Author: YBB Capital Researcher Ac-Core
Key Points
World Liberty Financial, founded by the Trump family and top figures in the crypto industry, is gradually influencing the development direction of the industry, and their recent token purchases have also driven up secondary market prices.
After Trump's victory, key crypto-friendly policies in the short term include: establishing a Bitcoin strategic reserve in the U.S., legalizing cryptocurrencies, and supporting debt plans through the issuance of ETFs.
New interest rate cuts will attract more funds into DeFi, creating a macro environment similar to the DeFi summer of 2020-2021.
DeFi lending protocols like AAVE and Hyperliquid are gaining widespread attention and showing strong recovery and explosive potential.
Binance and Coinbase have recently favored DeFi-related tokens in their listing trends.
1. External factors influencing overall trends:
1.1 World Liberty Financial and the Trump Administration
Image source: Financial Times
World Liberty Financial positions itself as a decentralized financial platform providing fair, transparent, and compliant financial tools. It has attracted a large number of users, symbolizing the beginning of a revolution in banking. The platform was founded by the Trump family and top figures in the crypto industry, aiming to challenge the traditional banking system by offering innovative financial solutions. This reflects Trump's ambition to make the U.S. a global leader in cryptocurrency by providing innovative solutions to challenge the traditional banking system.
Recently, World Liberty Financial's purchasing activities in December impacted the market, leading to a rebound in prices of several DeFi tokens including ETH, cbBTC, LINK, AAVE, ENA, and ONDO.
1.2 Expected crypto-friendly policies after Trump takes office
The 47th President of the United States, Donald Trump, will be inaugurated on January 20, 2025, and the crypto-friendly policies expected to be implemented during his administration include:
Trump reiterates plans to establish a U.S. Bitcoin strategic reserve
Strategic reserves are key resources released during crises or supply disruptions. A well-known example is the U.S. Strategic Petroleum Reserve. Trump recently stated that the U.S. plans to take significant actions in the crypto space, potentially creating a cryptocurrency reserve similar to the oil reserve. According to CoinGecko data from July this year, governments hold 2.2% of the global Bitcoin supply, with the U.S. holding 200,000 BTC, valued at over $2 billion.
Normalization of cryptocurrency legalization
With the coming of Trump's second term, cryptocurrency may move towards full legalization. The field may see more open policies. At the annual meeting of the Blockchain Association, Trump expressed support for efforts to legislate cryptocurrency in the U.S. and acknowledged that practical use cases like DePIN would make cryptocurrency legalization a priority on the legislative agenda. He promised to ensure the prosperity of Bitcoin and cryptocurrency in the U.S.
Cryptocurrency Power Play: Strengthening Dollar Dominance + Bitcoin Reserves + Cryptocurrency Legalization + ETFs = Bonds
Trump has publicly supported the view that crypto assets bring many benefits, including: 1) Strengthening the position of the dollar and the pricing power of cryptocurrencies against the dollar; 2) Preemptively positioning in the crypto market to attract more capital; 3) Forcing the Fed to ally with him; 4) Bringing previously hostile capital into alignment with him.
As shown in the chart, the dollar index was around 80 in 2014, when U.S. debt was about $20 trillion. Now, U.S. debt has risen to about $36 trillion, an increase of 80%, yet the dollar continues to rise abnormally. If the dollar continues to strengthen, combined with the SEC approving a Bitcoin spot ETF, the new increments could fully cover future bond issuance costs.
Image data source: Investing
Image data source: fred.stlouisfed
1.3 New round of interest rate cuts makes DeFi more attractive
Data from the U.S. Bureau of Labor Statistics shows that core inflation rose 0.3% in November for the fourth consecutive quarter, with a year-on-year increase of 3.3%. Housing costs have eased somewhat, but prices for goods excluding food and energy rose 0.3%, the largest increase since May 2023.
