Why has the DeFi track skyrocketed?

Jessy, Golden Finance

In the past month, the DeFi track has seen a surge, with Sushi rising nearly 30% in 24 hours, and quadrupling from its low point in November within a month. Uni also tripled in a month, and DYDX also nearly tripled. Hyperliquid, a project that issued tokens on November 29, has also seen a 52% increase in tokens in the past week, with a market value that has surpassed Arbitrum.

In the past period of time, the market value of the DeFi market has rapidly climbed from US$70.5 billion to US$132.4 billion, with an average token increase of 87%, far ahead of the 67% average increase in the overall cryptocurrency market.

The collective rise of DeFi projects has performed well in a number of tracks. It is not a simple bull market sector rotation or "general rise" factor. Behind it are changes in people's expectations for supervision, and more importantly, the fundamentals of DeFi projects themselves are improving, achieving continuous profitability, etc.

Rise rate

According to Messari data, in the past thirty days, Uni's increase was 85%, CRV's increase was 289%, DYDX's increase was 94%, COMP's increase was 125%, RSR's increase was 110%, ZRX's increase was 101%, 1inch's increase was 95%, Ondo's increase was 104%, Sushi's increase was 208%, AAVE's increase was 35%, OM's increase was 177%, and Torn's increase was 357%.

Market capitalization of the top 14 DeFi tokens (excluding the stablecoin Dai)

Reasons for the increase

1. Improving US regulation

In recent years, regulatory agencies such as the US CFTC and SEC have continuously charged and punished some companies that have conducted business in the DeFi field without registering in accordance with regulations. For example, in September 2023, the CFTC issued an order to simultaneously file and resolve charges against Opyn, Inc., ZeroEx, Inc., and Deridex, Inc., which were accused of failing to register as a trading execution facility or designated contract market, failing to register as a futures principal, and failing to implement a customer identification program under the Bank Secrecy Act.

At present, the wind has turned. After Trump was elected as the next president of the United States, some analysts believe that as traders expect the Trump administration to strengthen the "investment attractiveness" of holding "utility" tokens, it has triggered a wave of "regulatory optimism" and the market expects DeFi projects and their tokens to face a more friendly environment.

First, the 21st Century Financial Innovation and Technology Act (FIT 21 Act) may be prioritized after Trump takes office. This encryption bill, hailed as the "most important" encryption bill to date, not only clearly defines when cryptocurrencies are commodities or securities, but will also end the "tug-of-war" between the SEC and the CFTC on encryption regulation. The U.S. House of Representatives previously passed the bill with an overwhelming majority and submitted it to the Senate, but the latter did not take decisive action. However, with Trump taking office, the market generally expects that the bill will be accelerated.

After the passage of the FIT 21 Act, more compliant trading platforms and crypto-listed companies will emerge, and clear attribute standards will enrich tradable tokens and provide new opportunities for spot ETFs and other crypto-financial products.

The FIT 21 Act will also promote innovation in decentralized applications, especially the development of the DeFi track. The FIT 21 Act clearly states that if relevant tokens are determined to be decentralized and functional, they will be regarded as digital commodities and will not be regulated by the SEC, and as long as the degree of centralization meets the requirements, they can obtain a certain exemption period, which will encourage more DeFi projects to evolve in a more decentralized direction. The bill also requires the SEC and CFTC to study the development of DeFi, evaluate its impact on traditional financial markets and potential regulatory strategies, and the exemption period factor will attract more DeFi projects to "return".

In addition to Trump's commitment to the crypto market and the previously proposed 21st Century Financial Innovation and Technology Act (FIT 21 Act), the recent Tornado Cash incident also marks that US crypto regulation is moving in a more open and friendly direction. At the end of November, the U.S. Fifth Circuit Court of Appeals ruled that the Treasury Department's sanctions on Tornado Cash's immutable smart contracts were illegal, holding that these smart contracts did not meet the legal definition of "property". This ruling provides important support for the legality of smart contracts, so that developers and users no longer face direct conflicts with traditional legal frameworks when using these protocols, thereby promoting the development of finance in a more inclusive, friendly and free direction, and directly contributing to the booming development of DeFi.

2. Continued optimism of capital

With the continuous development and application of blockchain technology, people are full of confidence and expectations for the future development of DeFi. The market generally believes that DeFi will become an important force for change in the future financial field. This positive expectation has driven investors to buy and hold DeFi assets.

