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 direction of the industry, and their recent token purchases have also driven up secondary market prices.
Following Trump's victory, key favorable cryptocurrency policies in the short term include: establishing a strategic reserve for Bitcoin 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, showcasing 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 Libertyfi and the Trump Administration
Image source: Financial Times
World Liberty Financial positions itself as a decentralized financial platform that provides fair, transparent, and compliant financial tools. It has attracted a large number of users, symbolizing the beginning of a banking revolution. The platform was founded by the Trump family and top figures in the crypto industry, with the aim of challenging 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 framework.
Recently, World Liberty Financial's purchasing activity in December has impacted the market, leading to price rebounds in several DeFi tokens including ETH, cbBTC, LINK, AAVE, ENA, and ONDO.
1.2 Expected Cryptocurrency-Friendly Policies to be Introduced After Trump's Presidency
Donald Trump, the 47th President of the United States, will take office on January 20, 2025, and the expected favorable cryptocurrency policies during his administration include:
Trump reiterated plans to establish a U.S. Bitcoin strategic reserve.
Strategic reserves are key resources released during a crisis or supply disruption. A well-known example is the U.S. Strategic Petroleum Reserve. Trump recently stated that the U.S. plans to take significant action in the crypto space, potentially creating a cryptocurrency reserve similar to the oil reserve. According to data from CoinGecko in July this year, governments hold 2.2% of the global Bitcoin supply, with the U.S. holding 200,000 BTC worth over $20 billion.
Normalization of Cryptocurrency Legalization
With Trump's second term in office, cryptocurrency may move towards full legalization. There could be more open policies in the field. At the annual conference 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 pledged to ensure Bitcoin and cryptocurrencies thrive in the U.S.
Cryptocurrency Power Play: Strengthening Dollar Dominance + Bitcoin Reserves + Cryptocurrency Legalization + ETF = Bonds
Trump has publicly supported the view that cryptocurrency brings many benefits, including: 1) Strengthening the dollar's status and cryptocurrencies' pricing power against the dollar; 2) Preemptively laying out plans in the crypto market to attract more capital; 3) Forcing the Federal Reserve to ally with him; 4) Encouraging previously hostile capital to ally with him.
As shown in the diagram, the dollar index was around 80 in 2014 when U.S. debt was approximately $20 trillion. Today, U.S. debt has increased to about $36 trillion, an increase of 80%, but the dollar continues to rise unusually. If the dollar continues to strengthen, coupled with the SEC's approval of Bitcoin spot ETFs, the new increments could easily cover future bond issuance costs.
Image data source: Investing
Image data source: fred.stlouisfed
1.3 The 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% for the fourth consecutive quarter in November, with a year-on-year increase of 3.3%. Housing costs have eased, but commodity prices excluding food and energy rose 0.3%, the largest increase since May 2023.
The market quickly responded by increasing the probability of the Federal Reserve cutting interest rates next week from 80% to 90%. Investment manager James Assy believes that a December rate cut is almost certain. JPMorgan also expects the Federal Reserve to begin quarterly rate cuts 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 key external economic changes. As global interest rates fluctuate, high-risk assets like DeFi and cryptocurrencies are becoming increasingly attractive to investors seeking higher returns. The market is preparing for a potentially sustained low-interest-rate period, similar to the environments seen 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 like TVL are beginning to rebound. The trading volume of DeFi platforms has also significantly increased.
Image data source: DeFiLlama
2. On-chain Growth Drives Market Trends
2.1 The Recovery of Lending Protocol AAVE
Image source: Cryptotimes
The architecture of AAVE V1, V2, and V3 is fundamentally the same, but a 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. Portal, as a cross-chain feature in V3, aims to facilitate cross-chain asset supply, but many users are unfamiliar with or have never used it. The purpose of Portal is to bridge assets between different blockchains through cross-chain minting and burning of aTokens.
For example, Alice holds 10 aETH on Ethereum and wants to transfer it to Arbitrum. She can submit a transaction via the whitelisted bridging protocol, which will execute the following steps:
Contracts on Arbitrum temporarily minted 10 aETH without any underlying assets.
These aETH were transferred to Alice.
