Author: Zuoye
Ethereum returns with DeFi once again. Aave/Pendle/Ethena allow circular loans to become leverage amplifiers. Compared to the on-chain stack based on ETH during DeFi Summer, the leverage increase curve supported by stablecoins like USDe is more gradual.
We might enter a warm long cycle. The examination of on-chain protocols will be divided into two parts: the first involves more asset types, with external liquidity expected to be more abundant under the Fed's interest rate cut expectations; the second examines the extreme values of leverage multiples, corresponding to a safe deleveraging process, i.e., how individuals can exit safely and how a bull market will end.
Crypto Six Protocols: Interaction of Ecosystems and Tokens
There are countless on-chain protocols and assets, but under the Pareto principle, we only need to focus on parameters like TVL/ trading volume / token price, and even more focused on the few individuals that are indispensable to the on-chain ecosystem, further examining their relationships in the ecological network to account for individual importance, ecological linkage, and the highest growth potential of new protocols.
Image caption: DeFi TVL Overview, image source: @zuoyeweb3
In the composition of DeFi TVL, Ethereum accounted for over 60% of DeFi TVL in July, while Aave also accounted for over 60% of Ethereum's ecological TVL. This represents the 20% in the Pareto principle. The remaining protocols must have a strong connection with the two to be included as main beneficiaries.
As the flywheel of the three musketeers of circular lending starts, the degree of association among Ethereum, Aave, Pendle, and Ethena is self-evident. Adding Bitcoin, WBTC, ETH, and USDT/USDC are the de facto foundational assets of DeFi. However, USDT/USDC, like Lido, only has asset attributes and lacks ecological value, while Plasma, Stablechain, etc., are just beginning to compete.
To differentiate a bit, one protocol can have multiple values. For instance, Bitcoin primarily possesses asset value, meaning everyone needs BTC, but no one knows how to utilize the Bitcoin ecosystem. This is not to suggest that BTCFi is a scam (just a precaution).
ETH/Ethereum possesses dual value; everyone needs ETH and the Ethereum network, including EVM and its extensive DeFi stack and development facilities.
Further dividing by asset and ecological value, examining the degree to which each leading protocol is 'needed'. Needed asset attributes score one point, needed ecological value scores another, leading to the following table:
Pendle/Aave/Ethena/Ethereum/HyperEVM/Bitcoin are the six protocols with the strongest connections. Any two of them can couple with each other, needing at most one additional protocol or asset for linkage.
Let's explain a bit:
Ethena <> HyperEVM: USDe has been deployed to the HyperEVM ecosystem.
Pendle <> HyperEVM: $kHYPE and $hbHYPE rank first and third in the trend chart.
Aave <> HyperEVM: Hyperlend TVL accounts for 25% of HyperEVM ($500M vs. $2B), it is a friendly fork of Aave, promising to distribute 10% of profits to Aave.
BTC/ETH are the two cryptocurrencies with the highest trading volume on Hyperliquid and can be recharged and withdrawn via the Unit Protocol.
Pendle, Aave, and Ethena have already become one entity, but the asset attributes of USDe are recognized, while the ecological value of $ENA is slightly inferior.
Pendle's new product Boros is based on funding rates for trading, with BTC and ETH contracts as the first choice.
Aave requires WBTC and various ETH, such as staked ETH, especially since Ethereum's ecological value as infrastructure is needed by Aave/Pendle/Ethena, serving as on-chain support for ETH prices.
The most unique aspect here is that the Ethereum ecosystem has a one-way need for BTC, while the Bitcoin ecosystem does not need any external assets.
Ethena has no relation to Bitcoin/BTC.
HyperEVM/Hyperliquid is the 'most proactive' external ecosystem, giving a strong sense of 'I am here to join this family'.
According to statistics, these are the six assets with the closest connections. The introduction of any other ecosystems and tokens will require more assumptions, such as Lido, which ranks second in TVL, having a weak relationship with Hyperliquid and Bitcoin. After Pendle 'abandoned' LST assets to invest in YBS, Lido's ecological linkage attributes within Ethereum will weaken.
We base on the highest BTC of 7 and categorize six types of assets into three nodes according to their influence on other protocols. Please note that this is not a depiction of their asset value, but a ranking of their importance within the ecosystem.
BTC/ETH are the strongest infrastructures, BTC excels in value attributes, and ETH's ecological position is unshakable. If we add Solana to calculate the degree of connection, we will find it is not as connected to Ethereum as Hyperliquid/HyperEVM. The core reason is the trading attributes of Hyperliquid itself, which, combined with HyperEVM, is more aligned with the EVM ecosystem.
