作者：YBB Capital Researcher Ac-Core
TL;DR
● World Liberty Financial, jointly launched by the Trump family and top figures in the crypto industry, is gradually influencing the direction of the industry’s development. Its recent purchase of selected coins has also driven the growth of the secondary market;
● After Trump's victory, potential short-term crypto-friendly policies include: the establishment of a strategic Bitcoin reserve in the United States, the normalization and legalization of cryptocurrencies, and the issuance of debt plans in conjunction with ETFs;
● The new interest rate cut cycle will attract more capital injection to DeFi, similar to the macro environment during the DeFi Summer from 2020 to 2021;
● Many lending protocols such as AAVE and Hyperliquiquit have attracted widespread attention from the market, showing strong potential for recovery and explosion;
● The recent listing trends of Binance and Coinbase are more inclined towards DeFi-related tokens.
1. Impact of off-chain situations on the overall trend:
1.1 World Libertyfi and the Trump Administration
Image 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. It expresses Trump's ambition to make the United States a global cryptocurrency leader, aiming to challenge the traditional banking system by providing innovative financial solutions.
At the same time, affected by World Liberty Financial's purchase in December, the prices of related DeFi tokens have also rebounded, including ETH, cbBTC, LINK, AAVE, ENA, and ONDO.
1.2 Crypto-friendly policies to be finalized
The 47th President of the United States, Donald Trump, will be inaugurated on January 20, 2025. There are three main favorable policies for cryptocurrencies to be implemented:
● Trump reiterates plan to establish US strategic Bitcoin reserve
Strategic reserves are reserves of key resources that are released in times of crisis or supply disruptions, with the most famous example being the U.S. Strategic Petroleum Reserve. Trump recently said the U.S. plans to make major moves in the crypto space, possibly establishing a cryptocurrency reserve similar to its oil reserves. According to Coingecko data from July this year, governments hold a total of 2.2% of the global bitcoin supply, of which the U.S. owns 200,000 bitcoins, worth more than $20 billion.
● Normalization and legalization of encryption
The Trump administration may fulfill its promise to completely legalize cryptocurrencies if it comes to power again, and it is possible that a more open policy will be adopted in this field in the future. In his speech at the Blockchain Association's annual party, Trump affirmed the Blockchain Association's efforts to legislate for cryptocurrency in the United States; he said that real use cases like DePIN legalize cryptocurrency and are on the priority list for legislation; and he promised to ensure that Bitcoin and cryptocurrency thrive in the United States.
● Crypto combination punch: stabilizing the dollar hegemony + Bitcoin strategic reserve + legalization of crypto + ETF = bonds
Trump's public and strong support for crypto assets has brought him many benefits: 1. Better consolidate the status of the US dollar and the US dollar pricing power in the crypto industry during his tenure; 2. Plan the crypto market in advance to allow more funds to enter; 3. Force the Federal Reserve to move closer to itself; 4. Force the hostile capital in the past to move closer to itself.
As shown in the following figure, in 2014, the US dollar index was around 80 and the US debt was only about 20 trillion. Now the US debt has increased to about 36 trillion US dollars, an increase of 80% month-on-month, but the US dollar has continued to appreciate contrary to the norm. If the US dollar continues to strengthen, combined with the approval of the US Securities and Exchange Commission for the spot Bitcoin ETF, the new incremental part is likely to cover the future bond issuance costs.
Source data: investing
Image source: fred.stlouisfed
1.3 The new interest rate cut cycle makes DeFi more attractive
Data released by the U.S. Bureau of Labor Statistics showed that core inflation rose 0.3% in November for four consecutive quarters and rose 3.3% year-on-year. Housing costs fell, but commodity prices excluding food and energy rose 0.3%, the largest increase since May 2023.
The market reacted quickly, raising the probability of the Fed cutting interest rates next week from 80% to 90%. Investment manager James Assi believes that a rate cut in December is almost a foregone conclusion. Short-term U.S. Treasury bonds rose first and then fell due to mixed employment data, and the market's expectations for the Fed to cut interest rates this year have increased. At the same time, JPMorgan Chase expects the Fed to cut interest rates quarterly after the December policy meeting until the federal funds rate reaches 3.5%.
