Behind the Comprehensive Revival of DeFi: The Resilience and Innovation of New and Old Protocols

Author: Alvis, Mars Finance

Four months ago, Marsbit boldly predicted that the turning point for the DeFi sector might have quietly arrived, providing numerous high-quality projects with excellent layout opportunities.

Now, four months later, the DeFi market has proven the accuracy of this conclusion with impressive data. Key indicators such as token performance, total locked value (TVL), and lending volume all demonstrate a strong recovery momentum.

All of this indicates that a field once considered to be "in continuous decline" is gradually rising from its lows, establishing a more solid economic foundation and innovative path.

DeFi Market Cap Table, data source: CoinGecko

Looking back over this period, the market cap of DeFi has rapidly climbed from $70.5 billion to $132.4 billion, with an average token increase of 87%, significantly outpacing the overall cryptocurrency market's average increase of 67%. This not only reflects DeFi's outstanding performance during the market recovery but also highlights its immense potential for future growth.

Outstanding Performance of DeFi Tokens: Average Increase Exceeds 110%

DeFi Pulse Index, source: Messari

The DeFi Pulse Index (DPI) from Index Coop is a tokenized index designed to track the performance of top decentralized finance (DeFi) assets available on the Ethereum blockchain. DPI provides diversified investment in the DeFi space through a single token, simplifying the investment process for users. It includes assets such as Uniswap, Aave, and MakerDAO, representing a broad range of DeFi projects.

Bitcoin reached an all-time high in December, but we can see that the recent performance of most DeFi tokens has far outpaced BTC and ETH.

The DeFi Pulse Index (DPI) has rapidly surged over the past month, surpassing the peak levels of March this year as of the time of writing.

This indicates that the prices of most DeFi tokens have reached new highs, with investors achieving an average return of over 110%.

TVL Growth: A Core Indicator of Market Recovery

Total TVL of Multi-chain DeFi, data source: DeFiLlama

As of December 6, 2024, the total locked value (TVL) of multi-chain DeFi stands at $134.6 billion, up over 59% from $84.6 billion in August. Although this figure is still 38% below the historical peak of $186.8 billion reached in December 2021, it clearly shows an upward trend, partly attributable to the general increase in asset consolidation, such as the record highs of wrapped assets on Ethereum and Bitcoin, while favorable external crypto policies have also contributed to this upward trend.

Recovery in Lending Volume: Leverage Demand Stimulating Market Vitality

Major Lending Protocols on Ethereum, data source: Token Terminal

The lending volume—measuring the value of outstanding debt in lending protocols—currently stands at $18.8 billion. This is nearing the peak levels of $20 billion seen in March and November 2021. The rising demand for loan leverage has directly contributed to the prosperity of the DeFi ecosystem.

Explosive DEX Trading Volume: The Dominance of Decentralized Exchanges

Total Trading Volume of All DEXs, data source: DeFiLlama

In recent months, DEX trading volume has surged, reaching $372.3 billion last month, surpassing the peak of $292 billion in November 2021. Current trading volume in December has already reached $101 billion, with expectations to exceed $400 billion this month, setting new records.

DEX Trading Volume Rankings, data source: DeFiLlama

Among them, Uniswap, Raydium, and Pancakeswap have maintained the top three positions with 24-hour trading volumes of $6.1 billion, $2.1 billion, and $1.8 billion, respectively, representing the leading DEXs in the Ethereum, Solana, and BNB ecosystems. From the token prices, it is evident that Uni's price has risen from $6.5 to $16.2, Ray's price has increased from $1.3 to $5 over the past three months, and Cake's price has gone from $1.5 to $4.1.

As trading activity is highly correlated with price appreciation, this upward trend may continue until March next year, supported by the liquidity brought by ETF funds.

Expansion of the Stablecoin Market: Stablecoins Become the Core of Market Liquidity

Stablecoin Rankings, data source: DeFiLlama

Currently, the market cap of stablecoins stands at $196.8 billion, up 16% from the previous $169 billion, reaching an all-time high.

