Author: YBB Capital Researcher Ac - Core
TL; DR
World Liberty Financial, jointly initiated by the Trump family and top figures in the crypto industry, is gradually influencing the development trajectory of the industry, and its recent selection of coins has also driven the rise in the secondary market;
After Trump's victory, potential short-term crypto-friendly policies mainly include: the establishment of a Bitcoin strategic reserve in the U.S., the normalization of cryptocurrency legalization, and a debt issuance plan in conjunction with ETFs;
The new interest rate cut cycle will attract more capital into DeFi, similar to the macro environment during the DeFi Summer of 2020-2021;
Many lending protocols like AAVE and Hyperliquid have sparked widespread market attention, showing strong recovery and explosive potential;
Binance and Coinbase's recent token listing trends are more inclined towards DeFi-related tokens.
I. The impact of external situations on overall trends:
1.1 World Libertyfi and the Trump administration
Image source: Financial Times
World Liberty Financial is positioned as a decentralized financial platform, providing fair, transparent, and compliant financial tools, attracting a large user base, symbolizing the beginning of a revolution in the banking industry. 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, expressing Trump's ambition to make the U.S. a global leader in cryptocurrency.
Recently, affected by World Liberty Financial's acquisition in December, related DeFi tokens have also rebounded in price, including ETH, cbBTC, LINK, AAVE, ENA, ONDO.
1.2 Crypto-friendly policies waiting to be finalized
The 47th President of the United States, Donald Trump, will hold his inauguration on January 20, 2025. The main crypto-friendly policies waiting to be implemented include three points:
Trump reiterates plans to establish a U.S. Bitcoin strategic reserve
Strategic reserves are crucial resource reserves released during crises 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, possibly establishing a cryptocurrency reserve similar to the oil reserve. According to CoinGecko data from July of this year, governments hold a total of 2.2% of the global Bitcoin supply, with the U.S. owning 200,000 Bitcoins, worth over $20 billion.
Normalization of cryptocurrency legalization
The Trump administration's return to power may fulfill the complete legalization of cryptocurrencies, potentially adopting a more open policy in this field in the future. Trump's speech at the Blockchain Association's annual gala affirmed the efforts of the Blockchain Association for U.S. cryptocurrency legislation; he stated that real use cases like DePIN make cryptocurrencies legal and prioritize them on the legislative list; and he promised to ensure that Bitcoin and cryptocurrencies thrive in the U.S.
Crypto combo: solidifying dollar hegemony + Bitcoin strategic reserve + crypto legalization + ETF = bonds
Trump publicly supports crypto assets, bringing numerous benefits: 1. Better solidification of the dollar's position and the dollar pricing power in the crypto industry during his tenure; 2. Early positioning in the crypto market, allowing more capital to enter; 3. Forcing the Fed 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 while U.S. debt was only about $20 trillion. Now, U.S. debt has increased to about $36 trillion, an 80% increase, but the dollar has been unusually appreciating. If the dollar continues to strengthen, combined with the SEC's approval of a spot Bitcoin ETF, the new incremental portion could completely cover future bond issuance costs.
Image source data: investing
Image source data: fred.stlouisfed
1.3 The new interest rate cut cycle makes DeFi more attractive
Data released by the U.S. Bureau of Labor Statistics shows that core inflation rose 0.3% for four consecutive quarters in November, with a year-on-year increase of 3.3%. Housing costs have eased, but prices of goods excluding food and energy rose 0.3%, marking the largest increase since May 2023.
The market reacted quickly, raising the probability of the Fed cutting rates next week from 80% to 90%. Investment manager James Acy believes that a rate cut in December is almost a certainty. Short-term U.S. Treasury bonds rose and then fell due to mixed employment data, increasing the market's expectations for the Fed to cut rates this year. Meanwhile, JPMorgan expects the Fed to cut rates quarterly after the December policy meeting until the federal funds rate reaches 3.5%.
The recovery of DeFi is driven not only by internal factors but also by external economic changes. With changes in global interest rates, high-risk assets such as crypto assets, including DeFi, have become more attractive to investors seeking higher returns. The market is preparing for a period that could be characterized by low interest rates, similar to the environment that drove the cryptocurrency bull markets of 2017 and 2020.
The recovery of DeFi is driven not only by internal factors but also by external influences, such as Bitcoin ETFs, the legalization of crypto assets, and changes in global interest rates. 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.
So DeFi benefits from two points in a low-interest rate environment:
Lower capital opportunity costs: Returns on traditional financial products are declining, prompting investors to turn to DeFi for higher yields (this also means that the future profit margins of the crypto market may be further squeezed);
Lower borrowing costs: Financing becomes cheaper, encouraging users to borrow and activate the DeFi ecosystem.
After two years of adjustment, key indicators such as total locked value (TVL) have started to rise. The trading volume on DeFi platforms has also significantly increased.
Image source data: DeFiLlama
2. On-chain growth drives market trends:
2.1 The recovery of the lending protocol AAVE
Image 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 expansion of the Portal concept from version V3. Portal, as a cross-chain feature in V3, aims to supply cross-chain assets, but many users are unfamiliar with or have not used it. The intention behind Portal is to complete cross-chain bridging operations by destroying and minting aTokens between different blockchains.
