Introduction: The Outbreak of a Trust Crisis
In November 2025, the DeFi industry experienced a rare "perfect storm." Within a week, Balancer lost $128 million, Stream triggered $285 million in bad debts, four stablecoins went to zero, and the entire stablecoin market shrank by $2 billion. Almost simultaneously, Uniswap launched a fee switch proposal that had been in the works for two years, to the delight of the market.
The collapse of DeFi exposed systemic security, transparency, and governance issues, while the fee switch proposal represents a typical industry response to these problems—addressing the crisis through financial engineering and profit redistribution.
Is this approach effective? The core argument of this report is that DeFi is currently facing not a valuation crisis, but a value creation crisis. When the industry's fundamental problem lies in its inability to continuously create value for users, capital operations such as buybacks and fee on/off switches not only fail to solve the problem but may also accelerate the crisis.
Part 1: Defaults and Buybacks – A Battle of Two Forces
Why do destructive forces outweigh constructive efforts?
Balancer TVL plummeted 50% in a single day, and Stream triggered the collapse of four stablecoins to zero, far exceeding the impact of direct losses. This contagion speed proves that once trust collapses, the destructive power spreads exponentially.
Meanwhile, almost all of the industry's large-scale buyback programs over the past year have failed. Aave continued to buy at unfavorable times, creating a high-level buying opportunity, and despite strong fundamentals, MakerDAO's price is only one-third of its all-time high.
A profound asymmetry emerges here: construction is linear, slow, and requires continuous investment; while destruction is exponential, instantaneous, and can wipe out all accumulated resources. Buybacks attempt to address demand-side issues (security, trust, user growth) through supply-side optimization (token burning), while defaults directly destroy the very foundation of demand.
Systemic misjudgment behind repurchase failure
1. Mistaking a symptom for a cause. The protocol considers the low token price a problem, so it tries to boost it through buybacks. However, the low price is merely a symptom; the real causes are business stagnation, user churn, and declining competitiveness.
2. Confusing short-term stimulus with long-term value. Buybacks may lead to short-term price increases, but without business improvement, prices will quickly fall back. The market will not sustainably inflate valuations due to buybacks; prices are ultimately determined by growth and narrative.
These misjudgments all point to the same root cause: treating DeFi as a purely financial game while ignoring its fundamental nature as a technological product that requires the continuous creation of user value. Hyperliquid forms a positive flywheel through product optimization → user growth → trading volume growth, with buybacks merely icing on the cake. Other protocols only offer buybacks without business growth, turning buybacks into a "Ponzi scheme using savings to prop up the market."
Part Two: Uniswap's Dilemma – The Zero-Sum Game Trap
Misreading of the fee switch
Uniswap's fee toggle proposal fueled a token surge of over 40%, but this optimism is built on a fundamental misunderstanding. The market perceives it as a buyback program, but in reality, it's taking 17-25% of LP revenue for the protocol. This is a zero-sum game—every dollar of the protocol's revenue is taken from the LPs.
This difference in understanding pushes all the previous buyback failures to an extreme. The previous cases, at least theoretically, did not harm existing stakeholders, while Uniswap's fee switch actively created a civil war between LPs and token holders—sacrificing the protocol's foundation (LPs providing liquidity) to please protocol shareholders (UNI holders).
The superposition of triple crises
The timing was wrong: Uniswap launched its fee switch when the aftermath of its collapse was still lingering and the crisis of trust was deepening. When the market needed answers on "how to ensure the safety of funds," it offered a solution on "how to redistribute profits."
User churn: On the Base chain, Aerodrome's yield is already several times that of Uniswap, and the gap will widen further after the fee switch is activated. Rational LPs only look at yield and will not stay because of brand loyalty.
The cyclical dilemma: If the fee switch leads to liquidity outflow, it may create a negative cycle—LP returns decrease → liquidity decreases → trading slippage increases → user experience deteriorates → trading volume decreases → protocol revenue falls short of expectations → more LPs leave.
The essence of zero-sum games
Looking at Uniswap's fee switch in a broader context, it represents a dangerous trend: when industries can no longer create incremental value, they turn to a zero-sum game.
