Tokenized real-world assets hit $34 billion in 2025. Analysts keep predicting $16 trillion by 2030. The gap between those numbers tells you everything about why TradFi money hasn't actually arrived.
The problem isn't regulatory uncertainty anymore. The GENIUS Act passed. SAB 121 got repealed. The infrastructure works. BlackRock runs a tokenized fund. JP Morgan settles trades on-chain. And yet, pension funds, insurance companies, and sovereign wealth managers, the institutions that actually move markets, remain almost entirely absent from DeFi.
The reason is embarrassingly simple: public blockchains broadcast every transaction to the entire world. That's a feature for crypto natives. It's a dealbreaker for anyone managing other people's money.
The Transparency Paradox
Consider what happens when a major institution wants to use DeFi. Every trade, every position, every strategy becomes visible to competitors, regulators, and front-running bots simultaneously. A pension fund can't accumulate a position without moving markets. A hedge fund can't execute a strategy without revealing it. A corporate treasury can't manage cash without exposing sensitive financial data.
Grayscale's 2026 outlook puts it plainly: almost everyone expects their paychecks, taxes, and spending habits to remain private. Yet most blockchains are transparent by default. The report notes that if public blockchains integrate more deeply into financial infrastructure, they'll need much more robust privacy capabilities.
The market has responded with workarounds. Private blockchains. Permissioned pools. KYC-gated vaults. These solutions work, but they fragment liquidity and eliminate the composability that makes DeFi valuable in the first place. A permissioned lending pool on Ethereum can't interact with public AMMs. A private chain can't tap into the broader ecosystem's liquidity.
FHE: Computing on Encrypted Data
Fully Homomorphic Encryption represents something fundamentally different from privacy coins or zero-knowledge proofs. Where Monero and Zcash hide transaction details, and ZK proofs verify statements without revealing underlying data, FHE enables actual computation on encrypted information.
The distinction matters. A ZK proof can confirm you have sufficient collateral without revealing your balance. FHE can actually calculate your liquidation price, execute the trade, and update your position, all while the data stays encrypted throughout. The computation happens. The result is valid. Nobody sees the inputs.
Zama, now valued above $1 billion after a $57 million Series B in June 2025, has built this technology into a practical framework called fhEVM. Solidity developers write contracts using familiar syntax. The encryption and decryption happen automatically. From a user perspective, the experience looks identical to regular DeFi, except the blockchain can't see what you're doing.
The company frames it as the natural progression of internet security: HTTP transmitted everything in cleartext. HTTPS encrypted data in transit. HTTPZ, their term for FHE-enabled applications, encrypts data even during processing. The server never sees unencrypted information.
What Confidential DeFi Actually Enables
The use cases extend beyond simple transaction privacy.
Dark Pools Without Counterparty Risk: Institutional traders need venues where large orders don't move markets. Traditional dark pools require trusting an operator. FHE-based dark pools execute trades on encrypted order books where even the matching engine can't see the orders it's processing. Front-running becomes impossible when nobody can observe the pending transactions.
Compliant Token Transfers: The emerging ERC-7984 standard enables confidential tokens that keep balances and transfer amounts encrypted while still allowing smart contracts to enforce compliance rules. A stablecoin can verify KYC status and check against sanctions lists without revealing who's transacting with whom.
Private Lending Markets: Current DeFi lending exposes borrower positions to the entire market. Whales get hunted. Liquidations get front-run. FHE-enabled lending keeps positions confidential while still allowing the protocol to calculate interest, monitor health factors, and execute liquidations when necessary.
JP Morgan built a proof-of-concept using Zama's technology for exactly this purpose. Their Kynexis project demonstrated confidential tokenized asset trading on public infrastructure, proving institutional workflows can operate without sacrificing either privacy or composability.
The LeveX Take: This Isn't a Privacy Coin Trade
Let's cut through the noise: FHE infrastructure tokens aren't positioned as privacy coin alternatives. Zama's $ZAMA token, launching with mainnet in Q4 2025, follows a burn-and-mint model where protocol fees get burned and operators earn rewards for running coprocessors. It's infrastructure economics, not speculation on regulatory arbitrage.
The trading angle here is second-order. Watch what happens when confidential DeFi enables institutional flows that currently can't touch public chains. Ethereum benefits as the primary host chain for fhEVM. Chainlink benefits from oracle integration with confidential compute layers. Solana gets fhEVM support in H2 2026, potentially unlocking high-speed confidential applications.
The tokens to watch aren't necessarily privacy-focused ones. They're the base layer assets that become more valuable when institutional capital finally has a pathway into DeFi. The $100 trillion in assets that "could potentially move onchain," as Zama's announcement noted, needs somewhere to go.
Technical Realities and Limitations
FHE isn't magic. Current throughput sits around 20 transactions per second per chain, enough to run Ethereum's typical load under FHE but nowhere near what high-frequency trading demands. Zama claims 1,000 tps next year with hardware acceleration, and eventually thousands more with dedicated ASICs.
The mainnet roadmap shows Ethereum support in Q4 2025, additional EVM chains in H1 2026, and Solana integration in H2 2026. That timeline means confidential DeFi remains testnet-only for most of 2025, with production deployment ramping through 2026.
Performance overhead also limits what applications make sense. Real-time trading systems that need millisecond execution won't work under FHE's current latency constraints. Batch-oriented workflows, settlement systems, and applications where minutes of processing time are acceptable become viable first.
Positioning for the Confidential Future
The institutional DeFi narrative has circulated for years. What's different now is that the technical barriers are actually falling. Regulatory clarity emerged in 2025. Infrastructure protocols work. And confidential compute layers like Zama's are solving the transparency problem that kept real institutional capital out.
The question isn't whether institutions will eventually use DeFi. The infrastructure economics are too compelling. The question is which protocols capture that flow when confidentiality stops being a barrier.
For traders, the opportunity lies in understanding how base layer assets, liquid staking protocols, and oracle networks benefit from institutional inflows rather than chasing privacy token narratives that may face regulatory headwinds. Trade ETH or SOL on LeveX with up to 100x leverage, or buy ETH spot for direct exposure. Explore our Crypto in a Minute guides to understand the ecosystem these institutional flows will eventually enter.