal guidelines with 100% reserve backing.

And the market is rewarding companies that saw this coming. Circle went public on the NYSE in June 2025, with Goldman Sachs, JPMorgan, and Citigroup as underwriters [5]. Robinhood has gone from $10 in late 2022 to around $115 in late 2025 [6], fueled by its Bitstamp acquisition and tokenized stock launch [7][8].

The capital is flowing one direction. DeFi is adding compliance layers and identity solutions. TradFi is exploring blockchain rails and programmable contracts. They're meeting in the middle—and firms that don't evolve risk being left behind.

Why This Matters

The companies building at this intersection—Coinbase, Kraken, Anchorage, Fidelity's digital asset arm—aren't just crypto companies anymore. They're becoming financial infrastructure. And that work requires people who can move between worlds: who understand how TradFi actually works, and who understand what programmable money makes possible.

Many crypto-native teams haven't had to operate inside bank constraints. Many bank-native teams still underestimate what programmable money changes. That gap is where the real work is happening now—and it's closing fast.

What’s changing isn’t “crypto adoption.” It’s the shape of money movement: instant settlement, composable liquidity, and contracts that execute by default. DeFi explored the primitives in public. TradFi is now adopting the rails where it makes economic sense. The work ahead is building systems that are secure, compliant where needed, and actually useful—so institutions and users can move value with less friction.

The financial system is being rebuilt. I intend to help build it.

If you're building at this intersection—or thinking about making the jump—I'd love to hear from you.