Whenever innovation stagnates and user growth slows, protocols tend to "optimize" through financial engineering—adjusting fee structures, designing complex token economics, and introducing various buyback and burn mechanisms. The common characteristic of these operations is that they redistribute existing value rather than create new value.
Hyperliquid's success demonstrates another path: supporting buybacks through product innovation → user growth → real revenue growth. This is an incremental game, a positive-sum game, where all participants benefit because the pie is getting bigger.
The fee switch represents a zero-sum game, a zero-sum game where the pie doesn't get bigger; it's just been redistributed. This kind of game might satisfy UNI holders in the short term, but it will inevitably damage the foundation of the protocol in the long run.
Part Three: The Breakthrough Path to Value Creation
From valuation crisis to value creation crisis
The current crisis facing DeFi is not a valuation crisis (token prices are too low), but a value creation crisis (inability to continuously create value for users).
The distinction between the two is crucial. In a valuation crisis, financial engineering measures like buybacks and fee switches are indeed reasonable solutions. However, in a value creation crisis, these measures are futile—they consume resources without solving the fundamental problem and may even accelerate the crisis.
DeFi TVL has recovered to 89% of its all-time high, but token prices have generally only recovered to 20-40%. This divergence indicates that funds are flowing back, but confidence has not. Users are willing to use DeFi to earn yield, but are unwilling to hold DeFi tokens because they do not believe these protocols can continuously create value.
The collapse of DeFi has deepened this skepticism. When top-audited protocols still lose hundreds of millions of dollars, when 70% of the funds in projects claiming to be "decentralized" are kept in the dark, and when Curator earns huge commissions without taking any responsibility—the problem with DeFi is not token prices, but the credibility of the system.
Transparency is a competitive advantage, not a cost.
Stream's collapse offers a clear lesson: in an environment of trust crisis, transparency is a key competitive advantage. While Stream attracted users in the short term by offering high yields with 70% of its funds held in secrecy, the collapse of this secrecy not only destroyed Stream itself but also dragged down the entire ecosystem. This created a market opportunity—the demand for transparency far exceeded the supply. Following Stream's collapse, demand for highly transparent stablecoins surged, even with lower yields. In an environment lacking trust, transparency itself is a product.
Protocols should proactively increase transparency, rather than passively responding to regulation. Making this the core of their market positioning—"We are the most transparent DeFi protocol"—is more valuable in the current environment than "We have the highest yields."
A governance mechanism with equal rights and responsibilities
In DeFi governance, power and responsibility are often separated. Early DeFi protocols pursued "decentralization," often interpreting it as "dispersion of power," while ignoring the dangers of "dispersion of responsibility." The result is a large number of "powerless" roles—they can influence protocol decisions, manage user funds, and design strategies, but they do not bear any losses when problems arise.
The core principle of the solution is that power must be commensurate with responsibility, and benefits must be commensurate with risks. Any person wielding power must pledge a significant proportion of their funds, establishing an automatic penalty mechanism and delaying the payment of benefits. When the Curator's own funds are exposed to risk, they will more carefully evaluate each strategy. This alignment of interests is more effective than any moral constraint.
Conclusion: The timing of the choice
The DeFi industry is now at a crossroads.
One path is to continue the capital game—more buybacks, more complex token economics, and more sophisticated profit-sharing mechanisms. We've already seen the end of this path: Aave, MakerDAO, and Pancake all failed to prop up their token prices simply through buybacks and deflation.
Another path is to shift towards value creation—investing resources in security, transparency, user growth, and product innovation. This path is more difficult, requiring genuine technological breakthroughs and long-term investment, with a longer payback period. But Hyperliquid has proven that this is the only sustainable path.
The window of opportunity is closing. The next collapse could come sooner and be more destructive. The industry still has a chance to complete a paradigm shift before trust completely collapses.
Ultimately, the golden age of DeFi will not belong to the protocols most adept at financial engineering, but to those that truly create value for users, respect risk, pursue transparency, and improve governance. Buybacks and fee on/off switches can be means, but should never be ends. The true purpose is singular: to build a trustworthy, usable, and sustainable decentralized financial system.
