Outlook for 2025: Make DeFi Great Again

Author: Ac-Core, Researcher at YBB Capital

Key Points

• World Liberty Financial, founded by the Trump family and top figures in the crypto industry, is gradually influencing the direction of the industry, and their recent token purchases have also driven up secondary market prices.

• After Trump's victory, key crypto-friendly policies in the short term include: establishing a strategic reserve of Bitcoin in the United States, legalizing cryptocurrencies, and supporting debt plans through the issuance of ETFs.

• The new interest rate cuts will attract more funds into DeFi, creating a macro environment similar to the DeFi summer of 2020-2021.

• DeFi lending protocols such as AAVE and Hyperliquid are attracting widespread attention and showing strong recovery and explosive power.

• Binance and Coinbase have recently favored DeFi-related tokens in their listing trends.

1. External factors affecting 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. It has attracted a large number of users and symbolizes the beginning of a banking revolution. Founded by the Trump family and top figures in the crypto industry, the platform aims to challenge the traditional banking system by providing innovative financial solutions. This reflects Trump's ambition to make the United States a global leader in cryptocurrency by offering innovative solutions to challenge the traditional banking system.

Recently, World Liberty Financial's purchases in December had an impact on the market, causing the prices of several DeFi tokens including ETH, cbBTC, LINK, AAVE, ENA and ONDO to rebound.

1.2 Crypto-friendly policies are expected after Trump takes office

Donald Trump, the 47th President of the United States, will take office on January 20, 2025. Crypto-friendly policies expected to be implemented during his administration include:

• Trump reiterates plan to establish a US strategic reserve of Bitcoin

Strategic reserves are key resources that are released in times of crisis or supply disruptions. A well-known example is the US Strategic Petroleum Reserve. Trump recently said that the United States plans to take major actions in the crypto field, possibly creating a cryptocurrency reserve similar to the oil reserve. According to CoinGecko data from July this year, governments hold 2.2% of the global Bitcoin supply, with the United States holding 200,000 BTC, worth more than $20 billion.

• Normalization of Cryptocurrency Legalization

With the coming of Trump's second administration, cryptocurrency may move towards full legalization. There may be more open policies in this field. At the Blockchain Association's annual event, Trump expressed support for efforts to pass U.S. cryptocurrency legislation and acknowledged that practical use cases like DePIN will legalize cryptocurrency and make it a priority on the legislative agenda. He promised to ensure that Bitcoin and cryptocurrencies prosper in the United States

• Crypto power game: Strengthening the dominance of the US dollar + Bitcoin reserves + Legalization of cryptocurrencies + ETFs = bonds

Trump has publicly supported the view that crypto assets bring many benefits, including: 1) strengthening the position of the US dollar and the pricing power of cryptocurrencies against the US dollar; 2) preemptively deploying in the crypto market to attract more capital; 3) forcing the Federal Reserve to ally with him; 4) pushing previously hostile capital to ally with him.

As shown in the figure below, the US dollar index was around 80 in 2014, when the US debt was about 20 trillion US dollars. Today, the US debt has increased to about 36 trillion US dollars, an increase of 80%, but the US dollar continues to rise abnormally. If the US dollar continues to strengthen, coupled with the approval of the US Securities and Exchange Commission for the Bitcoin spot ETF, the new increase can fully cover the cost of future bond issuance.

Image data source: Investing

Image data source: fred.stlouisfed

1.3 A new round of interest rate cuts makes DeFi more attractive

Data from the U.S. Bureau of Labor Statistics showed that core inflation rose 0.3% for the fourth consecutive quarter in November and 3.3% year-on-year. Housing costs eased, but commodity prices excluding food and energy rose 0.3%, the largest increase since May 2023.

The market responded quickly, raising the probability of a rate cut by the Federal Reserve next week from 80% to 90%. Investment manager James Assy believes that a rate cut in December is almost certain. JPMorgan also expects the Federal Reserve to begin cutting interest rates quarterly after the December policy meeting until the federal funds rate reaches 3.5%.

The revival of DeFi is driven not only by internal factors but also by key external economic changes. As global interest rates change, high-risk assets such as DeFi and cryptocurrencies are becoming increasingly attractive to investors seeking higher returns. The market is preparing for a period of low interest rates that may continue, similar to the environment of the cryptocurrency bull market in 2017 and 2020.

Therefore, DeFi benefits in a low interest rate environment for two reasons:

1. Reduced opportunity cost of capital: As the yield of traditional financial products declines, investors may turn to DeFi for higher returns (which also means that the potential profit margins of the crypto market will be compressed).

2. Reduced borrowing costs: Cheaper financing encourages borrowing and promotes the activity of the DeFi ecosystem.

After two years of adjustment, key indicators such as TVL have begun to pick up. The transaction volume of DeFi platforms has also increased significantly.

Image data source: DeFiLlama

2. On-chain growth drives market trends

2.1 Recovery of the lending protocol AAVE

Image source: Cryptotimes

The architecture of AAVE V1, V2, and V3 is basically the same, but the key upgrade of V4 is the introduction of a "unified liquidity layer". This function is an extension of the Portal concept introduced in AAVE V3. As a cross-chain function in V3, Portal aims to achieve cross-chain asset supply, but many users are not familiar with or have never used it. The purpose of Portal is to bridge assets between different blockchains by minting and destroying aTokens across chains.

