Original title: (2025 Mainstream 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 up secondary market prices;
● After Trump's election victory, the potential short-term pro-crypto policies mainly include: establishing a strategic reserve for Bitcoin in the U.S., legalizing crypto as a norm, and issuing debt plans in conjunction with ETFs;
● The new interest rate cut cycle will attract more funds into DeFi, similar to the macro environment during the DeFi Summer of 2020 to 2021;
● Many lending protocols such as AAVE and Hyperliquid have sparked 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, the aim is to challenge the traditional banking system by providing innovative financial solutions. It expresses Trump's ambition to make the U.S. a global leader in cryptocurrency by providing innovative financial solutions to challenge the traditional banking system.
Recently, influenced by World Liberty Financial's purchases in December, related DeFi tokens have also seen price rebounds, including ETH, cbBTC, LINK, AAVE, ENA, and ONDO.
1.2 Pro-Crypto Policies Awaiting Implementation
The 47th President of the United States, Donald Trump, will be inaugurated on January 20, 2025, and the pro-crypto policies awaiting implementation mainly include three points:
● Trump reiterated plans to establish a U.S. Bitcoin strategic reserve
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, potentially establishing a cryptocurrency reserve similar to the oil reserve. According to CoinGecko data from July this year, governments around the world hold a total of 2.2% of the global Bitcoin supply, with the U.S. holding 200,000 Bitcoins worth over $20 billion.
● The normalization of crypto legalization
The Trump administration's return could fulfill the complete legalization of cryptocurrencies, and it is possible that more open policies will be adopted in this field. Trump's speech at the Blockchain Association's annual gala confirmed the efforts of the Blockchain Association for U.S. cryptocurrency legislation; he stated that real use cases like DePIN make cryptocurrencies legal and are on the legislative priority list; and he promised to ensure that Bitcoin and cryptocurrencies thrive in the U.S.
● Crypto combination: solidifying dollar hegemony + Bitcoin strategic reserve + crypto legalization + ETF = bonds
Trump's public strong support for crypto assets has brought many benefits to himself: 1. A better consolidation of the dollar's status and the dollar pricing power of the crypto industry during his tenure; 2. Early layout in the crypto market, allowing more funds to enter; 3. Forcing the Federal Reserve to align with him; 4. Forcing previously hostile capital to align with him.
As shown in the data, 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, yet the dollar has been unusually strengthening continuously. If the dollar continues to strengthen, combined with the SEC's approval of spot Bitcoin ETFs, the new incremental portion could fully 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 released by the U.S. Bureau of Labor Statistics shows that core inflation rose 0.3% in November for four consecutive quarters, with an annual increase of 3.3%. Housing costs have declined, but the prices of goods excluding food and energy increased by 0.3%, marking the largest increase since May 2023.
The market reacts quickly, believing that the probability of the Federal Reserve cutting interest rates next week has increased from 80% to 90%. Investment manager James Assee believes that a rate cut in December is almost a foregone conclusion. Short-term U.S. Treasury bonds rose and then fell due to mixed employment data, with market expectations for the Federal Reserve to cut rates this year increasing. Meanwhile, 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 not only driven by internal factors; external economic changes have also played a key role. 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 possible low-interest-rate period, 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 by external influences from factors such as Bitcoin ETFs, the legalization of crypto assets, and changes in global interest rates. As interest rates decrease, high-risk assets become more attractive to investors, similar to the environment of the overall crypto bull markets of 2017 and 2021.
Therefore, DeFi benefits in low-interest-rate environments for two reasons:
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 profit space available in the crypto market will be further compressed in the future);
2. Lower loan 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 of 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 is the introduction of the 'Unified Liquidity Layer'. This feature is an extension of the Portal concept in the AAVE V3 version. Portal, as a cross-chain feature in V3, aims to enable the supply of cross-chain assets, but many users are not familiar with or have not used it. The intention of Portal is to complete asset cross-chain bridging operations by destroying and minting aTokens between 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 supporting underlying assets;
2. These aETH are transferred to Alice;
3. Batch processing bridging transactions to transfer 10 real ETH to Arbitrum;
4. When 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 in pursuit of higher deposit rates. Although Portal achieves cross-chain liquidity, its operation relies on a whitelisted bridging protocol rather than the core AAVE protocol, and users cannot use this function directly through AAVE.
The V4 version's 'Unified Liquidity Layer' is an improvement based on this, adopting a modular design to unify the management of supply, borrowing limits, interest rates, assets, and incentives, enabling liquidity to be dynamically allocated more efficiently. In addition, the modular design also allows AAVE to easily introduce or remove new modules without massive liquidity migration.
