Written by: Wajahat Mughal.
Compiled by: Alex Liu, Foresight News
Last year, the call for a 'DeFi Renaissance' spread widely, and the DeFi field experienced a period of revival and rekindled interest.
This is led by protocols like AAVE, Uniswap, Lido, Maker, Ethena, Morpho, and Pendle, which continue to scale and contribute the vast majority of the total locked value (TVL) in the crypto space. Previously, DeFi had just gone through its toughest phase: one of the largest stablecoins, UST, collapsed, leading centralized exchange FTX went bankrupt, and hacks, exploits, and depegging events plagued the DeFi space during the last bear market. The situation has changed dramatically over the past few years, giving rise to the narrative called the 'DeFi Renaissance.'
The history of DeFi's development over the years - cited from an article by Arthur0x (DeFi Renaissance: Making DeFi Great Again).
These protocols survived the harsh bear market and continued to develop, improve, and innovate based on decentralized exchanges (DEX), money markets, and staking areas they initially built.
There are multiple reasons for DeFi's renaissance, some of which are as follows:
Mainstream protocols have been tested in real-world scenarios: applications have withstood multiple disaster tests from the last cycle, including USDC depegging, stETH depegging, a complete boom-bust cycle, and the high-yield/high-interest environment of traditional finance.
Product offerings are stronger: whether it's high-yield stablecoins (Ethena), more capital-efficient DEXs (Fluid / Uniswap V4), or innovations in money markets (Euler, Morpho, AAVE, etc.).
Shifting towards sustainability: reducing reliance on token emissions by generating income while optimizing the token economics of DeFi's native tokens.
Growth of stablecoins: the current total has reached $267 billion, far exceeding the previous cycle's peak and setting a new historical high. Although Tether and Circle dominate the market, yield-bearing stablecoins are still on the rise.
One reason for the thriving DeFi renaissance is that the aforementioned protocols can work together to create unique DeFi tools, highlighting the advantages of tokenization and the 'Lego-like' nature of money. A typical example is the collaboration between Ethena, Pendle, and AAVE to create the PT-USDe collateral type.
Among the three Ethena PT markets on AAVE, only one has reached the limit of $2 billion.
This asset combination had a size of $1.3 billion in June this year, and just months later has soared to over $3.3 billion - accounting for over 2% of the current total TVL in DeFi, achieved through a single tool. And this is just the tip of the iceberg of what DeFi has accomplished in the past few years.
DeFi overview as of August 2025 - DeFillama
The current overall TVL in DeFi is $150 billion, only 15% lower than the previous peak. Although some may argue that previous data was inflated due to the peak of ETH at nearly $4,800 and the massive growth of defunct stablecoins like UST. Excluding these two variables, DeFi will undoubtedly surpass previous cycle levels. With the DeFi renaissance firmly established over the past few years, I believe DeFi is entering a new chapter.
The Renaissance has ended.
The Baroque era of DeFi.
In European history, the 15th and 16th centuries brought modernity marked by art, science, literature, and culture, classified as the Renaissance, characterized by balance and clarity. It then transitioned into the Baroque period, where cultural arts were marked by grandeur and complexity, aiming to evoke awe, suspense, and depth.
This is precisely the direction of evolution in today's DeFi market: the era of simplicity is over, and strange, grand, and vibrant markets are on the horizon.
"Girl with a Pearl Earring" - also known as the Northern Mona Lisa.
DeFi is innovating in specific categories across all fields, impacting every existing area - derivatives.
The nominal market size of $600 trillion for traditional finance is merely a marker of the scale of the derivatives space. For DeFi, derivatives are reshaping the space, and many will ask: how is this achieved?
The following will introduce some pioneers leading the next iteration of the DeFi market.
Starting from Hyperliquid
Readers are aware of Hyperliquid and its achievements, but some may not understand its future plans and the unique tools built on Hyperliquid.
CoreWriter - Unified Execution Layer.
