Original title: (2025 Main Melody Outlook: Making DeFi Great Again)
Original authors: Ac-Core, YBB Capital Research
TL;DR
● World Liberty Financial, jointly initiated by the Trump family and top figures in the crypto industry, is gradually influencing the direction of industry development, and its recent token purchases have also driven increases in the secondary market;
● After Trump's victory, potential short-term crypto-friendly policies mainly include: the U.S. establishing a Bitcoin strategic reserve, the legalization of crypto, and a debt issuance plan in conjunction with ETF releases;
● The new interest rate cut cycle will attract more capital into DeFi, similar to the macro environment during the 20 to 21 DeFi Summer;
● Many lending protocols like AAVE and Hyperliquid have garnered widespread market attention, showing strong recovery and explosive potential;
● Binance and Coinbase's recent 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
Data source: Financial Times
World Liberty Financial is positioned 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, expressing Trump's ambition to make the U.S. a global leader in cryptocurrencies.
Meanwhile, influenced by World Liberty Financial's recent purchases in December, related DeFi tokens have also seen price rebounds, including ETH, cbBTC, LINK, AAVE, ENA, ONDO.
1.2 Crypto-friendly policies to be firmly established
The 47th President of the United States, Donald Trump, will hold his inauguration on January 20, 2025. The crypto-friendly policies awaiting implementation mainly include three points:
● Trump reiterates plans to establish a strategic Bitcoin reserve in the U.S.
Strategic reserves are key 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 field, possibly establishing a cryptocurrency reserve similar to oil reserves. According to data from CoinGecko in July this year, governments worldwide hold 2.2% of the global Bitcoin supply, with the U.S. owning 200,000 Bitcoins, valued at over $20 billion.
● The normalization of crypto legalization
The Trump administration's return may fulfill the complete legalization of cryptocurrencies, potentially adopting more open policies in this field. Trump affirmed the efforts of the Blockchain Association for U.S. cryptocurrency legislation in a speech at the Blockchain Association's annual gala; he stated that real use cases like DePIN make cryptocurrencies legitimate and a priority on the legislative list; he promised to ensure that Bitcoin and cryptocurrencies thrive in the U.S.
● Crypto combination punch: solidifying dollar hegemony + Bitcoin strategic reserve + crypto legalization + ETF = bonds
Trump's open support for crypto assets brings many benefits: 1. Better consolidate the dollar's position and the crypto industry's dollar pricing power during his term; 2. Early layout in the crypto market to attract more capital; 3. Force the Federal Reserve to align with him; 4. Force previously hostile capital to align with him.
As shown in the data, the dollar index was around 80 in 2014, while U.S. debt was only around $20 trillion. Now, U.S. debt has increased to approximately $36 trillion, an 80% increase, while the dollar has unusually continued to appreciate. If the dollar continues to strengthen, combined with the SEC's approval of spot Bitcoin ETFs, the new incremental part could completely cover future bond issuance costs.
Data source: investing
Data source: fred.stlouisfed
1.3 The new interest rate cut cycle 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, up 3.3% year-on-year. Housing costs have moderated, but prices for goods excluding food and energy rose 0.3%, marking the largest increase since May 2023.
The market reacted quickly, raising the probability of an interest rate cut by the Federal Reserve next week from 80% to 90%. Investment manager James Arcy believes that a rate cut in December is almost a certainty. Short-term U.S. Treasuries rose and then fell due to mixed employment data, increasing market expectations for a rate cut by the Federal Reserve this 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 recovery of DeFi is driven not only by internal factors but also by external economic changes. With the changes in global interest rates, 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 possibly low interest rates, similar to the environment that drove the crypto bull markets of 2017 and 2020.
The recovery of DeFi is not only driven by internal factors but also influenced by three external factors: Bitcoin ETF approval, 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 overall crypto bull market environments of 2017 and 2021.
Thus, DeFi benefits in a low-interest-rate environment from two points:
1. The opportunity cost of capital decreases: returns on traditional financial products decline, leading investors to turn to DeFi for higher yields (this also means that the potential profit margins of the crypto market in the future will be further compressed);
2. Lower borrowing costs: financing becomes cheaper, encouraging users to borrow and invigorate the DeFi ecosystem.
After two years of adjustments, key indicators such as total locked value (TVL) have begun to rebound. The trading volume on DeFi platforms has also increased significantly.
Data source: DeFiLlama
II. On-chain growth drives market trend direction:
2.1 The Recovery of Lending Protocol AAVE
Data source: Cryptotimes
AAVE V1, V2, and V3 share the same architecture, while the main upgrade of V4 introduces the 'Unified Liquidity Layer.' This feature extends the Portal concept from AAVE V3. Portal, as a cross-chain feature in V3, aims to facilitate the supply of cross-chain assets, but many users are unfamiliar with it or have never used it. The original intention of Portal is to complete cross-chain bridging operations of assets by burning and minting aToken across 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, and then the protocol will execute the following steps:
1. Contracts on Arbitrum will temporarily mint 10 aETH without underlying asset support;
2. These aETH are transferred to Alice;
3. Batch process bridging transactions to transfer 10 actual ETH to Arbitrum;
4. When funds are available, these ETH will be injected into the AAVE pool to support the minted aETH.
Portal allows users to transfer funds across chains in pursuit of higher deposit rates. Although Portal has achieved cross-chain liquidity, its operation relies on whitelisted bridging protocols, not the core AAVE protocol, so users cannot use this feature directly through AAVE.