With the cross-chain interoperability protocol (CCIP) of Chainlink, 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 configurations, and non-EVM ecosystem expansions, with stablecoin GHO and AAVE lending protocol at its core to build the Aave Network.
As the leader in the DeFi field, AAVE has held approximately 50% market share over the past three years, and the launch of the V4 version aims to drive further expansion of its ecosystem to serve a potential new user base of 1 billion.
Data source: DeFiLlama
As of December 18, 2024, AAVE's TVL data is also growing significantly, currently surpassing 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 improvements compared to the last round. (For modular lending protocols, please refer to our previous article (The Derivative of Modular Narratives: The Modular Evolution of DeFi Lending).
2.2 The Strongest Derivatives Dark Horse of the Year: Hyperliquid
Data source: Medium: Hyperliquid
According to research by Yunt Capital@stevenyuntcap, the revenue sources of the Hyperliquid platform include instant listing auction fees, HLP market maker profits and losses, and platform fees. The first two are public information, and the team recently explained the last revenue source. Based on this, we can estimate that Hyperliquid's total revenue from the beginning of the year to date is approximately $44 million, with HLP contributing $40 million; HLP Strategy A lost $2 million, Strategy B gained $2 million; revenue from liquidation is $4 million. When HYPE launches, the team repurchases HYPE tokens on the market through the Assistance Fund wallet. Assuming the team has no other USDC AF wallets, the USDC AF's profit and loss from the beginning of the year to date is $52 million.
Therefore, combining HLP's $44 million and USDC AF's $52 million, Hyperliquid's total revenue from the beginning of the year to date is approximately $96 million, surpassing Lido, becoming the ninth most profitable crypto project in 2024.
Messari Research@defi_monk recently conducted a valuation study on the HYPE token, with its fully diluted market cap (FDV) around $13 billion, potentially exceeding $30 billion under appropriate market conditions. Additionally, Hyperliquid plans to launch HyperEVM through TGE (Token Generation Event), with more than 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. Hyperliquid has integrated 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 classified aggregation valuation method 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 the opinions of Multicoin Capital and ASXN, the only difference being 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, eliminating the fragmentation problem of blockchains;
● Unlike centralized exchanges, using decentralized exchanges does not require permission;
● There are network effects in order flow and liquidity.
In the future, Hyperliquid's dominance will become increasingly strong. 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 it is viewed as actual income. Based on a 15 times amplification multiple of DeFi valuation standards, the valuation of Perp DEX as an independent business could reach $8.3 billion. For enterprise clients, a complete model can be reviewed. Next, let's look at the valuation of L1:
Typically, the premiums of DeFi applications are used to assess L1. With Hyperliquid's recent increase in activity on its network, its valuation may further enhance. Hyperliquid is currently the 11th largest TVL chain, while similar networks like Sei and Injective have valuations of $5 billion and $3 billion, respectively, while similarly-sized high-performance networks like Sui and Aptos have valuations of $30 billion and $12 billion, respectively.
Since HyperEVM has not yet gone live, the L1 valuation of Hyperliquid is conservatively estimated at a $5 billion premium. However, if assessed at current market prices, the L1 valuation could approach $10 billion or higher.
Therefore, 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. Conclusion
Looking ahead to 2025, the comprehensive 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 U.S. crypto industry has welcomed a more friendly regulatory environment, and DeFi is ushering in unprecedented innovation and growth opportunities. As the leader in lending protocols, AAVE, with the innovation of its V4 version liquidity layer, is gradually restoring and surpassing its former glory, becoming a core force in the DeFi lending field. In the derivatives market, Hyperliquid has rapidly emerged as the strongest dark horse of 2024, attracting a large number of users and liquidity due to its outstanding technological innovation and efficient market share integration.
At the same time, mainstream exchanges such as Binance and Coinbase are also changing their listing strategies, with DeFi-related tokens becoming the new focus, such as the recent listings of ACX, ORCA, COW, CETUS, and VELODROME. The actions of these two platforms reflect the market's confidence in DeFi.
The prosperity of DeFi is not limited to lending and derivatives markets but will fully blossom in various fields such as stablecoins, liquidity supply, and cross-chain solutions. It is foreseeable that with the joint promotion of policies, technology, and market forces, DeFi will become great again in 2025, becoming an indispensable part of the global financial system.
This article is from a submission and does not represent the views of BlockBeats.
