2025 on-chain sports inspection report: Making Decentralized Finance more Decentralized Finance

Author: Zuo Ye

Within a month, the crypto market experienced two shocks on October 11 and November 3, raising a common question about whether DeFi still has a future. At this time, it is just right to observe the current structure and changing direction of the DeFi market.

From the most macro perspective, DeFi is rapidly breaking away from the “second system effect.” The impact of stablecoins on traditional banks and the payment industry is becoming increasingly real. The Federal Reserve's attempt to provide a simplified main account is a clear proof of this. Institutional DeFi represented by Aave/Morpho/Anchorage is changing the operational model of traditional finance, while Uniswap plans to open the fee switch and the Perp DEX War represented by Hyperliquid is still in full swing.

The immature characteristic lies in choosing noble death for ideals. It is far too early to talk about DeFi being completely mature; we are only in the stage of large-scale adoption. In the sky of DeFi, there are still two dark clouds floating:

• Who is the ultimate lender in the entire on-chain economic system? Morgan created the Federal Reserve, so what mechanism should take on a similar role in DeFi?
• How should truly original DeFi tracks or mechanisms be triggered beyond the established DEX/Lending/Stable products that are continuously replicated?

The price is the result of the game.

Bert, as long as you're connected to the internet, I am by your side.

We are often blinded by the omnipresent, and in the DeFi microcosm, all innovations so far revolve around DEX/Lending/Stablecoin. This is not to say that BTC/ETH are not mechanisms of innovation, nor that RWA/DAT/token stocks/insurance are not innovations in assets.

Referring to the six pillars of on-chain protocols, BTC and Bitcoin essentially do not require any other assets or protocols. The DeFi we are discussing refers to projects occurring on public chains/L2 such as Ethereum/Solana. Considering the leverage cycle of currency, stocks, and bonds, the selling costs of innovative assets are becoming increasingly high, and the entire industry is pursuing products that have real profitability, such as Hyperliquid.

Image description: The evolution of the DeFi paradigm, image source: @zuoyeweb3

Since the end of DeFi Summer, innovations in DeFi have been continuous improvements to established products, existing assets, and established facts. For example, trading is divided into three types: spot, Perp, and Meme, corresponding to AMM/CLOB/Bonding Curve during the DeFi Summer period. Even the most innovative Hyperliquid still hides many shadows of Serum.

From the most microscopic perspective, Pendle started with the earliest fixed-income products, embraced yield-bearing stablecoins like LST/LRT and Ethena, and both Euler and Fluid coincidentally chose to build their own lending + Swap products. If users set yield strategies using Ethena and other YBS, they can theoretically utilize DEX/Lending/Stablecoin across any chain, any protocol, and any Vault simultaneously.

This synergetic effect not only amplifies profits but also “creates” numerous liquidation disasters and trust crises. Beyond this, there are No-Go Zones everywhere; the blockchain is born free, yet is bound by shackles everywhere.

Decentralization is a beautiful vision, but centralization is more efficient. The more impoverished aspect of the competition is the centralization of protocols. Aave is certainly large and secure, but this also means you have fewer and newer options. Later entrants like Morpho/Euler can only embrace unsafe custodians and “inferior” assets.

The unbanked have sparked a chase for stablecoins in the third world. It cannot be said that Aave's prudence created the crisis for Morpho, but unAaved has also triggered the on-chain rat race and the younger generation's pursuit of subprime bonds, subprime protocols, and subprime managers.

Innovation can only happen among marginalized groups, where the cost of trial and error is indeed very low. Those who survive will repeatedly challenge the established order, and Aave V4 will become more like its competitors rather than its own successful past.

The protocols and their tokens we see now, as well as their market prices and trading volumes, are merely an intuitive reflection of the current environment; in other words, they are already a recognition of the results of repeated games.

It is difficult to say whether it is effective for the future or even if it has any reference significance. The stablecoin chains Plasma and Stablechain are exceptionally popular, but it is almost impossible to challenge the adoption rates of Tron and Ethereum. Even xUSD's challenge against the much smaller USDe compared to USDT has already been declared a failure.

The pricing system prefers time; protocols that last longer tend to survive longer. The success of Hyperliquid and USDe is an outlier that goes against the norm. It is worth discussing how much market share Euler/Morpho/Fluid can capture from Aave, but it is almost impossible to replace Aave.

Image description: Crypto Gravity Well: Time Scale and Income, image source: @zuoyeweb3

Crypto Gravity Well: Time and App Rev【Continuous】From left to right is the coin issuance time, from top to bottom is Rev.

• Time: Balancer (hacked), Compound (silent), Aave (thriving) capturing our time
• Rev: The ability to make money is the only business value. One is the intrinsic token value BTC (the issuance of USDT, earning stablecoins wants to take this shortcut), and the other is the ability to capture value (the mining, withdrawal, and selling of Pumps).

Competition has turned inward, burning money for growth.

As shown in the figure above, the x-axis represents the time the protocol has continued to date, while the y-axis indicates the protocol's value capture capability. Compared to indicators such as token price, trading volume, and TVL, the ability to make money is the most objective representation (Polymarket theoretically does not make money).

In theory, the earlier a protocol is established, the stronger its stable profitability will be. Later entrants can only continuously enhance their own token <><>< liquidity <> trading volume flywheel. Referencing Monad/Berachain/Story, failure is a more likely outcome.

The value is the target in balance.

One must believe in the power of the masses, but not in the wisdom of the masses.

DeFi is a movement that, in the context of overall loosening compared to exchanges and TradFi, is indeed one of the best innovation cycles in history, potentially giving rise to a new paradigm that surpasses DeFi Summer.