The recovery of DeFi is not only driven by internal factors, but external economic changes have also played a key role. As global interest rates change, high-risk assets such as crypto assets, including DeFi, become more attractive to investors seeking higher returns, and the market is preparing for a period of low interest rates, similar to the environment that drove the crypto bull market in 2017 and 2020.
The recovery of DeFi is not only driven by internal factors, but also by the three factors of Bitcoin ETF, legalization of crypto assets, and changes in global interest rates, which will also make the future crypto market more affected by external factors. As interest rates fall, high-risk assets become more attractive to investors, which is similar to the environment of the overall crypto bull market in 2017 and 2021.
Therefore, DeFi benefits from two points in a low interest rate environment:
1. Reduced capital opportunity cost: As the returns of traditional financial products decline, investors may turn to DeFi to seek higher returns (which also means that the profit space of the future crypto market will be further compressed);
2. Lower loan 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 begun to recover. The transaction volume of DeFi platforms has also increased significantly.
Image source: DeFiLlama
2. Intra-chain growth drives market trends:
2.1 Recovery of the lending protocol AAVE
Image source: Cryptotimes
AAVE V1, V2, and V3 share the same architecture, and the main upgrade of V4 is the introduction of a "unified liquidity layer". This feature is an extension of the Portal concept in AAVE V3. Portal, as a cross-chain function in V3, aims to enable the supply of cross-chain assets, but many users are not familiar with it or have never used it. The original intention of Portal is to complete the cross-chain bridging operation of assets 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 whitelisted bridge protocol, and the protocol will then perform the following steps:
1. The contract on Arbitrum will temporarily mint 10 aETH without underlying asset support;
2. These aETH are transferred to Alice;
3. Batch bridge transactions to transfer the actual 10 ETH to Arbitrum;
4. When funds become available, these ETH are injected into the AAVE pool to provide support for the minted aETH.
Portal allows users to transfer funds across chains in pursuit of higher deposit rates. Although Portal enables cross-chain liquidity, it operates on the whitelist bridge protocol rather than the AAVE core protocol, and users cannot use this feature directly through AAVE.
V4's "unified liquidity layer" is based on this improvement, using a modular design to uniformly manage supply, lending limits, interest rates, assets, and incentives, so that liquidity can be more efficiently and dynamically allocated. In addition, the modular design also allows AAVE to easily introduce or remove new modules without the need to migrate liquidity on a large scale.
With the help of 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. 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 configuration, non-EVM ecosystem expansion, etc., to build the Aave Network with the stablecoin GHO and AAVE lending protocol as the core.
As a leader in the DeFi field, AAVE has occupied about 50% of the market share in the past three years. The launch of version V4 aims to promote the further expansion of its ecosystem and serve potential 1 billion new users.
Image source: DeFiLlama
As of December 18, 2024, AAVE's TVL data has also grown significantly, currently exceeding the 30% level during the peak of DeFi Summer in 2021, reaching $23.056B. Compared with the previous round, the changes in this round of DeFi protocols are more biased towards modular lending and better capital efficiency improvements. (For the modular lending protocol, please refer to the content of our previous article (Derivation of Modular Narrative: Modular Evolution of DeFi Lending))
2.2 Hyperliquid, the dark horse of the strongest derivatives of the year
Image source: Medium: Hyperliquid
According to research by Yunt Capital @stevenyuntcap, the sources of revenue for the Hyperliquid platform include instant listing auction fees, HLP market maker profits and losses, and platform fees. The first two items are public information, and the team recently explained the last source of revenue. Based on this, we can deduce that Hyperliquid's total revenue from the beginning of the year to date is approximately US$44 million, of which HLP contributed US$40 million; HLP strategy A lost US$2 million and strategy B made a profit of US$2 million; and revenue from liquidation was US$4 million. When HYPE was launched, the team repurchased HYPE tokens on the market through the Assistance Fund wallet. Assuming that the team has no other USDC AF wallets, the profit and loss of USDC AF from the beginning of the year to date is US$52 million.