The batch 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.
Portal allows users to transfer funds cross-chain in pursuit of higher deposit rates. Although Portal achieves 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, enabling 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' allowing users to instantly access all liquidity resources across different networks. These improvements will enable Portal to evolve into a complete cross-chain liquidity protocol.
In addition to the 'Unified Liquidity Layer', AAVE V4 also plans to introduce new features, including dynamic interest rates, liquidity premiums, smart accounts, dynamic risk parameter configurations, and expansion to 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 launch of V4 aims to further expand its ecosystem and 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 the peak levels of 30% from the summer of DeFi in 2021, reaching $23.056 billion. This round of changes in DeFi protocols is more focused on modular lending and improving capital efficiency compared to the previous round. (For more details on modular lending protocols, you can refer to our previous article (Modular Narrative Derivatives: 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), the revenue sources of the Hyperliquid platform include instant listing auction fees, HLP market maker gains 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 approximately $44 million, with HLP contributing $40 million. HLP Strategy A incurred a loss of $2 million, while Strategy B gained $2 million. Liquidation revenue was $4 million. At the time of the HYPE token launch, the team repurchased HYPE tokens from the market via the assistance fund wallet. Assuming the team has no other USDC AF wallets, the P&L for USDC AF year-to-date is $52 million.
Therefore, with the addition of $44 million from HLP and $52 million from USDC AF, Hyperliquid's total revenue year-to-date is approximately $96 million, surpassing Lido to become the ninth largest cryptocurrency project by revenue in 2024.
Recent valuation research on the HYPE token by Messari Research's @defi_monk shows its FDV at approximately $13 billion, potentially exceeding $30 billion under favorable market conditions. Furthermore, Hyperliquid plans to launch HyperEVM through its TGE, with over 35 teams expected to participate in the new ecosystem, bringing 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 belongs to the application token, while revenue from the Layer 1 network belongs 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 vertical integration characteristics. First, let's look at the valuation of the 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, thereby eliminating the blockchain fragmentation problem.
Unlike centralized exchanges, decentralized exchanges do not require permission to use.
There are network effects in order flow and liquidity.
In the future, Hyperliquid's dominance will continue to grow. Hyperliquid is expected to capture nearly half of the on-chain market share by 2027, generating $551 million in revenue. Currently, trading fees belong to the community and are thus considered real revenue. Based on DeFi valuation standards with a 15x multiple, the Perp DEX, as an independent business, is valued at $8.3 billion. For enterprise clients, you can refer to our complete model. Now let's look at the L1 valuation:
Typically, the valuation of an L1 is assessed using a premium based on the DeFi applications running on it. As Hyperliquid's activities on its network increase, its valuation may rise further. Hyperliquid is currently ranked 11th in TVL among blockchains. Similar networks like 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.
Due to HyperEVM not being launched yet, Hyperliquid's L1 valuation conservatively estimates a premium of $5 billion. However, based on current market prices, the L1 valuation could be close to $10 billion or even higher.
Thus, under base case assumptions, Hyperliquid's Perp DEX is valued at $8.3 billion, with its L1 network valued 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 full recovery and surge of the DeFi ecosystem will undoubtedly become a 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 poised for unprecedented innovation and growth opportunities. As a leader in lending protocols, AAVE is gradually recovering and surpassing its former glory with liquidity layer innovations in V4, becoming a core force in the DeFi lending space. Meanwhile, in the derivatives market, Hyperliquid is rapidly emerging as the strongest dark horse of 2024, attracting a large number of users and liquidity with its outstanding technological innovations and efficient market share integration.
At the same time, the listing strategies of mainstream exchanges like Binance and Coinbase are continually evolving, with DeFi-related tokens becoming a new focus, such as the recently listed ACX, ORCA, COW, CETUS, VELODROME, reflecting the market's confidence in DeFi.
The prosperity of DeFi is not limited to lending and derivatives markets but will also blossom comprehensively in areas like stablecoins, liquidity provision, and cross-chain solutions. It is foreseeable that, propelled by policies, technology, and market forces, DeFi will rise again in 2025, becoming an indispensable part of the global financial system.
