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 direction of the industry. Their recent token purchases have also contributed to price increases in the secondary market.

• After Trump’s potential victory, key crypto-positive policies in the short term include: establishing a Bitcoin strategic reserve in the U.S., the legalization of crypto, and supporting debt plans with 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 like AAVE and Hyperliquid are drawing significant attention and show strong recovery and explosive potential.

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

1. External Factors Impacting Overall Trends:

1.1 World Libertyfi and the Trump Administration

World Liberty Financial is positioned as a decentralized financial platform offering fair, transparent, and compliant financial tools. It has attracted a large number of users, symbolizing the start of a banking revolution. Founded by the Trump family and top figures from 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 U.S. the global leader in cryptocurrency, by providing innovative solutions to challenge the traditional banking system.

Recently, World Liberty Financial’s purchases in December have impacted the market, leading to price rebounds in several DeFi tokens, including ETH, cbBTC, LINK, AAVE, ENA, and ONDO.

1.2 Expected Crypto-Friendly Policies Under Trump

The 47th U.S. President, Donald Trump, will be inaugurated on January 20, 2025. The crypto-positive policies that are expected to be implemented under his administration include:

• Trump Reaffirms Plan to Establish a U.S. Bitcoin Strategic Reserve

Strategic reserves are critical resources released during crises or supply disruptions. A well-known example is the U.S. Strategic Petroleum Reserve. Trump has recently stated that the U.S. plans to take significant actions in the crypto sector, potentially 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 U.S. holding 200,000 BTC, valued at over $20 billion.

• Normalization of Crypto Legalization

With a second Trump administration, there could be a move towards full legalization of cryptocurrency. There may be more open policies in this sector. At the Blockchain Association’s annual gala, Trump expressed his support for efforts to pass U.S. cryptocurrency legislation, acknowledging that real-use cases like DePIN will make crypto legal and a priority on the legislative agenda. He promised to ensure the prosperity of Bitcoin and cryptocurrencies in the U.S.

• Crypto Power Play: Strengthening Dollar Dominance + Bitcoin Reserve + Crypto Legalization + ETF = Bonds

Trump has publicly supported the idea that crypto assets bring many benefits, including: 1) strengthening the position of the dollar and crypto’s pricing power in the dollar; 2) preemptively positioning in the crypto market to attract more capital; 3) forcing the Federal Reserve to align with him; 4) pushing former hostile capital to align with him.

As shown in the data below, the U.S. dollar index was around 80 in 2014, while U.S. debt was about $20 trillion. Today, U.S. debt has increased to approximately $36 trillion, an 80% increase, yet the dollar continues to rise unusually. If the dollar continues to strengthen, along with the approval of the spot Bitcoin ETF by the SEC, the new increments could fully cover future bond issuance costs.

1.3 New Interest Rate Cuts Make DeFi More Attractive

According to the U.S. Bureau of Labor Statistics, core inflation in November rose by 0.3% for the fourth consecutive quarter, with a 3.3% year-on-year increase. Housing costs have eased, but excluding food and energy, goods prices increased by 0.3%, the largest increase since May 2023.

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

DeFi’s revival is driven not only by internal factors but also by key external economic changes. As global interest rates change, high-risk assets like DeFi and crypto are becoming more attractive to investors seeking higher returns. The market is preparing for what could be a prolonged low-interest period, similar to the environment that fueled the 2017 and 2020 crypto bull markets.

The revival of DeFi is driven not only by internal factors but also by three external factors: the approval of Bitcoin ETFs, the legalization of crypto assets, and changes in global interest rates. With interest rates lowering, high-risk assets become more attractive to investors, creating an environment similar to the 2017 and 2021 crypto bull markets.

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

1. Lower Capital Opportunity Costs: As returns on traditional financial products decline, investors may turn to DeFi for higher yields (while also meaning that potential profit margins in the crypto market will be compressed).

2. Lower Borrowing Costs: Cheaper financing encourages borrowing and boosts activity in the DeFi ecosystem.

After two years of adjustments, key metrics like TVL are starting to rebound. Trading volumes on DeFi platforms have also surged.

2. On-Chain Growth Drives Market Trend

2.1 Recovery of the Lending Protocol AAVE

AAVE V1, V2, and V3 share the same architecture, but the key upgrade in V4 is the introduction of the “Unified Liquidity Layer.” This feature is an extension of the Portal concept introduced in AAVE V3. Portal, as a cross-chain feature in V3, was designed to enable cross-chain asset supply, but many users were unfamiliar with it or had never used it. The purpose of Portal was to bridge assets between different blockchains by minting and burning aTokens across chains.

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

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

• These aETH are transferred to Alice.

• A batch process bridges the actual 10 ETH to Arbitrum.

• Once funds are available, these ETH are injected into the AAVE pool to back the minted aETH.

Portal enabled users to transfer funds across chains in pursuit of higher deposit rates. Although Portal realized cross-chain liquidity, its operation relied on whitelisted bridge protocols rather than AAVE’s core protocol, and users could not directly use this functionality via AAVE.

The “Unified Liquidity Layer” in V4 improves on this by using a modular design to manage supply, borrowing limits, interest rates, assets, and incentives, allowing liquidity to be dynamically and more efficiently allocated. Additionally, the modular design allows AAVE to easily introduce or remove new modules without a large-scale liquidity migration.