Hyperliquid has a dual-state execution environment above the consensus layer: HyperCore and HyperEVM. HyperCore is the high-performance engine we are familiar with, supporting perpetual contracts and order book spot markets. HyperEVM is a completely different environment, hosting the smart contract layer of Hyperliquid. Both share state, but previously HyperEVM smart contracts could only read HyperCore data. CoreWriter has changed this completely.
HyperCore and HyperEVM are both built on top of the HyperBFT consensus layer.
This is the core innovation that distinguishes Hyperliquid from other chains. CoreWriter enables HyperEVM smart contracts to not only read HyperCore data but also execute trading instructions (including trade orders, staking, transfers, and vault management).
This opens the door for HyperEVM protocols to access the largest on-chain order book and its liquidity, creating unprecedented unique DeFi mechanisms.
CoreWriter integration example:
DEX utilizes AMM and order book liquidity to enhance capital efficiency.
Creating complex delta hedging strategies through perpetual contracts.
When funding rates are favorable, CLAMM hedges impermanent loss through perpetual contracts.
Using a combination strategy with both options and perpetual contracts.
Tokenized funding rate strategies on HyperEVM.
Current liquidations are usually performed by AMM, while CoreWriter allows money markets to utilize order book liquidations to enhance capital efficiency.
Non-custodial tokenized vaults including HLP.
Kinetiq is one of the cases that has applied this technology. Kinetiq uses a scoring system with a decentralized validator staking mechanism, with all operations automatically completed through smart contracts between HyperEVM and HyperCore. This enhanced trust gives liquidity staking tokens (LST) like kHYPE a significant advantage.
Kinetiq's TVL jumped to the top of HyperEVM applications within weeks of its mainnet launch.
Another innovation is the introduction of new types of collateral assets - the felix protocol team (unconfirmed) is considering this direction. Specifically: achieving collateralization of tokenized perpetual positions as collateral assets for lending in money markets, creating DeFi mining yield opportunities fully backed by derivatives.
Felix's Morpho instance remains one of the most attractive money markets in HyperEVM.
CoreWriter is just one of the innovations bringing DeFi into a more peculiar, complex, and composable Baroque era. Another key innovation from Hyperliquid is as follows:
HIP-3: The Uniswap moment for perpetual contracts.
Hyperliquid's next innovation is to create permissionless perpetual markets through HIP-3. With 1 million HYPE (approximately $38 million at the time of writing) and an oracle, new types of permissionless perpetual markets can be deployed on Hyperliquid. This opens up a new market - which we can call 'perpetual contracts as a service' (PaaS).
The true 'Uniswap moment' for the perpetual contract market has arrived: any perpetual market can be created, including:
Stock perpetual contracts.
Index perpetual contracts.
Forex market perpetual contracts.
Commodity market perpetual contracts.
Pre-IPO market perpetual contracts.
Real estate perpetual contracts.
Special new markets.
This also means that if the tokens issued by the protocol are not listed on HyperCore perpetual or CEX, trading pairs can now be created without permission on the most commonly used on-chain markets. Traditional financial indices, including the S&P 500, are expected to be quickly launched after introduction, forming the largest market for Hyperliquid. Stocks like $NVDA, $HOOD, and $TSLA can also be 'perpetualized', creating new tools for these tech giants. Market issuers can also earn 50% of the trading fees from their tools.
HIP-3 opens the door to new markets like stock perpetual contracts.
As DeFi users, some special markets are particularly appealing - especially when perpetual positions are tokenized through CoreWriter for use in other HyperEVM applications. Given time, we may witness bizarre markets like real estate perpetuals, prediction market perpetuals, or even orange juice futures. However, attracting market makers into such markets may be challenging. Therefore, mainstream markets are likely to appear first.
