Author: YBB Capital Researcher Ac-Core
TL;DR
● World Liberty Financial, initiated by the Trump family and top figures in the crypto industry, is gradually influencing the direction of industry development, and its recent selection of tokens has also driven price increases in the secondary market;
● Following Trump's victory, the potential short-term crypto-friendly policies mainly include: the establishment of a U.S. Bitcoin strategic reserve, the normalization of crypto assets, and a debt issuance plan in conjunction with ETFs;
● The new interest rate cut cycle will attract more funds into DeFi, similar to the macro environment during the DeFi Summer of 2020-2021;
● Various lending protocols like AAVE and Hyperliquid have attracted widespread market attention, showing strong recovery and explosive potential;
● The recent listing trends of Binance and Coinbase are more inclined towards DeFi-related tokens.
I. The impact of off-chain situations on overall trends:
1.1 World Libertyfi and the Trump Administration
Source: Financial Times
World Liberty Financial positions itself as a decentralized financial platform that provides fair, transparent, and compliant financial tools, attracting a large number of users and symbolizing the beginning of a banking revolution. Jointly initiated by the Trump family and top figures in the crypto industry, it aims to challenge the traditional banking system by providing innovative financial solutions. It expresses Trump's ambition to make the U.S. a global leader in cryptocurrency, aiming to challenge the traditional banking system through innovative financial solutions.
At the same time, influenced by World Liberty Financial's purchases in December, related DeFi tokens have also seen price rebounds, including ETH, cbBTC, LINK, AAVE, ENA, and ONDO.
1.2 Crypto-friendly policies that are set in stone
The 47th President of the United States, Donald Trump, will be inaugurated on January 20, 2025. The crypto-friendly policies pending implementation mainly include three points:
● Trump reiterated plans to establish a U.S. Bitcoin strategic reserve
Strategic reserves are key resource reserves released in times of crisis or supply disruptions, with the most famous example being the U.S. Strategic Petroleum Reserve. Trump recently stated that the U.S. plans to make significant moves in the crypto space, potentially establishing a cryptocurrency reserve similar to the oil reserve. According to CoinGecko data from July this year, governments around the world hold a total of 2.2% of the global Bitcoin supply, with the U.S. holding 200,000 Bitcoins worth over $20 billion.
● Legalization of crypto normalization
The Trump administration's return may fulfill the complete legalization of cryptocurrencies, potentially adopting a more open policy in this area. Trump's speech at the Blockchain Association's annual gala confirmed the efforts of the Blockchain Association for U.S. cryptocurrency legislation; he stated that real use cases like DePIN make cryptocurrencies legitimate and are a priority on the legislative list; he committed to ensuring that Bitcoin and cryptocurrencies thrive in the U.S.
● Crypto combo: solidify dollar hegemony + Bitcoin strategic reserve + crypto normalization + ETF = bonds
Trump publicly supports crypto assets, bringing many benefits: 1. Better solidifying the dollar's position and the dollar pricing power in the crypto industry during his tenure; 2. Early positioning in the crypto market, bringing more funds in; 3. Forcing the Federal Reserve to align with him; 4. Forcing previously hostile capital to align with him.
As shown in the data below, the dollar index in 2014 was around 80, and U.S. debt was only around $20 trillion. Now, U.S. debt has increased to about $36 trillion, an 80% increase, but the dollar has strangely continued to appreciate. If the dollar continues to strengthen, in conjunction with the SEC's approval of a spot Bitcoin ETF, the new incremental part could completely cover future debt issuance costs.
Source of data: investing
Source of data: fred.stlouisfed
1.3 The new cycle of interest rate cuts makes DeFi more attractive
Data released by the U.S. Bureau of Labor Statistics shows that in November, core inflation rose 0.3% for the fourth consecutive quarter, an increase of 3.3% year-on-year. Housing costs have declined, but the prices of goods excluding food and energy rose 0.3%, the largest increase since May 2023.
Market reaction is swift, with the probability of the Federal Reserve cutting interest rates next week rising from 80% to 90%. Investment manager James Acy believes that a rate cut in December is almost a foregone conclusion. Short-term U.S. Treasuries initially rose and then fell due to mixed employment data, increasing market expectations for a rate cut by the Federal Reserve within the year. At the same time, JPMorgan expects the Federal Reserve to cut rates quarterly after the December policy meeting until the federal funds rate reaches 3.5%.
