Author: YBB Capital Researcher Ac-Core
TL;DR
World Liberty Financial, launched by the Trump family and top figures in the crypto industry, is gradually influencing the development direction of the industry, and its recent token purchases have also driven the upward trend in the secondary market;
After Trump's victory, the potential short-term crypto-friendly policies mainly include: the US establishing a BTC strategic reserve, the normalization of crypto legalization, and a debt plan to accommodate ETF issuance;
The new interest rate cut cycle will attract more capital inflows to DeFi, similar to the macroeconomic environment during the DeFi Summer period from 2020 to 2021;
Many lending protocols such as AAVE and Hyperliquid have attracted widespread market attention and show strong recovery and explosive potential;
Binance and Coinbase's recent token 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. Launched 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 US a global leader in cryptocurrencies.
Meanwhile, the recent purchase by World Liberty Financial in December has also led to a price rebound in related DeFi tokens, including ETH, cbBTC, LINK, AAVE, ENA, and ONDO.
1.2 Crypto-Friendly Policies Awaiting Confirmation
The 47th US President, Donald Trump, will hold his inauguration ceremony on January 20, 2025. The main crypto-friendly policies awaiting implementation are:
Trump reaffirms plans to establish a US BTC strategic reserve
A strategic reserve is a key resource reserve released in times of crisis or supply disruption, with the most famous example being the US Strategic Petroleum Reserve. Trump recently stated that the US plans to take major steps in the crypto field, possibly establishing a cryptocurrency reserve similar to the oil reserve. According to CoinGecko data from July this year, governments collectively hold 2.2% of the global BTC supply, with the US owning 200,000 BTC, worth over $20 billion.
Normalization of crypto legalization
With the Trump administration returning to power, the full legalization of cryptocurrencies may be realized. In the future, the government may adopt more open policies in this area. Trump's speech at the Blockchain Association's annual gala affirmed the association's efforts to pass crypto legislation in the US, recognized real-use cases like DePIN as enabling crypto legalization, and promised to ensure the thriving of BTC and cryptocurrencies in the US.
Crypto combo: Solidifying USD hegemony + BTC strategic reserve + crypto legalization + ETF = Bonds
Trump openly supports crypto assets for many benefits: 1) better consolidating the USD's status and crypto's USD pricing power during his term; 2) pre-positioning in the crypto market to attract more capital; 3) forcing the Fed to align with him; 4) forcing past hostile capital to align with him.
As shown in the data, the USD index was around 80 in 2014 when US debt was only about $20 trillion, but US debt has now increased to about $36 trillion, a growth of 80%, while the USD has continued to appreciate. If the USD continues to strengthen, combined with the SEC's approval of a spot BTC ETF, the new incremental portion could potentially cover future debt issuance costs.
Source: investing
Source: fred.stlouisfed
1.3 The New Interest Rate Cut Cycle Makes DeFi More Attractive
Data released by the US Bureau of Labor Statistics shows that the core inflation rate rose 0.3% for four consecutive quarters in November, up 3.3% year-over-year. Housing costs have declined, but excluding food and energy, commodity prices rose 0.3%, the largest increase since May 2023.
The market reacted quickly, with the probability of the Fed cutting rates next week rising from 80% to 90%. Investment manager James Ashe believes a December rate cut is almost a done deal. Short-term US Treasuries initially rose and then fell, as employment data was mixed, and market expectations for Fed rate cuts this year have strengthened. Meanwhile, JPMorgan expects the Fed 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. As global interest rates change, high-risk assets like crypto, including DeFi, become more attractive to investors seeking higher returns, and the market is preparing for a potentially low-interest-rate period, similar to the environment that drove the crypto bull markets in 2017 and 2020.
The recovery of DeFi is influenced by three factors: the BTC ETF, 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 environment in 2017 and 2021.
So DeFi benefits in a low-interest-rate environment in two ways:
Reduced opportunity cost of capital: Traditional financial products' returns decline, and investors may turn to DeFi to seek higher yields (which also means the future profit space in the crypto market may be further compressed);
Lower borrowing costs: Financing becomes cheaper, encouraging users to borrow and actively participate in the DeFi ecosystem.
After two years of adjustment, key indicators like Total Value Locked (TVL) have started to rebound. The trading volume of DeFi platforms has also increased significantly.
Source: defillama
II. On-Chain Growth Driving Market Trends
2.1 The Recovery of the Lending Protocol AAVE
Source: Cryptotimes
AAVE V1, V2, and V3 share the same architecture, while the main upgrade in 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 the cross-chain functionality in V3, aims to enable the supply of cross-chain assets, but many users are not familiar with or have not used it.
For example, Alice holds 10 aETH on Ethereum and wants to transfer it to Arbitrum. She can submit this transaction through a whitelisted bridging protocol, which will then execute the following steps:
The contract on Arbitrum will temporarily mint 10 unsupported aETH;
These aETH will be transferred to Alice;
The bridging transaction will be processed in batches, transferring the actual 10 ETH to Arbitrum;
When the funds are available, the ETH will be injected into the AAVE pool to provide backing for the minted aETH.
Portal allows users to transfer funds across chains and pursue higher deposit rates. Although Portal has realized cross-chain liquidity, its operation relies on whitelisted bridging protocols rather than the AAVE core protocol, so users cannot use this feature directly through AAVE.
Here is the English translation of the text, with the specified terms translated as requested:The "Unified Liquidity Layer" of V4 is based on this improvement, using a modular design to unify the management of supply, borrowing limits, interest rates, assets, and incentives, allowing liquidity to be more efficiently dynamically allocated. In addition, the modular design also allows AAVE to easily introduce or remove new modules without the need for large-scale liquidity migration.