The V4 'Unified Liquidity Layer' is an improvement based on this, using a modular design to unify the management of supply, borrowing limits, interest rates, assets, and incentives, allowing liquidity to be more efficiently and dynamically allocated. Additionally, the modular design enables AAVE to easily introduce or remove new modules without large-scale migration of liquidity.
With the cross-chain interoperability protocol (CCIP) from Chainlink, AAVE V4 will also build a 'cross-chain liquidity layer' to allow users to instantly 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 new features such as dynamic interest rates, liquidity premiums, smart accounts, dynamic risk parameter configurations, and non-EVM ecosystem expansions, aiming to build the Aave Network centered around the stablecoin GHO and the AAVE lending protocol.
As a leader in the DeFi field, AAVE has maintained about 50% market share over the past three years, and the launch of the V4 version aims to drive further expansion of its ecosystem, serving potential new users in the billion-range.
Data source: 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 of 21, reaching $23.056B. The changes in this round of DeFi protocols compared to the last round are more inclined towards modular lending and better capital efficiency improvements. (For modular lending protocols, please refer to our previous article on the modular narrative's evolution in DeFi lending.)
2.2 The strongest annual derivatives dark horse Hyperliquid
Data 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 has recently explained the last revenue source. Based on this, we estimate Hyperliquid's total revenue from the beginning of the year to date to be approximately $44 million, with HLP contributing $40 million; HLP strategy A lost $2 million, while strategy B gained $2 million; income from liquidations was $4 million. When HYPE launches, the team repurchased HYPE tokens in the market through the Assistance Fund wallet. Assuming the team has no other USDC AF wallets, the USDC AF has a profit and loss of $52 million year-to-date.
Therefore, combining HLP's $44 million and USDC AF's $52 million, Hyperliquid's total revenue year-to-date is approximately $96 million, surpassing Lido and becoming the ninth most profitable crypto project in 2024.
Messari Research @defi_monk recently conducted a valuation study on HYPE tokens, estimating its fully diluted market cap (FDV) at around $13 billion, which could exceed $30 billion under appropriate market conditions. Furthermore, Hyperliquid plans to launch HyperEVM via TGE (Token Generation Event), with over 35 teams planning to participate in this new ecosystem, bringing Hyperliquid closer to a universal L1 chain rather than just an application chain.
Data source: Messari
Hyperliquid should adopt a new valuation framework. Typically, killer applications and their L1 networks are independent; the application's revenue belongs to the application token, while the L1 network's revenue 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 L1 network. We use a categorized total valuation method to reflect its vertical integration features. 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, avoiding the problem of blockchain fragmentation;
● Unlike centralized exchanges, using decentralized exchanges does not require permission;
● There are network effects in order flow and liquidity.
In the future, Hyperliquid's leading position will become stronger. Hyperliquid is expected to occupy nearly half of the on-chain market share by 2027, generating $551 million in revenue. Currently, trading fees belong to the community, so this is viewed as actual revenue. Based on a 15x valuation multiple according to DeFi valuation standards, the valuation of Perp DEX as an independent business could reach $8.3 billion. For enterprise clients, a complete model is available.
Typically, the premium of DeFi applications is used to assess L1. With the recent increase in Hyperliquid's activity on its network, its valuation may further increase. Hyperliquid is currently the 11th largest chain by TVL, with similar networks like Sei and Injective 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.
Since HyperEVM has not yet been launched, the L1 valuation of Hyperliquid is conservatively estimated with a premium of $5 billion. However, based on current market prices, the L1 valuation could approach $10 billion or higher.
Thus, under the base scenario, Hyperliquid's Perp DEX valuation is $8.3 billion, L1 network valuation is $5 billion, and 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 leap 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 friendlier regulatory environment, creating unprecedented opportunities for innovation and growth in DeFi. AAVE, as the leader in lending protocols, has gradually restored and surpassed its former glory with the innovative liquidity layer of its V4 version, becoming a core force in the DeFi lending space. In the derivatives market, Hyperliquid has rapidly risen to become the strongest dark horse of 2024 due to its outstanding technological innovation and efficient market share integration, attracting a large number of users and liquidity.
At the same time, mainstream exchanges like Binance and Coinbase are also changing their listing strategies, with DeFi-related tokens becoming the new focus, such as recent listings of ACX, ORCA, COW, CETUS, and VELODROME. The actions of the two platforms reflect market confidence in DeFi.
The prosperity of DeFi is not limited to the lending and derivatives markets but will also bloom in multiple areas such as stablecoins, liquidity provision, and cross-chain solutions. It is foreseeable that with the combined efforts of policy, technology, and market forces, DeFi will once again become great in 2025 and become an indispensable part of the global financial system.
This article comes from a submission and does not represent the views of BlockBeats.