Especially as big capital continues to be optimistic about the DeFi track, more and more investment institutions have begun to pay attention to and deploy the DeFi field.

For example, in 2024, Comma 3 Ventures and OtterSec invested in Scallop on Sui, a lending protocol in the Sui ecosystem. The current TVL has reached 61.4 million US dollars, and it is the first DeFi project funded by the Sui Foundation. In the same year, A16Z invested 100 million US dollars in EigenLayer. EigenLayer has attracted much attention for introducing the re-pledge function, and its TVL has jumped to more than 10 billion US dollars, ranking among the top three DeFi projects. Earlier this year, A16Z invested in the lending protocol Compound Labs and so on.

The continued optimism and investment of big capital in DeFi not only injected funds into the development of the project, but also boosted market confidence, leading retail investors to pursue this track.

3. The integration of the DeFi track itself with traditional finance is becoming closer and closer, and it is becoming more and more popular

When it comes to DeFi, the most popular application at present must be stablecoins. Whether it is USDT, USDC or other stablecoins, they are growing steadily all the way. The rich stablecoin system meets the basic financial needs of users such as asset mortgage and peer-to-peer lending, and also makes the non-accessible DeFi ecosystem initially formed, which is the basis for accepting a large number of new users.

At present, the integration of DeFi, CeFi and TradeFi is becoming closer and closer.

For example, some CeFi institutions have begun to cooperate with DeFi projects to take advantage of DeFi's efficient trading mechanisms and innovative financial products. Some traditional financial institutions will host some of their assets on their own centralized platforms, while using DeFi's decentralized exchanges to execute some transactions. This can improve transaction efficiency and reduce transaction costs. For example, traditional banks can trade customers' crypto assets on DEXs such as Uniswap through smart contract interfaces, which can not only take advantage of the bank's reputation and secure custody services, but also enjoy the decentralized trading advantages of DeFi.

Many trading platforms have begun to integrate DeFi's liquidity pools and trading pairs while providing traditional trading services. For example, some platforms that support cryptocurrency futures trading will use stablecoins in DeFi projects as margin or settlement currencies, allowing users to trade traditional futures and DeFi-based assets on the same platform at the same time.

4. The fundamentals of the DeFi project itself are good, and it is continuously profitable

Let's take Uniswap as an example. Its governance token Uni was once considered useless, but in October 2024, everything began to change. Uniswap launched the Ethereum second-layer network Unichain. The node operators of this chain need to stake UNI tokens on the Ethereum network to become validators on Unichain. Participants who stake UNI can obtain corresponding benefits, including a share of transaction fees and possible block rewards, which encourages more users to participate in the maintenance and development of the Unichain network, and also gives UNI tokens a certain economic value and investment attractiveness.

In 2024, the DeFi protocols on the chain also ushered in a profitable year. For example, according to a report by Kairos Research, Maker Dao (SKY) is expected to generate approximately $88.4 million in net protocol revenue throughout 2024. MKR is valued at $1.6 billion, only 18 times its net revenue.

The DeFi project itself is also constantly innovating and iterating. Let's take Hyperliquid, a project that has been popular in the past week, as an example. This is a decentralized perpetual contract exchange that also has a spot market and actively promotes meme culture. The team has also developed a high-frequency trading optimized L1 public chain. Its goal is not only contract trading, but also to build a complete on-chain financial ecosystem, promote innovation in the DeFi field, and further expand to an efficient decentralized options market. In terms of user use, one-click trading without wallet authorization greatly simplifies the transaction process and lowers the threshold for user use. In terms of trading products, it has rich trading functions and high leverage trading. As a perpetual contract exchange, it provides advanced trading functions such as TWAP, scale orders and TP/SL orders, and allows users to trade with up to 50 times leverage, meeting the diverse needs of professional traders. Moreover, these transactions do not require gas fees at present. In addition, the project carried out a large-scale token airdrop on November 29, distributing a total of 310 million HYPE tokens, accounting for 31% of its total 1 billion tokens, and the airdrop scale reached 620 million US dollars, which attracted widespread attention from the market and the participation of a large number of investors.

Summary

In general, the continuous rise in the tokens of DeFi projects is the product of the continuous increase in market demand in the process of encryption gradually integrating into traditional finance. If we turn our attention to the micro level, we will see the improvement of regulatory expectations, the enhanced profitability of high-yield and high-return DeFi products themselves, the continuous enrichment of products, the empowerment of tokens, and so on.

As the most important innovation in the crypto industry, DeFi continues to be bullish.