The resurgence of DeFi is driven not only by internal factors but also by external economic changes. As global interest rates change, high-risk assets like crypto assets, including DeFi, have become more attractive to investors seeking higher returns. The market is preparing for a period of potentially low interest rates, similar to the environment that drove the crypto bull markets of 2017 and 2020.
The resurgence of DeFi is not only driven by internal factors; the legalization of Bitcoin ETFs, the legalization of crypto assets, and changes in global interest rates will also have a greater external impact on the future crypto market. As interest rates decline, high-risk assets become more attractive to investors, similar to the environment of the overall crypto bull markets in 2017 and 2021.
Thus, DeFi benefits from two points in a low-interest environment:
1. Lower opportunity costs of capital: Returns on traditional financial products are declining, and investors may turn to DeFi for higher returns (which also means that the future profit potential of the crypto market may be further compressed);
2. Lower borrowing costs: financing becomes cheaper, encouraging users to borrow and invigorate the DeFi ecosystem.
After two years of adjustment, key indicators such as total locked value (TVL) have begun to rebound. The trading volume of DeFi platforms has also significantly increased.
Source of data: DeFiLlama
II. On-chain growth drives market trend direction:
2.1 The recovery of lending protocol AAVE
Source: Cryptotimes
AAVE V1, V2, and V3 share the same architecture, while the main upgrade in V4 is the introduction of the 'Unified Liquidity Layer'. This feature is an extension of the Portal concept in the AAVE V3 version. The Portal, as a cross-chain feature in V3, is designed to enable the supply of cross-chain assets, but many users are not familiar with or have not used it. The original intention of the Portal was to achieve cross-chain bridging of assets by burning and minting aToken between different blockchains.
For example, Alice holds 10 aETH on Ethereum, and she wants to transfer it to Arbitrum. She can submit this transaction through a bridging protocol on the whitelist, after which the protocol will execute the following steps:
1. A contract on Arbitrum will temporarily mint 10 aETH without underlying asset support;
2. These aETH are transferred to Alice;
3. Batch process bridging transactions, transferring 10 ETH to Arbitrum;
4. When funds are available, these ETH will be injected into the AAVE pool, providing support for the minted aETH.
The Portal allows users to transfer funds across chains in pursuit of higher deposit rates. Although the Portal achieves cross-chain liquidity, its operation relies on whitelisted bridging protocols rather than the AAVE core protocol, meaning users cannot directly use this feature through AAVE.
The 'Unified Liquidity Layer' of V4 is an improvement based on this, adopting a modular design to unify the management of supply, borrowing limits, interest rates, assets, and incentives, allowing liquidity to be allocated more efficiently and dynamically. Additionally, the modular design allows AAVE to easily introduce or remove new modules without the need for large-scale liquidity migration.
With the cross-chain interoperability protocol (CCIP) from Chainlink, AAVE V4 will also build a 'cross-chain liquidity layer', enabling users to instantly access all liquidity resources across different networks. With these improvements, the Portal will further evolve into a complete cross-chain liquidity protocol.
In addition to the 'Unified Liquidity Layer', AAVE V4 also plans to introduce new features such as dynamic interest rates, liquidity premiums, smart accounts, dynamic risk parameter settings, and non-EVM ecosystem expansion, constructing the Aave Network centered on the stablecoin GHO and AAVE lending protocol.
As a leader in the DeFi space, AAVE has held about 50% of the market share over the past three years, and the launch of version V4 aims to further expand its ecosystem to serve potential new users in the scale of one billion.
Source of data: DeFiLlama
As of December 18, 2024, AAVE's TVL data is also showing significant growth, currently exceeding 30% of the peak level during the DeFi Summer in 2021, reaching $23.056 billion. This round of changes in DeFi protocols is more inclined towards modular lending and better capital efficiency improvements compared to the last round. (For modular lending protocols, please refer to our previous article on the modular evolution of DeFi lending.)
2.2 The strongest dark horse in derivatives this year: Hyperliquid
Source: Medium: Hyperliquid
According to research by Yunt Capital @stevenyuntcap, Hyperliquid's revenue sources include instant listing auction fees, HLP market maker profits and losses, and platform fees. The first two are public information, and the team recently explained the last revenue source. Based on this, we can estimate that Hyperliquid's total revenue from the beginning of the year to date is about $44 million, with HLP contributing $40 million; HLP strategy A lost $2 million, and strategy B gained $2 million; revenue from liquidations was $4 million. When HYPE was launched, the team repurchased HYPE tokens on the market through the Assistance Fund wallet. Assuming the team has no other USDC AF wallets, the profit and loss of USDC AF from the beginning of the year to date is $52 million.
