Author: YBB Capital Researcher Ac-Core
TL;DR
World Liberty Financial, jointly launched by the Trump family and top figures in the crypto industry, is gradually influencing the direction of the industry, and its recent purchase of selected coins has also driven the growth of the secondary market;
After Trump's victory, potential short-term crypto-friendly policies include: the establishment of a strategic Bitcoin reserve 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 attract more capital injection to DeFi, similar to the macro environment during the DeFi Summer from 2020 to 2021;
Many lending protocols such as AAVE and Hyperliquiqui have attracted widespread attention from the market, showing strong potential for recovery and explosion;
The recent listing trends of Binance and Coinbase are more inclined towards DeFi-related tokens.
1. Impact of off-chain situations on 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, attracting a large number of users and symbolizing the beginning of a banking revolution. It was jointly initiated by the Trump family and top figures in the crypto industry. , aims to challenge the traditional banking system by providing innovative financial solutions. Expresses Trump's ambition to make the United States a global cryptocurrency leader, 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 President of the United States, Donald Trump, will be inaugurated on January 20, 2025. There are three main favorable policies for cryptocurrencies to be implemented:
Trump reiterates plan to establish US strategic Bitcoin reserve
Strategic reserves are reserves of key resources that are released in times of crisis or supply disruptions. The most famous example is the U.S. Strategic Petroleum Reserve. Trump recently said that the U.S. plans to make a major move in the crypto space and may establish a cryptocurrency reserve similar to the oil reserve. According to data from Coingecko 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.
The normalization of encryption
The Trump administration is likely to legalize cryptocurrencies once again, and may adopt a more open policy in this area in the future. Trump made a speech at the Blockchain Association’s annual party: affirming that the Blockchain Association is the United States. Efforts to legislate cryptocurrency; said real use cases like DePIN legitimize cryptocurrency and are on the priority list for legislation; pledged to ensure Bitcoin and cryptocurrency thrive in the United States.
Crypto Combo: Stabilizing the U.S. dollar hegemony + Bitcoin strategic reserve + Crypto legalization + ETF = Bonds
Trump's public and strong support for crypto assets has brought him many benefits: 1. Better consolidation of the dollar's position and the dollar's pricing power in the crypto industry during his term; 2. Early layout of the crypto market to allow more funds to enter; 3. Force The Federal Reserve moves closer to itself; 4. Forces once hostile capital to move closer to itself.
As shown in the following figure, in 2014, the US dollar index was around 80 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 its norm. If it strengthens, combined with the U.S. Securities and Exchange Commission's approval of the spot Bitcoin ETF, the new incremental portion is entirely likely to cover future bond issuance costs.
Source data: investing
Image 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 showed that core inflation rose 0.3% in November for the fourth consecutive quarter and rose 3.3% year-on-year. Housing costs fell, but commodity prices excluding food and energy rose 0.3%, the highest since May 2023. Biggest increase.
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 a rate cut in December is almost a foregone conclusion. Short-term U.S. Treasury bonds rose first and then fell due to mixed employment data. Market expectations for the Fed to cut interest rates this year have increased. 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 also by external economic changes. As global interest rates change, high-risk assets such as crypto assets, including DeFi, become more attractive to investors seeking higher returns. As a result, markets are preparing for a period of potentially low interest rates, similar to the environment that drove the crypto bull runs of 2017 and 2020.
The recovery of DeFi is not only driven by internal factors, but also by the three factors of Bitcoin ETF, legalization of crypto assets, and changes in global interest rates, which will also make the future crypto market more affected by external factors. Assets are becoming more attractive to investors, which is similar to the environment during the overall crypto bull runs of 2017 and 2021.
Therefore, DeFi benefits from two points in a low interest rate environment:
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);
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 recover. The transaction volume of DeFi platforms has also increased significantly.
