Author: YBB Capital Researcher Ac-Core

Key Points

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

After Trump wins, key short-term benefits for cryptocurrencies include: establishing a strategic Bitcoin reserve 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 Liberty and Trump

Image source: Financial Times

< p>World Liberty Financial is positioned as a decentralized financial platform that provides fair, transparent, and compliant financial tools. It attracted a large number of users and symbolized the beginning of the 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 cryptocurrencies by providing innovative solutions that challenge the traditional banking system.

More recently, World Liberty Financial’s purchases in December had an impact on the market, causing price rallies in several DeFi tokens including ETH, cbBTC, LINK, AAVE, ENA, and ONDO.

1.2 Trump is expected to introduce cryptocurrency-friendly measures after taking office

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

Trump reiterates plan to establish U.S. Bitcoin strategic reserve

Strategic reserves are critical resources released in times of crisis or supply disruptions. A well-known example is the U.S. Strategic Petroleum Reserve. Trump recently stated that the United States plans to take major actions in the crypto space, possibly creating a cryptocurrency reserve similar to the oil reserve. According to data from CoinGecko in July this year, countries hold 2.2% of the global Bitcoin supply, of which the United States holds 200,000 BTC, worthMore than $20 billion.

The normalization of the legalization of cryptocurrency

With Trump taking office for the second term, cryptocurrency may move towards full legalization. There may be more openings in this area. Speaking at the Blockchain Association’s annual event, Trump expressed support for efforts to pass U.S. cryptocurrency legislation, acknowledging that real-world use cases like DePIN would legitimize cryptocurrencies and make them a priority on the legislative agenda. He promises to ensure Bitcoin and cryptocurrencies prosper in the United States

Cryptocurrency Power Game: Strengthening USD Dominance + Bitcoin Reserves + Cryptocurrency Legalization + ETFs = Bonds

Trump He has publicly supported the view that crypto-assets bring many benefits, including: 1) strengthening the status of the U.S. dollar and the pricing power of cryptocurrencies against the U.S. dollar; 2) preemptively deploying in the crypto market to attract more capital; 3) forcing the Federal Reserve to cooperate with him Form an alliance; 4) Promote previously hostile capital to ally with him.

As shown in the chart below, the U.S. dollar index was around 80 in 2014, when U.S. debt was approximately $20 trillion. Today, U.S. debt has increased to approximately $36 trillion, an increase of 80%, but the U.S. dollar continues to rise abnormally. If the U.S. dollar continues to strengthen and the U.S. Securities and Exchange Commission approves a Bitcoin spot ETF, the new increment 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 by 0.3% for the fourth consecutive quarter in November, a year-on-year increase of 3.3%. Housing costs eased, but commodity prices excluding food and energy rose 0.3%, the largest increase since May 2023.

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

DeFi’s renaissance is driven not only by internal factors, but also by key external economic changes. As global interest rates change, riskier assets such as DeFi and cryptocurrencies are increasingly attractive to investors looking for higher returns. Markets are bracing for a potentially sustained period of low interest rates, similar to the environment that characterized the 2017 and 2020 cryptocurrency bull markets.

Therefore, DeFi benefits from the low interest rate environment for two reasons:

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

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

After two years of adjustment, key indicators such as TVL have begun to rebound. DeFi platforms have also seen significant growth in transaction volume.

Image data source: DeFiLlama

2. On-chain growth drives market trends 2.1 Recovery of lending agreement AAVE

Image source: Cryptotimes

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

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

The contract on Arbitrum temporarily mints 10 aETH with no underlying asset.

These aETH are transferred to Alice.

The batch process bridges the actual 10 ETH to Arbitrum.

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

Portal allows users to transfer funds across chains to pursue higher deposit interest rates. Although Portal achieves cross-chain liquidity, its operation relies on the whitelist bridge protocol instead of AAVE's core protocol, 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, allowing for dynamic and more efficient allocation of liquidity . Additionally, the modular design enables AAVE to easily introduce or remove new modules without the need for large-scale liquidity migrations.