The market quickly reacted, raising the probability of a Fed rate cut next week from 80% to 90%. Investment manager James Assy believes that a December rate cut is almost certain. JPMorgan also expects the Fed to start cutting 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 significant external economic changes. With changes in global interest rates, high-risk assets like DeFi and cryptocurrencies are becoming increasingly attractive to investors seeking higher returns. The market is preparing for a potentially prolonged period of low-interest rates, similar to the environments during the 2017 and 2020 cryptocurrency bull markets.
Thus, DeFi benefits in a low-interest rate environment for two reasons:
1. Lower capital opportunity costs: As the yields on traditional financial products decline, investors may turn to DeFi for higher returns (which also implies that the potential profit margins in the crypto market will be compressed).
2. Lower borrowing costs: Cheaper financing encourages borrowing and promotes the activity of the DeFi ecosystem.
After two years of adjustment, key metrics such as TVL are starting to rebound. The trading volume of DeFi platforms has also increased significantly.
Image data source: DeFiLlama
2. On-chain growth drives market trends
2.1 Recovery of the lending protocol AAVE
Image source: Cryptotimes
The architecture of AAVE V1, V2, and V3 is basically the same, but the key upgrade in V4 is the introduction of the 'Unified Liquidity Layer'. This feature is an extension of the Portal concept introduced in AAVE V3. The Portal serves as a cross-chain function in V3 aimed at facilitating cross-chain asset supply; however, many users are unfamiliar with or have never used it. The purpose of the Portal is to bridge assets across different blockchains through cross-chain minting and burning of aToken.
For example, Alice holds 10 aETH on Ethereum and wants to transfer it to Arbitrum. She can submit a transaction through a whitelisted bridging protocol, which will execute the following steps:
A contract on Arbitrum temporarily minted 10 aETH without any underlying asset.
These aETH were transferred to Alice.
The batching process will bridge the actual 10 ETH to Arbitrum.
Once the funds are in place, these ETH will be injected into the AAVE pool to support the minted aETH.
The Portal allows users to transfer funds across chains in pursuit of higher deposit rates. Although the Portal has achieved cross-chain liquidity, its operation relies on a whitelisted bridging protocol rather than AAVE's core protocol, and users cannot directly use this feature through AAVE.
The 'Unified Liquidity Layer' in V4 improves this by using a modular design to manage supply, borrowing limits, interest rates, assets, and incentives, achieving dynamic and more efficient allocation of liquidity. Additionally, the modular design allows AAVE to easily introduce or remove new modules without large-scale liquidity migration.
With Chainlink's Cross-Chain Interoperability Protocol (CCIP), AAVE V4 will also build a 'Cross-Chain Liquidity Layer' that allows users to instantly access all liquidity resources across different networks. With these improvements, the Portal will evolve into a complete cross-chain liquidity protocol.
In addition to the 'Unified Liquidity Layer', AAVE V4 also plans to launch new features, including dynamic interest rates, liquidity premiums, smart accounts, dynamic risk parameter configurations, and expansion into non-EVM ecosystems, with stablecoin GHO and AAVE lending protocol as the core of the Aave network.
As a leader in the DeFi space, AAVE has maintained about 50% market share over the past three years. The release of V4 aims to further expand its ecosystem to serve a potential user base of 1 billion.
Image data source: DeFiLlama
As of December 18, 2024, AAVE's TVL has seen significant growth, exceeding 30% of the peak level during the DeFi summer of 2021, reaching $23.056 billion. This round of changes in DeFi protocols is more focused on modular lending compared to the previous round, improving capital efficiency. (For more details on modular lending protocols, refer to our previous article on the modular evolution of DeFi lending.)
2.2 The strongest dark horse in derivatives this year: Hyperliquid
Image source: Medium: Hyperliquid
According to research from 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, while the team recently explained the third revenue source. Based on this, we estimate that Hyperliquid's total revenue year-to-date is around $44 million, with HLP contributing $40 million. HLP strategy A incurred a loss of $2 million, while strategy B made a profit of $2 million. Liquidation revenue is $4 million. When the HYPE token launched, the team repurchased HYPE tokens from the market through the aid fund wallet. Assuming the team has no other USDC AF wallets, the profit and loss for USDC AF year-to-date is $52 million.