With the help of Chainlink’s Cross-Chain Interoperability Protocol (CCIP), AAVE V4 will also build a “Cross-Chain Liquidity Layer,” enabling users to access all liquidity resources instantly across different networks. Through these improvements, Portal will evolve into a complete cross-chain liquidity protocol.

In addition to the “Unified Liquidity Layer,” AAVE V4 plans to introduce new features, including dynamic interest rates, liquidity premiums, smart accounts, dynamic risk parameter configurations, and expansion into non-EVM ecosystems, with stablecoin GHO and AAVE lending protocols as the core of the Aave Network.

As a leader in the DeFi space, AAVE has consistently held around 50% of the market share over the past three years. The release of V4 is aimed at further expanding its ecosystem, serving a potential user base of 1 billion.

As of December 18, 2024, AAVE’s TVL has seen significant growth, surpassing 30% of the peak level during the DeFi Summer of 2021, reaching $23.056 billion. The changes in this round of DeFi protocols, compared to the previous round, are more focused on modular lending and improving capital efficiency. (For more details on modular lending protocols, refer to our previous article “The Derivatives of Modular Narrative: The Modular Evolution of DeFi Lending.”)

2.2 The Strongest Derivatives Dark Horse of the Year: Hyperliquid

According to research by Yunt Capital (@stevenyuntcap), the revenue sources for the Hyperliquid platform include instant listing auction fees, HLP market maker profits and losses, and platform fees. The first two are publicly available information, while the team recently explained the third revenue source. Based on this, we can estimate that Hyperliquid’s total revenue from the beginning of the year to date is approximately $44 million, with HLP contributing $40 million. HLP Strategy A incurred a loss of $2 million, while Strategy B made a profit of $2 million. Revenue from liquidations amounts to $4 million. When HYPE tokens were launched, the team repurchased HYPE tokens from the market through the Assistance Fund wallet. Assuming the team does not have other USDC AF wallets, the profit and loss for USDC AF from the beginning of the year to date stands at $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 approximately $96 million, surpassing Lido, making it the ninth-largest cryptocurrency project by revenue in 2024.

Messari Research@defi_monk recently conducted a valuation study on the HYPE token. Its FDV is around $13 billion, and under suitable market conditions, it could exceed $30 billion. In addition, Hyperliquid plans to launch HyperEVM through its TGE, with over 35 teams expected to participate in the new ecosystem, bringing Hyperliquid closer to being a general-purpose Layer 1 blockchain rather than just an application chain.

Hyperliquid should adopt a new valuation framework. Typically, killer applications and their Layer 1 networks are separate. The revenue from applications goes to the application token, while the revenue from the Layer 1 network goes 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 its underlying Layer 1 network. We use a sum-of-the-parts valuation to reflect its vertically integrated characteristics. First, let’s look at the valuation of the Perp DEX.

Messari’s general view on the derivatives market aligns with those of Multicoin Capital and ASXN, with one exception — the market share of Hyperliquid. The Perp DEX market is a “winner-takes-all” market for the following reasons:

• Any Perp DEX can launch any perpetual contract, eliminating blockchain fragmentation issues.

• 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, trading fees belong to the community, so they are considered actual revenue. Based on a 15x multiple from DeFi valuation standards, the Perp DEX as an independent business is valued at $8.3 billion. For enterprise clients, you can refer to our complete model. Now let’s look at the L1 valuation:

Typically, the valuation of an L1 is assessed using a premium from the DeFi applications running on it. With Hyperliquid’s increasing activity on its network, its valuation could rise further. Hyperliquid is currently the 11th largest chain by TVL. Similar networks, like Sei and Injective, are valued at $5 billion and $3 billion, respectively, while high-performance networks of similar scale, such as Sui and Aptos, have valuations of $30 billion and $12 billion, respectively.

Since HyperEVM has not yet launched, the L1 valuation for Hyperliquid is estimated conservatively at a $5 billion premium. However, based on current market prices, the L1 valuation could be close to $10 billion or even higher.

Thus, under the base scenario, the valuation of Hyperliquid’s Perp DEX is $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 would be about $3 billion, while in a bull market, it could reach $34 billion.

3. Conclusion

Looking ahead to 2025, the full recovery and soaring growth 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 witnessing unprecedented innovation and growth opportunities. AAVE, as the leader in lending protocols, has gradually recovered and surpassed its previous glory with the liquidity layer innovation in V4, becoming the core force in the DeFi lending space. Meanwhile, in the derivatives market, Hyperliquid has rapidly emerged as the strongest dark horse of 2024, attracting a large number of users and liquidity with its exceptional technological innovations and efficient market share integration.

At the same time, the listing strategies of major exchanges like Binance and Coinbase are evolving, with DeFi-related tokens becoming the new focus, such as the recent tokens ACX, ORCA, COW, CETUS, and VELODROME. The moves of the two major platforms reflect the market’s confidence in DeFi.

DeFi’s prosperity is not limited to lending and derivatives markets but will also fully bloom in areas such as stablecoins, liquidity provisioning, and cross-chain solutions. It is foreseeable that, driven by policies, technologies, and market forces, DeFi will once again rise to greatness in 2025, becoming an indispensable part of the global financial system.

About YBB

YBB is a web3 fund dedicating itself to identify Web3-defining projects with a vision to create a better online habitat for all internet residents. Founded by a group of blockchain believers who have been actively participated in this industry since 2013, YBB is always willing to help early-stage projects to evolve from 0 to 1.We value innovation, self-driven passion, and user-oriented products while recognizing the potential of cryptos and blockchain applications.

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