With Chainlink’s Cross-Chain Interoperability Protocol (CCIP), AAVE V4 will also build a “cross-chain liquidity layer” that allows users to instantly access all liquidity resources across different networks. Through these improvements, Portal will develop 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 into non-EVM ecosystems to stabilize CoinGHO and the AAVE lending protocol serve as the core of the Aave network.

As a leader in the DeFi space, AAVE has held approximately 50% of the market share over the past three years. The launch of V4 aims to further expand its ecosystem to serve a potential user base of 1 billion.

Image data source: DeFiLlama

As of December 18, 2024, AAVE’s TVL has increased significantly Growth, exceeding the 2021 DeFi summer peak level by 30%, reaching $23.056 billion. Compared with the previous round, this round of DeFi protocol changes focuses more on modular lending and improving capital efficiency. (For more details on the modular lending protocol, please refer to our previous article "Derivatives of Modular Narrative: Modular Evolution of DeFi Lending")

2.2 The strongest derivatives dark horse of the year: Hyperliquid

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Image source: Medium: Hyperliquid

According to Yunt According to research by Capital (@stevenyuntcap), the revenue sources of the Hyperliquid platform include instant listing auction fees, HLP market maker profits and losses, and platform fees. The first two are public information, while the team recently explained a third revenue stream. Based on this, we can estimate that Hyperliquid’s total revenue from the year to date is approximately US$44 million, of which HLP contributed US$40 million. HLP strategy A lost $2 million, and strategy B made a profit of $2 million. Liquidation proceeds were $4 million. When HYPE tokens were launched, the team repurchased HYPE tokens from the market through the aid fund wallet. Assuming that the team has no other USDC AF wallets, USDC AF’s profit and loss from the year to date is $52 million.

Thus, combined with HLP’s $44 million and USDC AF’s $52 million, Hyperliquid’s total year-to-date revenue is approximately $96 million, surpassing Lido to become the ninth largest cryptocurrency by revenue in 2024 project.

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

Image source: Messari

Hyperliquid should adopt a new valuation framework. Typically, the killer application and its Layer 1 network are separate. Revenue from the application goes to the application token, while revenue from the Layer 1 network goes to the network validators. However, Hyperliquid consolidates these revenue streams. As a result, Hyperliquid not only owns the 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 take a look at Perp DEX’s valuation.

Messari’s overall view on the derivatives market is consistent with that of 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, thus eliminating blockchain fragmentation issues.

Unlike centralized exchanges, decentralized exchanges do 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 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. Perp DEX as a standalone business is valued at $8.3 billion based on a DeFi valuation standard multiple of 15x. For enterprise customers, you can refer to our complete model. Now let’s look at L1 valuation:

Typically, L1 is valued using the premium of the DeFi applications running on it. As Hyperliquid continues to increase activity on its network, its valuation is likely to rise further. Hyperliquid is currently the 11th ranked 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 $1 respectively$2 billion.

Since HyperEVM has not yet come online, Hyperliquid’s L1 valuation is conservatively estimated at a premium of $5 billion. But based on current market prices, L1 could be valued at close to $10 billion or even higher.

So, 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 about $13.3 billion. In a bear market scenario, it would be valued at about $3 billion, while in a bull market scenario, it could reach $34 billion.

3. Conclusion

Looking forward to 2025, the comprehensive recovery and surge of the DeFi ecosystem will undoubtedly become the mainstream narrative. With Trump's support for decentralized finance, the U.S. cryptocurrency industry has ushered in a more favorable regulatory environment, and DeFi is ushering in unprecedented opportunities for innovation and growth. As a leader in lending protocols, AAVE has gradually restored and surpassed its former glory with the liquidity layer innovation in V4, becoming a 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 currency 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, and 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 areas such as stable coins, liquidity supply, and cross-chain solutions. It is foreseeable that, driven by , technology and market forces, DeFi will rise again in 2025 and become an integral part of the global financial system.