Within Ethereum, Lido/Sky's interaction with the existing six protocols is insufficient.
Outside Ethereum, Solana/Aptos have insufficient interaction with the existing six protocols.
However, Solana needs to support its own DEX to be compatible with more external assets, which naturally requires an additional step in assumptions. SVM’s compatibility with the EVM ecosystem will also be more difficult. In a word, everything in Solana must develop independently.
Image caption: Connectionism, image source: @zuoyeweb3
However, in the relational network, the synergistic effect of the Ethereum ecosystem is the strongest. One dollar of Ethena hedges through ETH, and then flows into Pendle and Aave for value transfer, while the generated Gas Fee becomes the value support for ETH.
Apart from Bitcoin naturally relying on BTC for value self-circulation and flow, ETH comes closest to a value closed loop, but this is the result of active and proactive actions. The combination of Hyperliquid/HyperEVM is still in progress; whether it can complete the linkage of trading (Hyperliquid) + ecology (HyperEVM) and $HYPE remains to be seen.
This is a process of increasing assumptions and entropy. BTC only needs itself, ETH needs ecosystems and tokens, while $HYPE needs trading, tokens, and ecology.
Does the expansion of DeFi have an end?
As mentioned earlier, Hyperlend needs to distribute profits to Aave. Aave's influence is not limited to this; in fact, Aave is the main character of the circular loan initiated by Pendle and Ethena, bearing the leverage role of the entire circular system.
Aave is the closest to being the foundational infrastructure on the Ethereum chain. This is not because its TVL is the highest, but due to a comprehensive consideration of security and capital volume. The safest way for any public chain and ecosystem to start a lending model is to fork Aave compliantly.
Image caption: Aave and Hyperlend profit-sharing settings, image source: @zuoyeweb3
In the forking template of Hyperlend, a 10% profit-sharing is fundamental, along with distributing 3.5% of its own tokens to Aave DAO and 1% to stAave holders. This means Aave is selling itself as a service to each ecosystem, which is where its ecological value and token value are linked.
However, it is not without competitors. Maple has already expanded to HyperEVM, while new lending protocols like Fluid and Morpho are competing fiercely with new assets like YBS. HyperEVM, as the strongest competitor in the Ethereum EVM ecosystem, may not always maintain a peaceful stance.
In terms of proactivity, Bitcoin and HyperEVM are absolute extremes. HyperEVM is siphoning traditional trading types onto the chain through HIP3, linking the liquidity of HyperCore and Hyperevm through CoreWriter, and supporting its own front-end agents through Builder Code.
Additionally, it utilizes Unit Protocol and Phantom to connect the liquidity of the Solana ecosystem, siphoning all on-chain liquidity. This is also a way to expand infrastructure.
To summarize:
Pendle targets all types of assets that can be split, expanding the derivatives market beyond perpetual contracts, specifically in the broad sense of the interest rate swap market.
Ethena leverages the DeFi circular loan model and treasury strategy to create a third pole for stablecoins, starting from $ENA and $USDe, $USDtb. The basic use of USDT/USDC remains trading and payments, while USDe aims to become a risk-free asset in the DeFi space.
Aave is already the de facto lending infrastructure, closely tied to Ethereum's status.
Bitcoin and Ethereum represent the limits of the blockchain economic system. The level of their expansion is the foundation for DeFi growth, meaning how much of the BTC scale can be migrated to DeFi and how much growth potential there is for DeFi.
Hyperliquid/HyperEVM are already closely bound to the existing DeFi giants. Although their TVL is far inferior to Solana's, the growth prospects are larger. Solana's story is about defeating the EVM system from the public chain perspective.
Conclusion
The Crypto Six Protocols examine the degree of linkage among each other. It does not imply that other protocols lack value, but a high degree of collaboration will exponentially increase the freedom and utilization of funds, leading to mutual benefit.
Of course, a loss will also affect all, which requires examining the follow-up development of DeFi's anchor switch—from ETH to YBS. ETH, as a high-value asset, is more aggressive in leverage, while YBS, like USDe, is naturally more price stable (not value). Based on it, DeFi's Lego is more solid. Excluding extreme decoupling scenarios, theoretically, it can make the leverage and deleverage curves milder.
The seats in the crypto pantheon are limited. The new chosen ones can only strive to move forward, make friends with existing deities, and build the strongest protocol network to earn their place.