Ventuals is one of the first teams to publicly promote a Pre-IPO market built on HIP-3. It utilizes industry-leading off-chain data sources to obtain accurate valuations, creating perpetual contracts around top global private companies like OpenAI, SpaceX, Stripe, and Anthropic.
Ventuals testnet market page.
Such special markets are driving DeFi innovation: one market, one oracle, and one dream.
Derivatives-backed stablecoins.
Derivatives also drive innovation in the stablecoin space - not through payment stablecoins (Tether and Circle are self-contained), but through yield-bearing stablecoins.
The field is rapidly growing, and USDe is the best example of the unique high-yield stablecoin development. We are tired of the explosive increase in the number of stablecoins that provide only 5% mediocre annualized returns backed by government bonds.
Perpetual contracts have generated the best delta-neutral strategies in recent years through funding rates, and Resolv is another high-yield delta-neutral stablecoin case. Its tiered system allows users to choose income levels according to their risk preferences. Combining with protocols like Pendle can create more complex and unique tools - PT (principal token) especially grabs my attention, as it essentially creates a fixed-rate income product backed by derivative yields.
Liminal, built on Hyperliquid, provides funding rate strategy services within its application. Users can automatically earn funding rate income by depositing stablecoins. While not stablecoins themselves, these derivative-backed products offer high yields priced in stablecoins that surpass real-world assets (RWA) like government bonds.
Stablecoins can sometimes be more imaginative: for example, Neutrl creates synthetic dollar products through OTC arbitrage and perpetual hedging, with a current TVL of $40 million and an annualized return exceeding 30% (currently private access only).
How do they achieve this?
Neutrl sources SAFT (Simple Agreement for Future Tokens) and token trades from foundations and investors seeking liquidity, with the vast majority of trades at a significant discount to spot prices. Its advantage lies in securing trading opportunities through capital networks and partners, and then hedging through perpetual contracts. Risk management includes diversified trading, backing by other stablecoins, additional buffers, and third-party custody.
Such new markets allow users to access unprecedented high yields. OTC trading was once exclusive to niche players, but now ordinary on-chain users can benefit through Neutrl.
Special forms of stablecoins are diverse: GAIB's AI GPU derivatives, USD.AI's AI infrastructure debt-backed stablecoins, and Hyperbeat's tokenized stablecoins utilizing USDT's DeFi strategies (technically classified as stablecoins).
New types of derivative tools based on options.
For a long time, discussions about poorly designed options products have been endless. This era has ended - on-chain options tools provide unique vehicles for expressing exposure: from trade-oriented products and high leverage to yield generation strategies.
Straddle strategies essentially go long on volatility.
The protocol has not fully opened the options world but focuses on creating high-quality products in niche areas before expanding. This has led to the emergence of a series of options protocols offering unprecedented on-chain products.
Last week, the nominal trading volume of tools like 0dte (options expiring within 24 hours) hit a historic high. Why are these tools useful? In short: the speculative space is astonishing.
Ultra-high leverage (up to hundreds of times nominal leverage).
Buying call/put options with no liquidation risk.
Traders can trade 0dte options markets for mainstream assets like BTC, ETH, SOL, and HYPE through the IVX protocol. These are among the best leverage tools currently available in the market, including high-leverage products for assets like HYPE.
BTC 400x leverage with no liquidation and no funding rate.
What truly pleases me is that each protocol focuses on its own track: Rysk Finance also focuses on options yield strategies (covered call options), again driving DeFi innovation through derivatives. Although there have been options yield products, the current applications have achieved a qualitative leap in user experience and sustainable mechanisms.
Gamma Swap's yield token is a newer product that creates unique derivatives on top of AMM. Its new yield token represents the archetype of derivatives in the new Baroque era of DeFi: utilizing borrowed Uni V3 positions, the yield token has underlying exposure similar to spot assets and is not affected by impermanent loss from AMM LP tokens.
These tools are about to unleash composability: through cross-application integration (such as listing on Euler or Morpho money markets), and the inevitable listing of Pendle, we will have unique vehicles for expressing ETH exposure.