Image source: DeFiLlama
2. Intra-chain growth drives market trends:
2.1 Recovery of the 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 is a cross-chain function in V3. It aims to realize 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 wants to transfer it to Arbitrum. She can submit this transaction through the whitelisted bridge protocol, and the protocol will then perform the following steps:
The contract on Arbitrum will temporarily mint 10 aETH that is not backed by underlying assets;
These aETH are transferred to Alice;
Batch bridge transactions to transfer the actual 10 ETH to Arbitrum;
When funds become available, this ETH will be injected into the AAVE pool to provide support for 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 AAVE core protocol, 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 New modules can be easily introduced or removed without requiring a large-scale migration of liquidity.
With the help of 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 A 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 ecosystem expansion, etc., to build the Aave Network with the stablecoin GHO and AAVE lending protocol 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 version V4 aims to promote the further expansion of its ecosystem and serve potential 1 billion new users.
Image source: DeFiLlama
As of December 18, 2024, AAVE's TVL data has also grown significantly, currently exceeding the 30% level during the peak of DeFi Summer in 2021, reaching $23.056B. Compared with the previous round, this round of DeFi protocol changes has more The focus is on modular lending and better capital efficiency. (For modular lending protocols, please refer to our previous article "The Derivative of Modular Narrative: The Modular Evolution of DeFi Lending")
2.2 Hyperliquid, the dark horse of the strongest derivatives of the year
Image source: Medium: Hyperliquid
According to research by Yunt Capital @stevenyuntcap, the Hyperliquid platform's revenue sources 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 source of revenue. Based on this, we It can be inferred that Hyperliquid's total revenue from the beginning of the year to date is about 44 million US dollars, of which HLP contributed 40 million US dollars; HLP strategy A lost 2 million US dollars, strategy B made a profit of 2 million US dollars; and the income from liquidation was 4 million US dollars. When the team buys back HYPE tokens on the market through the Assistance Fund wallet, the team will buy back HYPE tokens through the Assistance 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 US dollars.
Therefore, combined with HLP's $44 million and USDC AF's $52 million, Hyperliquid's total revenue so far this year is approximately $96 million, surpassing Lido to become the ninth most profitable crypto project in 2024.
Messari Research @defi_monk recently conducted a valuation study on the HYPE token, and its fully diluted market value (FDV) is around $13 billion, which may exceed $30 billion under the right market conditions. In addition, Hyperliquid also plans to launch a TGE (Token Generation Event) ) launched HyperEVM, with more than 35 teams planning 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 the application's revenue attributed to the application token and the L1 network's revenue attributed to the network validator. Hyperliquid integrates 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 sum-of-the-parts valuation method to reflect its vertical integration characteristics. First, let’s look at Perp DEX valuation.
Messari’s overall view of the derivatives market is consistent with that of Multicoin Capital and ASXN, with the only difference being 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, using decentralized exchanges does not require permission;
There are network effects in terms of order flow and liquidity.
Hyperliquid's dominance will become stronger in the future. Hyperliquid is expected to occupy 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 the 15x magnification of DeFi valuation standards, Perp DEX as an independent business can be valued at $8.3 billion. For enterprise customers, you can view our complete model. Next, let’s look at the valuation of L1:
L1 is often valued using the premium of 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, and similar networks such as Sei and Injective are valued at The valuations of 5G and 5G networks are $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, a more conservative $5 billion premium is used to estimate the valuation of Hyperliquid's L1. However, if evaluated at the current market price, L1's valuation may be close to $10 billion or more.
Therefore, in the base case, 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. In the bear market scenario, the valuation is about $3 billion, and in the bull market, the valuation is about $13.3 billion. It could reach $34 billion.
3. Summary
Looking ahead 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. As the leader of lending protocols, AAVE has gradually recovered and surpassed its past glory with the innovation of the liquidity layer in V4, becoming the core force in the DeFi lending field. In the derivatives market, Hyperliquid has Technological innovation and efficient market share integration have rapidly emerged as the strongest dark horse in 2024, 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 Confidence in DeFi.
The prosperity of DeFi is not limited to the lending and derivatives markets, but will also flourish in multiple fields such as stablecoins, liquidity supply, and cross-chain solutions. It is foreseeable that DeFi will flourish under the joint promotion of policies, technology, and market forces. Be great again in 2025 and become an integral part of the global financial system.