Therefore, combined with HLP's $44 million and USDC AF's $52 million, Hyperliquid's total revenue year-to-date is approximately $96 million, surpassing Lido, making it the ninth-largest cryptocurrency project by revenue in 2024.
Messari Research's @defi_monk recently conducted a valuation study on the HYPE token. Its FDV is approximately $13 billion, which could exceed $30 billion under suitable market conditions. Furthermore, Hyperliquid plans to launch HyperEVM through its TGE, expecting over 35 teams to participate in the new ecosystem, making Hyperliquid closer to becoming a universal Layer 1 blockchain rather than just an application chain.
Image source: Messari
Hyperliquid should adopt a new valuation framework. Typically, killer applications and their Layer 1 networks are separate. Revenue from applications goes to application tokens, while revenue from Layer 1 networks goes to network validators. However, Hyperliquid integrates these revenue sources. Therefore, Hyperliquid not only has a leading decentralized perpetual contract trading platform (Perp DEX) but also controls its underlying Layer 1 network. We use a sum-of-parts valuation 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 Multicoin Capital and ASXN, with one exception—Hyperliquid's market share. The Perp DEX market is a winner-takes-all market for the following reasons:
Any Perp DEX can launch any perpetual contract, solving the blockchain fragmentation issue.
Unlike centralized exchanges, decentralized exchanges do not require permission to operate.
There are network effects in terms of order flow and liquidity.
In the future, Hyperliquid's dominance is expected to continue to grow. Hyperliquid is projected to capture nearly half of the on-chain market share by 2027, generating $551 million in revenue. Currently, trading fees belong to the community, so they are considered actual revenue. Based on a 15x multiple from DeFi valuation standards, the Perp DEX as a standalone business is valued at $8.3 billion. For enterprise clients, you can refer to our complete model. Now let's look at L1 valuation:
Typically, the valuation of L1 is assessed using a premium from the DeFi applications running on it. As Hyperliquid's activity on its network increases, its valuation may further increase. Hyperliquid is currently the 11th ranked blockchain by TVL. Similar networks, such as Sei and Injective, are valued at $5 billion and $3 billion respectively, while similarly sized high-performance networks like Sui and Aptos are valued at $30 billion and $12 billion respectively.
As HyperEVM has not yet launched, Hyperliquid's L1 valuation is conservatively estimated to have a $5 billion premium. However, based on current market prices, the L1 valuation could be close to $10 billion or even higher.
Thus, under base case assumptions, the valuation of Hyperliquid's Perp DEX is $8.3 billion, with its L1 network valuation at $5 billion, bringing its total FDV to approximately $13.3 billion. In a bear market scenario, its valuation is about $3 billion, while in a bull market, it could reach $34 billion.
3. Conclusion
Looking ahead to 2025, the comprehensive recovery and surge of the DeFi ecosystem will undoubtedly become the mainstream narrative. With the Trump administration's policy support for decentralized finance, the U.S. cryptocurrency industry is ushering in a more favorable regulatory environment, and DeFi is experiencing unprecedented opportunities for innovation and growth. As a leader in lending protocols, AAVE is gradually recovering and surpassing its former glory through liquidity layer innovations in V4, becoming a core force in the DeFi lending space. Meanwhile, in the derivatives market, Hyperliquid is rapidly rising to become the strongest dark horse of 2024, attracting a large number of users and liquidity with its outstanding technological innovations and efficient market share integration.
Meanwhile, the listing strategies of mainstream exchanges such as Binance and Coinbase are continually evolving, with DeFi-related tokens becoming a new focus, such as the recently launched ACX, ORCA, COW, CETUS, VELODROME, etc. The actions of the two platforms reflect market confidence in DeFi.
The prosperity of DeFi is not limited to lending and derivatives markets; it will also flourish in areas such as stablecoins, liquidity provision, and cross-chain solutions. It is foreseeable that, driven by policies, technology, and market forces, DeFi will rise again in 2025, becoming an indispensable part of the global financial system.