The exchange is under heavy pressure, and Hyperliquid's transparency has shown stronger anti-fragility than Binance for the first time. After 1103, the pace of lending and stablecoins has slowed but has not been disproven. People do need subordinated bonds, as well as simple funds/bonds/equity certificates - stablecoins.

Compared to the liquidity migration restrictions faced by market makers in CEX on October 11, on-chain trading, spot/contracts, and alternative assets are actively expanding in scale. As long as the issues can be engineered and combined, there exists the possibility of being completely resolved.

Image description: Crypto assets: Time & Volatility, Image source: @zuoyeweb3

• First Quadrant (Rookie Zone): HYPE, PUMP, Public Chain /L2/Alt L1 (Monad, Berachain, MegaETH), RWA (Bond, Gold, Real Estate)
• Second Quadrant (Shanzhai Area): DOGE, SOL, Compound, Pendle, Polymarket, Euler, Fluid, Morpho, Ether.Fi, Lido, No-USD Stablecoin, Option,
• Third Quadrant (Industry Leaders): BTC/ETH/USDT/USDC/USDS/Aave/
• Fourth Quadrant (Death Zone): ADA, Meme, DAT, Insurance

Placing numerous new assets in the rookie area, they are sensitive to time and volatility, essentially belonging to short-term speculative assets. Only by surpassing the simple gambling cycle and falling into a stable holder group and usage scenarios can they enter the altcoin area, which means they are not particularly sensitive to time, but their liquidity cannot withstand drastic market fluctuations. Most projects will remain here.

Moreover, the more effort the project team puts in, such as under measures like ve(3, 3), buybacks, burning, merging, renaming, etc., it may still remain here, which can be seen as a gradual uphill period. If there is no progress, there will be a retreat, and even striving forward may lead to regression.

The subsequent story is simple: after successfully overcoming the tribulation, it enters a stable zone, becoming what is known as a cross-cycle asset, such as BTC and ETH, maybe adding half a SOL and USDT. However, the vast majority of assets will slowly die out, at which point they are neither time-sensitive nor exhibit any volatility.

Meme and DAT will coexist in the long term as a sector, but the assets under them are unlikely to have lasting opportunities, while a very few representative assets like DOGE and XRP are outliers.

In fact, if the protocol is viewed as an asset innovation, many issues will be resolved easily, that is, the purpose of entrepreneurship is to sell itself once and not to pursue becoming a continuous open system:

• Spot DEX: The trading itself is focused on mainstream assets (BTC/ETH) and whale rebalancing, with retail investors no longer trading altcoins. The core of the project is to seek specific clients rather than becoming an unrestricted public infrastructure, such as rationalizing the information gap between whales and retail investors in dark pools.
• Perp DEX: Lighter's massive financing news is a prelude to token issuance, and VC is highly differentiated; Big Names are more like TGE funding parties, while small VCs can only perish in the Perp track, and retail investors can only scavenge for scraps on various launchpads.
• Meme: The emotion itself becomes a tradable asset, and it cannot become a consensus across the entire industry. There are no signs or abilities shown by PumpFun to solve this problem.
• Platform-based & Modular Lending: A long-term trend, lending protocols can sell their liquidity, brand, and technology in chunks, essentially a B2B2C model.
• DEX+Lending integrated development: It is considered one of the latest in the nested dolls, and a dedicated article will be released later to introduce its mechanism.
• Non-US Dollar Stablecoins / Non-Dollar Pegged Stablecoins: Focused on developed regions such as the Euro, Japanese Yen, and South Korean Won in the short term, but the long-term market can only be in the Third World.

This section outlines the market situation of yield-bearing stablecoins. Overall, yield-based stablecoins are the asset form that best aligns with the integration of DEX/Lending/Stable, but they will require substantial engineering and combination capabilities.

In contrast, there are innovative models outside of DEX/Lending/Stable, with relatively few samples observed so far. For example, the stablecoin NeoBank is still a comprehensive model of the three, while prediction markets belong to the broad DEX category. The concepts of Agentics and Robotics might be particularly promising.

The internet has brought about scalable replication, which is vastly different from the production models of the industrial era. However, there has long been no corresponding economic model. Advertising economics needs to come at the expense of user experience. Compared to LLM on-chain, Agentics is at least more in line with the technical characteristics of blockchain, namely the all-weather trading efficiency brought by extreme programmability.

With the decreasing Gas Fee, along with years of TPS improvement and ZK development, the large-scale adoption of blockchain may occur in a replication economy that does not require human involvement.

The combination of robotics and cryptocurrency in the short term is not very interesting, at least until the hype and educational value have been eliminated in Yushu, it is difficult for robots to truly land in Web3. As for the long term, only time will tell.

Conclusion

Make DeFi more DeFi.

Robotics has taken too long, and the settlement must be done as soon as possible.

The composite liquidation mechanism of DEX+Lending is a proactive construction against the DeFi crisis, but it couldn't stop the spread of the crisis on November 3rd. The most effective response was Aave's early refusal, but looking at the entire industry, how to handle liquidation and restore the market has become the biggest challenge in the industry.

In 2022, after the 3AC incident broke out, SBF took the initiative to acquire and restructure the involved protocols, and less than half a year later, FTX was also taken over by traditional law firms. After the explosion of Stream's xUSD, it was also handed over to law firms immediately.

Code is Law, it’s about to become Lawyer is Coder.

Before SBF and the law firm, BTC long played the role of the ultimate liquidator, but it requires a long time to rebuild people's trust in the on-chain economy. At least, we still have BTC.