Therefore, combining HLP's $44 million and USDC AF's $52 million, Hyperliquid's total revenue from the beginning of the year to date is approximately $96 million, surpassing Lido and becoming the ninth most profitable crypto project in 2024.
Messari Research @defi_monk recently studied the valuation of HYPE tokens, estimating its fully diluted market cap (FDV) at around $13 billion, which may exceed $30 billion under favorable market conditions. Additionally, Hyperliquid plans to launch HyperEVM through a TGE (Token Generation Event), with over 35 teams planning to participate in this new ecosystem, bringing Hyperliquid closer to being a universal L1 chain rather than just an application chain.
Source: Messari
Hyperliquid should adopt a new valuation framework. Typically, killer applications and their L1 networks are independent, with the revenue of the application attributed to the application token and the revenue of the L1 network attributed to network validators. Hyperliquid integrates these revenue sources together. Therefore, Hyperliquid not only has a leading decentralized perpetual contract trading platform (Perp DEX) but also controls its underlying L1 network. We use a categorical total valuation method to reflect its vertically integrated characteristics. First, let's look at the valuation of Perp DEX.
Messari's overall view of the derivatives market aligns with that of Multicoin Capital and ASXN, with the only difference being Hyperliquid's market share. The Peap DEX market is a 'winner-takes-all' market for the following reasons:
● Any Perp DEX can launch any perpetual contract, eliminating issues of blockchain fragmentation;
● Unlike centralized exchanges, using decentralized exchanges does not require permission;
● There are network effects in terms of order flow and liquidity.
In the future, Hyperliquid's dominance will become stronger. Hyperliquid is expected to capture nearly half of the on-chain market share by 2027, bringing in $551 million in revenue. Currently, trading fees belong to the community, so they are considered actual income. Based on a 15x multiplier of DeFi valuation standards, the valuation of Perp DEX as an independent business could reach $8.3 billion. For enterprise clients, they can refer to our complete model. Next, let's look at the valuation of L1:
Typically, the premium of DeFi applications is used to assess L1, and with the recent increase in Hyperliquid's activities on its network, its valuation may further increase. Hyperliquid is currently the 11th largest TVL chain, while similar networks like Sei and Injective are valued at $5 billion and $3 billion, respectively, with high-performance networks of similar scale like Sui and Aptos valued at $30 billion and $12 billion, respectively.
Since HyperEVM has not yet been launched, the L1 valuation of Hyperliquid uses a more conservative estimate of $5 billion. However, if evaluated at current market prices, the L1 valuation could approach $10 billion or higher.
Therefore, under the base scenario, Hyperliquid's Perp DEX valuation is $8.3 billion, the L1 network valuation is $5 billion, and the total FDV is approximately $13.3 billion. In a bear market scenario, the valuation is about $3 billion, while in a bull market it could reach $34 billion.
III. Summary
Looking ahead to 2025, the full recovery and soaring of the DeFi ecosystem will undoubtedly become the mainstream trend. With the Trump administration's policy support for decentralized finance, the U.S. crypto industry has welcomed a more friendly regulatory environment, and DeFi is ushering in unprecedented opportunities for innovation and growth. As a leader in lending protocols, AAVE, with the liquidity layer innovation of version V4, is gradually recovering and surpassing its former glory, becoming a core force in the DeFi lending space. Meanwhile, in the derivatives market, Hyperliquid is rapidly rising as the strongest dark horse of 2024, attracting a large number of users and liquidity with its outstanding technological innovation and efficient market share integration.
Meanwhile, mainstream exchanges like Binance and Coinbase are also changing their listing strategies, with DeFi-related tokens becoming the new focus, such as the recent ACX, ORCA, COW, CETUS, and VELODROME. The actions of these two major platforms reflect market confidence in DeFi.
The prosperity of DeFi is not limited to lending and derivatives markets but will also fully blossom in stablecoins, liquidity provision, cross-chain solutions, and many other areas. It is foreseeable that with the combined promotion of policy, technology, and market forces, DeFi will once again become great in 2025, becoming an indispensable part of the global financial system.