Notably, the market cap of USDe has surpassed $5 billion, overtaking DAI to become the third-largest stablecoin by market cap, and it is also the largest decentralized stablecoin by market cap. Its governance token ENA has risen from $0.2 to the current $1.1 over the past three months.

Stablecoins have gained widespread attention and application globally, gradually expanding from a narrow scenario of cryptocurrency trading to an important choice for global payments.

Meanwhile, the growth in altcoin trading volume is primarily driven by stablecoin and fiat trading pairs, rather than traditional Bitcoin trading pairs, indicating that the market is experiencing substantial growth rather than simple asset rotation. The liquidity of stablecoins better explains the current surge in the altcoin market.

Institutional Financing Recovery: Increased Maturity of the DeFi Market

Annual Financing Amounts in the DeFi Sector, source: ROOTDATA

Venture capital funding in the DeFi space is experiencing a significant revival.

According to the latest data from Rootdata, the total investment in the DeFi sector this year has climbed to $1.48 billion. Although this figure has not yet reached the glorious peak of $2.2 billion in 2021, it has clearly emerged from the lows of 2023 and is approaching the levels of 2022.

Innovation and Future Prospects of Leading DeFi Projects

In the DeFi sector, leading projects (based on the top five DeFi projects ranked by market cap on CoinGecko) such as Aave, Uniswap, Chainlink, Hyperliquid, and Ethena are continuously innovating and expanding their business boundaries, demonstrating strong vitality and market competitiveness.

Oracle Leader ChainLink

Chainlink Token LINK, source: CoinGecko

Benefiting from the narrative of RWA, the Chainlink token LINK has risen from $10 to $24 over the past three months.

Chainlink's LINK token is primarily used to pay for the verification services of data retrieval nodes, and apart from this, the token itself does not provide much utility. While some believe that Chainlink as a business can thrive without the LINK token, this logic encounters issues with tokens based on real-world assets (RWA), as these tokens often automatically become yield-bearing assets, which may attract the attention of regulators, especially the SEC.

Chainlink's leadership in the oracle space is mainly due to its decentralized network design, strong security, and extensive ecosystem integration. As a decentralized oracle network, Chainlink provides reliable and diverse data sources by connecting multiple independent nodes, avoiding the risk of single points of failure. It collaborates with various blockchain platforms and traditional financial institutions (such as Google Cloud, Oracle, etc.), supporting cross-chain compatibility and expanding the application scenarios of smart contracts.

Additionally, Chainlink employs incentive mechanisms and staking mechanisms to ensure the accuracy and security of data while continuously innovating technologies such as off-chain computation and privacy protection solutions, further enhancing the functionality of smart contracts. With its technological advantages, extensive partnerships, and strong community support, Chainlink maintains its leadership position in the oracle field.

Possible driving forces for LINK include:

• Key developments and updates in the Chainlink ecosystem, such as the upcoming launch of the Staking v0.2 platform;
• Five Chainlink services being integrated into seven different chains, including Base and Arbitrum;
• Numerous collaborations with financial entities like SWIFT, utilizing Chainlink's Cross-Chain Interoperability Protocol (CCIP) for asset tokenization and cross-chain interoperability;
• The surge in TVL in the RWA sector and the hype surrounding this narrative.

DEX Leader Uniswap

Uniswap Trading Volume and Revenue, source: DeFiLlama

Since the launch of version V2 in May 2020, Uniswap's market share in the decentralized trading space has experienced fluctuations. It peaked at nearly 78.4% market share in August 2020 but subsequently fell to a low of 36.8% in November 2021 as competition among DEXs intensified. However, Uniswap has not only successfully regained momentum but has also demonstrated its resilience and recovery ability with nearly 70% market share. At the same time, Uniswap has set a historical monthly trading volume record of $94.4 billion.

As a leading automated market maker (AMM) protocol, the liquidity pool updates in Uniswap V4 once again showcase its innovation and leadership in the decentralized trading protocol space. This series of improvements enhances the protocol's flexibility and scalability, significantly boosting its market competitiveness, allowing Uniswap V4 to lead its competitors in multiple aspects and continue to solidify its dominant position in the DeFi ecosystem.