With Chainlink's Cross-Chain Interoperability Protocol (CCIP), 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, with the stablecoin GHO and the AAVE lending protocol as the core to build the Aave Network.
As a leader in the DeFi field, AAVE has occupied about 50% of the market share in the past three years, and the launch of the V4 version aims to drive further expansion of its ecosystem and serve potential 100 million new users.
Data source: defillama
As of December 18, 2024, AAVE's TVL data has also been growing significantly, currently exceeding the 30% level during the 2021 DeFi Summer peak, reaching $23.056 B. Compared to the previous round, the changes in DeFi protocols this time are more inclined towards modular lending and better capital efficiency improvements. (For reference on modular lending protocols, please refer to our previous article "The Derivative Narrative of Modularity: The Modular Evolution of DeFi Lending".)
2.2 Annual Strongest Derivative Dark Horse Hyperliquid
Source: Medium: Hyperliquid
According to research by Yunt Capital@stevenyuntcap, Hyperliquid's revenue sources include immediate listing auction fees, profits and losses of HLP market makers, and platform fees. The first two are public information, and the team has recently also 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 about $44 million, of which HLP contributed $40 million; HLP strategy A lost $2 million, strategy B made $2 million; and revenue from liquidations was $4 million. When HYPE was launched, the team used the Assistance Fund wallet to repurchase HYPE tokens in the market. Assuming the team has no other USDC AF wallets, the profit and loss of the USDC AF from the beginning of the year to date is $52 million.
Therefore, combining the $44 million from HLP and the $52 million from USDC AF, Hyperliquid's total revenue from the beginning of the year to date is about $96 million, surpassing Lido and becoming the 9th most profitable crypto project in 2024.
Messari Research@defi_monk's recent valuation research on the HYPE token estimates its fully diluted market cap (FDV) to be around $13 billion, which could exceed $30 billion under appropriate market conditions. In addition, Hyperliquid plans to launch HyperEVM through a TGE (Token Generation Event), with more than 35 teams planning to participate in this new ecosystem, making Hyperliquid closer to a general L1 chain rather than just an application chain.
Source: Messari
Hyperliquid should adopt a new valuation framework. Typically, killer applications and their L1 networks are independent, with the application's revenue accruing to the application token and the L1 network's revenue accruing to the network validators. However, Hyperliquid has integrated these revenue sources. Therefore, Hyperliquid not only has a leading decentralized perpetual contract trading platform (Perp DEX), but also controls the underlying L1 network. We use a sum-of-the-parts valuation approach to reflect its vertical integration characteristics. First, let's look at the valuation of the Perp DEX.
Messari's overall view of the derivatives market is consistent with Multicoin Capital and ASXN, the only difference being Hyperliquid's market share, as the Perp DEX market is a "winner-take-all" market, for the following reasons:
Any Perp DEX can list any perpetual contract, there is no fragmentation problem across blockchains;
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 continue to grow in the future. Hyperliquid is expected to account for nearly half of the on-chain market share by 2027, generating $551 million in revenue. Currently, the trading fees are owned by the community, so they are treated as actual revenue. Based on a 15x multiplier of DeFi valuation standards, the valuation of the Perp DEX as a standalone business can reach $8.3 billion. For enterprise clients, you can refer to our complete model. Next, let's look at the L1 valuation:
DeFi application premiums are typically used to evaluate L1s, and as Hyperliquid's activity on its network has increased recently, its valuation may further increase. Hyperliquid is currently the 11th largest TVL chain, and similar networks like Sei and Injective have valuations of $5 billion and $3 billion respectively, while high-performance networks of similar scale like Sui and Aptos have valuations of $30 billion and $12 billion respectively.
Since HyperEVM has not yet been launched, a more conservative $5 billion premium is used to estimate Hyperliquid's L1 valuation. But if evaluated at current market prices, the L1 valuation could be close to $10 billion or higher.
Therefore, in the base case scenario, Hyperliquid's Perp DEX valuation is $8.3 billion, and the L1 network valuation is $5 billion, with a total FDV of around $13.3 billion. In a bear market scenario, the valuation could be around $3 billion, while in a bull market it could reach $34 billion.
3. Conclusion
Looking ahead to 2025, the comprehensive revival and soaring of the DeFi ecosystem will undoubtedly become the mainstream melody. Under the policy support of the Trump administration for decentralized finance, the US crypto industry is entering a more friendly regulatory environment, bringing unprecedented innovation and growth opportunities for DeFi. As the leader in the lending protocol, AAVE, with the liquidity layer revolution of its V4 version, is gradually recovering and surpassing its past glory, becoming the core force in the DeFi lending field. In the derivatives market, Hyperliquid, with its excellent technical innovation and efficient market share integration, has quickly risen as the strongest dark horse of 2024, attracting a large number of users and liquidity.
At the same time, the listing strategies of mainstream exchanges like Binance and Coinbase are also changing, with DeFi-related tokens becoming the new focus, such as the recent ACX, ORCA, COW, CETUS, and VELODROME. The moves of the two platforms reflect the market's confidence in DeFi.
The prosperity of DeFi is not limited to the lending and derivatives markets, but will also fully bloom in areas such as stablecoins, liquidity supply, and cross-chain solutions. It can be foreseen that with the joint push of policies, technology, and market forces, DeFi will once again become great in 2025 and become an indispensable part of the global financial system.