Fixed-rate single-asset AMM V3 liquidity pools yield ETH collateral - the Renaissance has indeed ended...
Options come in various forms: Time Swap's V3 also excites me - it introduces time-bound tokens, providing extensive functionality for tokenization of time periods into YT/PT (yield tokens/principal tokens). This has multiple advantages over the current yield tokenization system: enhancing capital efficiency, reducing fragmentation, and increasing flexibility in yield trading.
Impermanent loss terminator.
Regarding new tools, the next innovation in DeFi on AMM comes from Yield basis - transforming crypto assets into productive yield-generating tools through unique leverage hedging.
Impermanent loss is an inherent characteristic of the AMM mechanism.
In traditional AMM, if $10,000 of wBTC and $10,000 of USDC are provided, when the BTC price doubles, the final asset value does not double (due to the position growing at a rate of √BTC price ratio by the formula xy=k). However, if wBTC is collateralized to borrow $10,000 to form an LP position, and through dynamic rebalancing, the debt ($10,000) always constitutes 50% of the collateral ($20,000), and when BTC price changes, the debt is automatically adjusted to maintain a 50% collateralization ratio, then the total value of the position will grow proportionally with the BTC price.
Yield basis exclusively adopts crvUSD to enhance usability and, more importantly, grants it control over interest rates.
The key point lies in the rebalancing mechanism: the re-leveraged AMM provides LP tokens to arbitrageurs at a slight discount, allowing arbitrageurs to add crvUSD to reduce debt and adjust position size. Similarly, when prices rise, the re-leveraged AMM offers crvUSD to LP token depositors at a premium, enabling arbitrageurs to increase their BTC holdings to restore a 2x leveraged position.
ybBTC brings much-needed innovative yield solutions for BTC; simulations by Curve founder Michael Egorov show great potential for ybBTC. To me, double-digit yields would be considered a success - although if the deposited funds reach billions, the degree of yield dilution is questionable (it would be a huge victory for Yield basis, Curve Finance, and all on-chain BTC traders).
Funding rate products.
Funding rates have become the most interesting tool for enhancing yields using delta-neutral positions. With funding rates for altcoins soaring (especially high-demand assets like HYPE, FARTCOIN, PUMP, etc.), the basic trade of spot buying plus perpetual shorting has become one of the best opportunities in this cycle. The previously mentioned Ethena, Resolv, and even Liminal are leveraging this point to provide yield tools.
Boros, launched by Pendle, is another innovator in the field, introducing a new type of derivative tool that allows trading funding rate yields: going long on funding rates requires paying a fixed rate while receiving market floating funding rates, and vice versa for going short.
Boros opens new possibilities: locking in fixed funding rates is significant for VCs, funds, traders, and protocols like Ethena/Resolv, as they can secure yields for a period of time. This will lead to more composable strategies (including fixed-rate markets).
Where is the future?
The above is only part of the astonishing innovations present in today's DeFi world. The pace of development is unprecedented, with teams constantly learning and evolving from industry challenges to create truly powerful products. The vast majority of these are driven by derivatives, further emphasizing the characteristics of the new era of DeFi. Derivatives will push DeFi to new heights - first breaking through the previous cycle's peak in TVL and ultimately approaching a trillion dollars (7 times the current scale).
These protocols only show the tip of the iceberg of their potential. In the next 6-12 months, they will work alongside existing giants (AAVE, Uniswap, Lido, etc.) to push the industry to new heights.
As DeFi continues to evolve and mature, there are still many interesting markets to develop: on-chain forex markets, Sharia-compliant DeFi, fixed-rate money markets, undercollateralized loans, privacy solutions, etc. These areas will transition from niche to mainstream, while existing areas (especially derivatives) will transition from mainstream to dominate the entire financial market.
One can be sure: DeFi has entered the Baroque era, and the future will only be more exciting.
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