2025 Main Theme Outlook: Make DeFi Great Again

Original title: "2025 Main Theme Outlook: Make DeFi Great Again"

Original author: 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 development direction of the industry. Its recent coin selection and purchase has also driven the growth of the secondary market;

● After Trump's victory, potential short-term favorable policies for cryptocurrencies mainly include: the establishment of a strategic reserve of Bitcoin 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 allow DeFi to attract more capital injections, similar to the macro environment during the DeFi Summer from 20 to 21 years;

● AAVE, Hyperliquid Many lending protocols such as BTC and ETH have attracted widespread attention in the market, showing strong potential for recovery and outbreak;

● Binance and Coinbase's recent listing trends are more inclined towards DeFi-related tokens.

I. The impact of off-chain situations on the overall trend:

1.1 World Libertyfi and the Trump Administration

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 leader in cryptocurrency, 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 U.S. President Donald Trump will hold his inauguration ceremony on January 20, 2025. There are three main favorable policies for crypto to be implemented:

● Trump reiterated his plan to establish a U.S. strategic Bitcoin reserve

Strategic reserves are reserves of key resources released in times of crisis or supply disruptions. The most famous example is the U.S. Strategic Oil Reserve. Trump recently said that the United States plans to make major moves in the crypto field and may establish a cryptocurrency reserve similar to the oil reserve. According to CoinGecko data in July this year, governments hold a total of 2.2% of the global Bitcoin supply, of which the United States owns 200,000 Bitcoins, worth more than $20 billion.

● Normal legalization of encryption

The Trump administration is in power again and may fulfill the complete legalization of cryptocurrencies. It is possible to adopt a more open policy in this field in the future. Trump's speech at the Blockchain Association's annual party: affirmed the Blockchain Association's efforts to legislate cryptocurrencies in the United States; said that real use cases like DePIN legalize cryptocurrencies and are on the priority list of legislation; promised to ensure that Bitcoin and cryptocurrencies flourish in the United States.

● Crypto combination punch: consolidate the hegemony of the US dollar + Bitcoin strategic reserve + legalization of encryption + ETF = bonds

Trump's public and strong support for crypto assets has brought many benefits to himself: 1. Better consolidate the status of the US dollar and the US dollar pricing power of the crypto industry during his tenure; 2. Arrange 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, the US dollar index was around 80 in 2014 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

Source data: fred.stlouisfed

1.3 The new rate cut cycle makes DeFi more attractive

Data released by the U.S. Bureau of Labor Statistics showed that core inflation rose 0.3% for four consecutive quarters in November and rose 3.3% year-on-year. Housing costs have fallen, 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 the December rate cut is almost a foregone conclusion. Short-term U.S. Treasuries rose first and then fell, as mixed employment data strengthened market expectations for the Fed to cut interest rates this year. 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.

DeFi's recovery is not only driven by internal factors, but also by Bitcoin ETFs, the legalization of crypto assets, and changes in global interest rates. The three factors 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.

So DeFi benefits from two points in a low interest rate environment:

1. Lower opportunity cost of capital: As returns from traditional financial products decline, investors may turn to DeFi to seek higher returns (which also means that the profit space in 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 rebound. The transaction volume of DeFi platforms has also increased significantly.

Source data: DeFiLlama

2. In-chain growth drives market trends:

2.1 Recovery of 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 achieve 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 she wants to transfer it to Arbitrum. She can submit this transaction through the whitelisted bridge protocol, which then performs the following steps:

1. The contract on Arbitrum temporarily mints 10 aETH without underlying assets;

2. These aETH are transferred to Alice;

3. The bridge transaction is batched to transfer the actual 10 ETH to Arbitrum;

4. When funds are available, these ETH are 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 enables cross-chain liquidity, it relies on the whitelisted bridge protocol rather than the AAVE core protocol to operate, and users cannot use this function 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 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 ecological expansion, and build Aave Network with stablecoin GHO and AAVE lending protocols 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 V4 is intended to promote the further expansion of its ecosystem and serve potential 1 billion new users.

Source data: DeFiLlama

As of December 18, 2024, AAVE's TVL data has also grown significantly, currently surpassing 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 inclined to modular lending and better capital efficiency. (For modular lending protocols, please refer to our previous article "Derivatives of Modular Narratives: Modular Evolution of DeFi Lending")

2.2 The strongest dark horse of derivatives of the year Hyperliquid

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 makers' 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 infer 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, strategy B made a profit of US$2 million; and revenue from liquidation was US$4 million. When HYPE was launched, the team bought back HYPE tokens on the market through the Assistance Fund wallet. Assuming the team has no other USDC AF wallets, USDC AF's PL YTD is $52M.

So combining HLP's $44M and USDC AF's $52M, Hyperliquid's total YTD revenue is about $96M, surpassing Lido to become the ninth most profitable crypto project in 2024.

Messari Research @defi_monk recently valued the HYPE token, with a fully diluted market cap (FDV) of around $13B, which could exceed $30B 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 rather than just an application chain.

Image source: Messari

Hyperliquid should adopt a new valuation framework. Usually killer applications and their L1 networks are independent, with application revenues attributed to application tokens and L1 network revenues attributed to network validators. Hyperliquid combines 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 aggregate classification 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 is consistent with that of Multicoin Capital and ASXN, the only difference is 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, there is no permission required to use decentralized exchanges;

● There are network effects in terms of order flow and liquidity.

Hyperliquid's dominance will become stronger and stronger in the future. Hyperliquid is expected to account for 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 income. Based on a 15x magnification of DeFi valuation standards, Perp DEX as a standalone business could be valued at $8.3 billion. For enterprise clients, you can view our full model. Next, let's look at the valuation of L1:

L1 is often valued using 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 high-performance networks of similar size 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 current market prices, L1's valuation may be close to $10 billion or more.

Therefore, in the basic scenario, 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. The valuation is about $3 billion in a bear market scenario, and it may reach $34 billion in a bull market.

Three, Summary

Looking forward 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 bloom in many fields such as stablecoins, liquidity supply, and cross-chain solutions. It can be foreseen that, driven by policies, technology, and market forces, DeFi will be great again in 2025 and become an indispensable part of the global financial system.

This article comes from a contribution and does not represent the views of BlockBeats.