Therefore, combined with HLP's $44 million and USDC AF's $52 million, Hyperliquid's total revenue so far this year is approximately $96 million, surpassing Lido to become the ninth most profitable crypto project in 2024.
Messari Research@defi_monk recently conducted a valuation study on the HYPE token, and its fully diluted market value (FDV) is around $13 billion, which may exceed $30 billion under the right market conditions. In addition, Hyperliquid also plans to launch HyperEVM through TGE (token generation event), and more than 35 teams plan to participate in the new ecosystem, which makes Hyperliquid closer to a general L1 chain, not just an application chain.
Image source: Messari
Hyperliquid should adopt a new valuation framework. Usually, killer applications and their L1 networks are independent, with the application's revenue attributed to the application token and the L1 network's revenue attributed to the network validator. Hyperliquid integrates these revenue sources together. Therefore, Hyperliquid not only owns the leading decentralized perpetual contract trading platform (Perp DEX), but also controls its underlying L1 network. We use the sum-of-categories valuation method to reflect its vertical integration characteristics. Let's first look at the valuation of Perp DEX.
Messari’s overall view of the derivatives market is consistent 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 list any perpetual contract, and there is no problem of blockchain fragmentation;
● Unlike centralized exchanges, using decentralized exchanges does not require permission;
● There are network effects in terms of order flow and liquidity.
Hyperliquid's dominance will become stronger in the future. Hyperliquid is expected to occupy nearly half of the on-chain market in 2027, bringing in $551 million in revenue. Currently, transaction fees belong to the community, so they are considered actual revenue. Based on the 15x magnification of DeFi valuation standards, Perp DEX as an independent business can be valued at $8.3 billion. For enterprise customers, you can view our complete model. Next, let's look at the valuation of L1:
L1s are often valued at a premium for DeFi applications, and with the recent increase in activity on Hyperliquid’s network, its valuation may increase further. Hyperliquid is currently the 11th largest TVL chain, with similar networks such as Sei and Injective valued at $5 billion and $3 billion, respectively, while similarly sized high-performance networks such as Sui and Aptos are valued at $30 billion and $12 billion, respectively.
Since HyperEVM has not yet been launched, a more conservative $5 billion premium is used to estimate the valuation of Hyperliquid's L1. However, if evaluated at the current market price, L1's valuation may be close to $10 billion or more.
Therefore, in the base case, Hyperliquid's Perp DEX is valued at $8.3 billion, the L1 network is valued at $5 billion, and the total FDV is about $13.3 billion. In a bear market scenario, the valuation is about $3 billion, and in a bull market it could reach $34 billion.
3. Summary
Looking ahead to 2025, the full recovery and take-off of the DeFi ecosystem will undoubtedly become the mainstream melody. With the Trump administration's policy support for decentralized finance, the US crypto industry has ushered in a more friendly regulatory environment, and DeFi has ushered in unprecedented innovation and growth opportunities. As the leader of lending protocols, AAVE has gradually recovered and surpassed its past glory with the innovation of the liquidity layer of the V4 version, becoming the core force in the DeFi lending field. In the derivatives market, Hyperliquid has rapidly emerged as the strongest dark horse in 2024 with its outstanding technological innovation and efficient market share integration, attracting a large number of users and liquidity.
At the same time, the listing strategies of mainstream exchanges such as Binance and Coinbase are also changing, and DeFi-related tokens have become a new focus, such as the recent ACX, ORCA, COW, CETUS, and VELODROME. The actions of the two major platforms reflect the market's confidence in DeFi.
The prosperity of DeFi is not limited to the lending and derivatives markets, but will also blossom in multiple fields such as stablecoins, liquidity supply, and cross-chain solutions. It is foreseeable that, driven by policies, technology, and market forces, DeFi will become great again in 2025 and become an indispensable part of the global financial system.