Derivatives Trading Leader Hyperliquid

Hyperliquid Token HYPE, source: CoinGecko

In the cryptocurrency space, many projects rely on hype and trading volume subsidies to attract attention, but Hyperliquid is different. It has not engaged in publicity or accepted venture capital funding, relying entirely on strong product capabilities to surpass competitors. Hyperliquid is a decentralized perpetual contract exchange with a rapidly growing spot market, actively promoting meme culture. The team aims to solve the current performance bottlenecks of L1 and L2 blockchains by developing an L1 public chain optimized for high-frequency trading. The on-chain order book design ensures transparency in trading, avoiding the "front-running" and information advantage issues of traditional centralized exchanges. Hyperliquid's goal is not just contract trading but to build a complete on-chain financial ecosystem, driving innovation in the DeFi space and further expanding into efficient decentralized options markets.

In addition to its strong technology and products, Hyperliquid has also garnered community support, with many users adopting usernames like "xxx.hl" to express their trust and support for the platform. For investors looking to capture value before Hyperliquid issues tokens, they can choose to purchase its signature meme coin "purr," invest in HLP, or buy Hyperliquid Points. Since Hyperliquid does not have venture capital backing and is highly profitable, they have ample room to increase the proportion of points allocated for airdrops, with at least 15% of tokens expected to be used for airdrops. As a trader and DeFi enthusiast, I am confident in Hyperliquid and believe that now is the best time to participate in its growth.

Currently, OKX has launched pre-trading for Hyperliquid (HYPE) at a price of $14, with more exchanges expected to follow.

Lending Leader AAVE

AAVE TVL and Revenue, source: DeFiLlama

Aave is one of the oldest DeFi projects, having completed its financing in 2017 and transitioned from a peer-to-peer lending model (when the project was still called Lend) to a pool-based lending model. During the last bull market cycle, it surpassed leading projects in the same sector, such as Compound, and currently ranks first in both market share and market cap in the lending sector.

With a TVL exceeding $21.6 billion, Aave's revenue has consistently surpassed the previous bull market peak for six consecutive months, demonstrating strong profitability.

As of the time of writing, the price of the AAVE token has exceeded $257, with an increase of over 83% in the past three months, reaching a two-year high.

Decentralized Stablecoin Leader Ethena

Ethena Token ENA, source: CoinGecko

In the past month, the total issuance of USDe has increased from $2.4 billion to $5 billion, achieving over 110% monthly growth. USDe has also overtaken DAI to become the largest decentralized stablecoin by market cap.

Ethena Protocol Annualized Rate, source: Ethena Official Website

The underlying logic of Ethena is that after BTC breaks new highs, bullish sentiment intensifies, and the increase in funding rates raises the staking yield of USDe, leading to its growth. Although it has decreased slightly in recent days, the APY displayed on the Ethena official website on December 6 is around 40%.

In this growth spiral, almost every participant benefits, as USDe's leveraged miners/lenders can achieve extremely high but variable yields through leverage.

Future Outlook: Deep Integration and Institutional Development of the DeFi Ecosystem

Looking ahead, the DeFi market will continue to deepen its development in the following areas:

• Institutional Development: As more traditional financial institutions enter the DeFi space, institutional investment will become an important driving force for the DeFi market, bringing more funding and technical support.
• Cross-Chain and Interoperability: The maturity of cross-chain technology will further promote the popularization of DeFi applications, especially with the help of oracles like Chainlink, enabling broader cross-chain collaboration and data sharing in DeFi.
• Compliance and Regulation: As regulatory frameworks gradually improve, the DeFi market will adapt to stricter compliance requirements, paving the way for the long-term healthy development of the market.
• User Experience Optimization: DeFi platforms will attract more non-technical users to participate in this ecosystem by continuously optimizing user experience and lowering entry barriers, promoting the popularization of DeFi.

In summary, although DeFi faces some volatility in the short term, the market data clearly indicates a significant recovery momentum for DeFi. With continuous innovation from core projects, increased institutional investment, and gradual policy support, the DeFi ecosystem is expected to showcase broader development prospects in the coming years.