For example, Alice holds 10 aETH on Ethereum and wants to transfer it to Arbitrum. She can submit this transaction through the bridge protocol on the whitelist, which will then execute the following steps:
On Arbitrum, contracts will temporarily mint 10 aETH without underlying asset support;
These aETH have been transferred to Alice;
Batch processing bridge transactions, transferring an actual 10 ETH to Arbitrum;
When the funds are available, these ETH will be injected into the AAVE pool to support the minted aETH.
Portal enables users to transfer funds across chains, seeking higher deposit rates. Although Portal achieves cross-chain liquidity, its operation relies on whitelisted bridge protocols rather than the core AAVE protocol, and users cannot directly use this feature through AAVE.
The V4 'unified liquidity layer' is based on this improvement, adopting a modular design to uniformly manage supply, lending limits, interest rates, assets, and incentives, allowing liquidity to be dynamically allocated more efficiently. Additionally, the modular design also 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 instantaneously access all liquidity resources across different networks. Through these improvements, Portal will further evolve into a complete cross-chain liquidity protocol.
In addition to the 'unified liquidity layer', AAVE V4 also plans to introduce dynamic interest rates, liquidity premiums, smart accounts, dynamic risk parameter configurations, and non-EVM ecosystem expansions, building the Aave Network centered around the stablecoin GHO and AAVE lending protocol.
As a leader in the DeFi space, AAVE has held about 50% market share over the past three years, and the launch of version V4 aims to drive further expansion of its ecosystem, serving a potential new user base in the billions.
As of December 18, 2024, AAVE's TVL data is also significantly growing, currently exceeding 30% of the peak level during the DeFi Summer of 2021, reaching $23.056B. The changes in this round of DeFi protocols are more inclined towards modular lending and better capital efficiency improvement compared to the previous round. (For modular lending protocols, please refer to our previous article on the modular narrative of the 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 gains and losses, and platform fees. The first two are public information, and the team has recently explained the last source of income. Based on this, we can estimate that Hyperliquid's total revenue year-to-date is approximately $44 million, with HLP contributing $40 million; HLP strategy A lost $2 million, while strategy B made a profit of $2 million; revenue from liquidation was $4 million. When HYPE launches, the team will repurchase HYPE tokens in the market through the Assistance Fund wallet. Assuming the team has no other USDC AF wallets, the profit and loss of USDC AF year-to-date is $52 million.
Therefore, combined with the $44 million from HLP and $52 million from USDC AF, Hyperliquid's total revenue year-to-date is approximately $96 million, surpassing Lido, becoming the ninth most profitable crypto project in 2024.
Messari Research @ defi_monk recently studied the valuation of the HYPE token, with its fully diluted market cap (FDV) around $13 billion, potentially exceeding $30 billion under suitable market conditions. Additionally, Hyperliquid plans to launch HyperEVM through TGE (Token Generation Event), with over 35 teams planning to participate in this new ecosystem, bringing Hyperliquid closer to a universal L1 chain, not just an application chain.
Hyperliquid should adopt a new valuation framework. Typically, killer applications and their L1 networks are separate, with the application's income attributed to the application token and the L1 network's income attributed to network validators. However, Hyperliquid integrates these income sources. Thus, Hyperliquid not only has a leading decentralized perpetual contract trading platform (Perp DEX) but also controls its underlying L1 network. We use a classification and aggregation valuation method to reflect its vertical integration characteristics. First, let's look at the valuation of Perp DEX.
Messari's overall view of the derivatives market aligns with the perspectives 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, without issues of blockchain fragmentation;
Unlike centralized exchanges, using decentralized exchanges does not require permission;
There are network effects regarding order flow and liquidity.
In the future, Hyperliquid's dominance will continue to strengthen. Hyperliquid is expected to capture nearly half of the on-chain market by 2027, generating $551 million in revenue. Currently, trading fees belong to the community, so they are considered actual income. Based on a 15x multiplier from DeFi valuation standards, the valuation of Perp DEX as an independent business could reach $8.3 billion. Corporate clients can refer to our complete model. Next, let's look at the valuation of L1:
It is common to use the premium of DeFi applications to assess L1. With the recent increase in Hyperliquid's network activity, its valuation may further increase. Hyperliquid is currently the 11th largest chain by TVL, while similar networks such as Sei and Injective are valued at $5 billion and $3 billion respectively, and high-performance networks of similar scale like Sui and Aptos are valued at $30 billion and $12 billion respectively.
Since HyperEVM has not yet launched, the L1 valuation for Hyperliquid is conservatively estimated at $5 billion. However, if assessed at current market prices, the L1 valuation could be close to $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 comprehensive recovery and soaring of the DeFi ecosystem will undoubtedly become the mainstream melody. With the Trump administration's policy support for decentralized finance, the U.S. crypto industry has welcomed a more favorable regulatory environment, and DeFi is ushering in unprecedented innovation and growth opportunities. AAVE, as the leader in lending protocols, is gradually recovering and surpassing its former glory with the liquidity layer innovation of version V4, becoming a core force in the DeFi lending field. Meanwhile, in the derivatives market, Hyperliquid has rapidly risen to become 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, the listing strategies of mainstream exchanges such as Binance and Coinbase are also changing, with DeFi-related tokens becoming the new focus, such as recent listings of ACX, ORCA, COW, CETUS, VELODROME. The actions of the two major platforms reflect the market's confidence in DeFi.
The prosperity of DeFi is not limited to lending and derivatives markets but will also bloom across various fields such as stablecoins, liquidity provision, and cross-chain solutions. It is foreseeable that with the combined push from policies, technology, and market forces, DeFi will once again become great in 2025, becoming an indispensable part of the global financial system.
