The path to mass adoption of decentralized finance (DeFi) passes through fintech firms and centralized exchanges, which together form a disruptive force with more incentive to switch to the new infrastructure than traditional finance (TradFi) incumbents, according to Paul Frambot, CEO of DeFi lending firm Morpho Labs.

Just as the auto industry, for example, has distribution and manufacturing sectors, so does finance. Financial technology companies – fintechs – such as Revolut and Robinhood (HOOD) provide the distribution frameworks for the digitization of financial services. But they still rely on TradFi as the manufacturer, Frambot said.

That will change, he said, and points to several pieces of evidence for his thesis that DeFi will scale through a combination of centralized crypto exchanges and fintech firms.

For instance, many fintechs and exchanges have noted the success U.S.-listed crypto exchange Coinbase (COIN) has had so far with Base, its layer-2 blockchain, and decided to build or partner with layer 2s themselves, Frambot said. Robinhood in February announced it was working with layer-2 blockchain Arbitrum, and many other fintech firms now have in place wallet infrastructure to seamlessly connect with Web3.

“TradFi has very little interest in moving to DeFi, to be frank, just because they have such an unfair advantage with their current infrastructure,” Frambot said in an interview. “However, fintechs don't have their own financial infrastructure, they have to go through all the fees of the TradFi guys. But they have distribution, they have adoption. So if they start owning their own infrastructure by building on top of layer-2s and immutable DeFi, then they can start generating more profits from it, gain efficiency and limit their operating costs.”

"I'm still frustrated that we're not changing finance at all,” he said. “We're still playing for crypto users that already have crypto. The promise of the open financial infrastructure underpinning every financial service is miles and miles away from where we are right now. And I think because there is so much money to make from just the crypto game, there are few incentives for founders to think beyond this.”

The answer to DeFi’s scaling problems also involves protocols that are neutral, like the rails of the internet itself, which can easily be built on top of, Frambot said. Having started out as a very successful optimization service on top of DiFi giants like Aave, using a matching engine to reduce spreads and offer users better interest rates, Morpho later transitioned to become a base-level protocol, more like Uniswap, the largest decentralized exchange by trading volume on the Ethereum blockchain.

The model of a broker or fund that exists on-chain, like Aave or Compound, that is necessarily mutable and continually subject to hundreds of risk-management governance decisions will not scale to the degree required to make DeFi mainstream, in Frambot’s opinion.

“We can't have [a] one-size-fits-all monolith that meets all the different compliance needs of the world,” Frambot said. “People want different [know your customer] or risk. So you have to have the core protocol that is completely un-opinionated, and people build specific financial products on top for their specific use cases.”