For example, Alice holds 10 aETH on Ethereum and wants to transfer it to Arbitrum. She can submit a transaction through the whitelist bridge protocol, which will perform the following steps:

• The contract on Arbitrum temporarily mints 10 aETH without any underlying assets.

• These aETH are transferred to Alice.

• The batching process bridges the actual 10 ETH to Arbitrum.

• Once the funds are in place, 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, its operation relies on the whitelist bridge protocol rather than the core protocol of AAVE, and users cannot use this feature directly through AAVE.

The "unified liquidity layer" in V4 improves on this, using a modular design to manage supply, borrowing limits, interest rates, assets, and incentives, thereby achieving dynamic and more efficient allocation of liquidity. In addition, the modular design enables 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" that enables users to instantly access all liquidity resources across different networks. With these improvements, Portal will evolve into a complete cross-chain liquidity protocol.

In addition to the "unified liquidity layer", AAVE V4 also plans to launch new features, including dynamic interest rates, liquidity premiums, smart accounts, dynamic risk parameter configuration, and expansion to the non-EVM ecosystem, with stablecoin GHO and AAVE lending protocol as the core of the Aave network.

As a leader in the DeFi field, AAVE has consistently occupied about 50% of the market share in the past three years. The launch of V4 aims to further expand its ecosystem and serve a potential user base of 1 billion.

Image data source: DeFiLlama

As of December 18, 2024, AAVE's TVL has increased significantly, exceeding the 2021 DeFi summer peak level by 30%, reaching US$23.056 billion. Compared with the previous round, this round of changes in DeFi protocols focuses more on modular lending and improving capital efficiency. (For more details about the modular lending protocol, 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

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 are public information, and the team recently explained the third source of revenue. Based on this, we can estimate that Hyperliquid's total revenue from the beginning of the year to date is about $44 million, of which HLP contributed $40 million. HLP Strategy A lost $2 million and Strategy B made a profit of $2 million. Liquidation income is $4 million. When the HYPE token was launched, the team bought back the HYPE token from the market through the aid 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 $52 million.

Therefore, with HLP's $44 million and USDC AF's $52 million, Hyperliquid's total revenue from the beginning of the year to date is about $96 million, surpassing Lido to become the ninth largest cryptocurrency project in terms of revenue in 2024.

@defi_monk of Messari Research recently conducted a valuation study on the HYPE token. Its FDV is about $13 billion, and under the right market conditions, it may exceed $30 billion. In addition, Hyperliquid plans to launch HyperEVM through its TGE, and it is expected that more than 35 teams will participate in the new ecosystem, bringing Hyperliquid closer to becoming a general-purpose Layer 1 blockchain, not just an application chain.

Image source: Messari

Hyperliquid should adopt a new valuation framework. Usually, killer applications and their Layer 1 networks are separate. Revenue from applications belongs to application tokens, while revenue from Layer 1 networks belongs to network validators. However, Hyperliquid integrates these revenue sources. So, not only does Hyperliquid own the leading decentralized perpetual swap exchange (Perp DEX), it also controls its underlying Layer 1 network. We use a sum-of-the-parts valuation 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 Multicoin Capital and ASXN, with one exception - 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 problem of blockchain fragmentation.

• Unlike centralized exchanges, decentralized exchanges do not require permission to use.

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

In the future, Hyperliquid’s dominance will continue to grow. Hyperliquid is expected to capture nearly half of the on-chain market share by 2027, generating $551 million in revenue. Currently, transaction fees belong to the community and are therefore considered real revenue. Based on a 15x multiple based on DeFi valuation standards, Perp DEX as a standalone business is valued at $8.3 billion. For enterprise clients, you can refer to our full model. Now let's look at L1 valuations:

Typically, L1 valuations are assessed using the premium of DeFi applications running on them. As Hyperliquid continues to increase activity on its network, its valuation is likely to rise further. Hyperliquid is currently the 11th largest blockchain by TVL. Similar networks, such as Sei and Injective, are 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, Hyperliquid's L1 valuation is conservatively estimated to have a $5 billion premium. But based on current market prices, the L1 valuation could be close to $10 billion or even higher.

Therefore, in the base case, Hyperliquid's Perp DEX is valued at $8.3 billion and its L1 network is valued at $5 billion, bringing its total FDV to approximately $13.3 billion. In a bear market scenario, its valuation is approximately $3 billion, while in a bull market scenario, its valuation could reach $34 billion.

3. Conclusion

Looking forward to 2025, the full recovery and surge of the DeFi ecosystem will undoubtedly become the mainstream narrative. With the Trump administration's policy support for decentralized finance, the U.S. cryptocurrency industry has ushered in a more favorable regulatory environment, and DeFi is ushering in unprecedented innovation and growth opportunities. As the leader of lending protocols, AAVE has gradually recovered and surpassed its former glory with the innovation of the liquidity layer in V4, becoming the core force in the DeFi lending field. At the same time, in the derivatives market, Hyperliquid has rapidly emerged as the strongest dark horse in 2024, attracting a large number of users and liquidity with its outstanding technological innovation and efficient market share integration.

At the same time, the listing strategies of mainstream exchanges such as Binance and Coinbase are also constantly evolving, and DeFi-related tokens have become a new focus, such as the recently launched ACX, ORCA, COW, CETUS, VELODROME, etc. 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 the fields of stablecoins, liquidity supply, cross-chain solutions, etc. It can be foreseen that driven by policies, technologies and market forces, DeFi will rise again in 2025 and become an indispensable part of the global financial system.