Introduction: The Evolving Frontiers of Decentralized Finance
The Decentralized Finance (DeFi) landscape extends far beyond the paradigm of Automated Market Makers (AMMs), with zero-to-one innovations emerging on a daily basis. DeFi has since established itself as a cornerstone of blockchain technology’s value proposition, empowering self-custodian, borderless payment, real-time settlement, programmable transaction, eliminating high middleman cost and more. The sector’s maturity is evidenced by a Total Value Locked (TVL) exceeding $300 billion, strategic pivots toward decentralization by major CEXs like Binance Alpha and ByReal, and a palpable sense of urgency from TradFi. This urgency is highlighted by the rush to tokenize securities issuance, the onboarding of cryptocurrency custodies and trading services, stablecoins integration, and development of proprietary blockchain technologies.
This analysis aims to dive into DeFi from a different angle and delves into several innovative DeFi mechanisms operating under the public radar, alongside the key mainstream trends shaping the future of the on-chain economy.
The Convergence of Liquidity: Unifying Trading and Borrowing
Fuild DEX Trading Volume
A pivotal trend is the optimization of capital efficiency by enabling liquidity providers (LPs) to simultaneously earn fees from both trading and lending. Fluid DEX’s “Smart Vault,” introduced in October 2024, was an early pioneer of this model. This mechanism is now gaining broader adoption, notably with EulerSwap, which integrates Uniswap v4 directly with lending vaults. This deepens liquidity through just-in-time (JIT) borrowing and establishes LP positions as native collateral.
While Uniswap v4 appears poised to dominate with its first-mover advantage and robust Hooks feature set, the future is more nuanced. The increasing prevalence of Request-for-Quote (RFQ) systems and aggregators means that the underlying AMM’s efficiency is paramount for capturing order flow. Competing protocols like Fluid are also planning to integrate modular “Hooks” designs. In this evolving environment, platforms offering only a single yield source or lacking modular integration points will inevitably lose their competitive edge.
The Race for Execution: Efficiency, Intents, and Aggregation
CoWSwap V3 Swap Volume
As aggregators and RFQ systems become standard, the efficiency of the underlying trading mechanism is the primary determinant of success. Ekubo, an optimized AMM that proved its efficiency on Starknet before launching on Ethereum in March 2025, serves as a prime example. Despite being only months old, it consistently ranks among the top 3 protocols by trading volume on Ethereum. Its innovations include:
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Ultra-Precision Concentrated Liquidity: Allowing for more granular and efficient capital deployment.
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Singleton Architecture: Consolidating core logic into a single contract to reduce gas costs.
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Flash Accounting: Netting out a series of trades within a single transaction to optimize execution.
Layered on top of these efficient AMMs are aggregators, which face their own intense competition. Some, like 1inch, focus on refining their routing algorithms, as seen in the recent Pathfinder upgrade that splits trades across numerous DEXs based on real-time depth. Others, like CowSwap, are moving towards full intent-based models, employing Fair Combinatorial Batch Auctions to secure optimal execution prices.
We believe intent-based approaches are poised to become the standard, offering superior price execution, an improved user experience (e.g., gas abstraction, faster execution), and greater resistance to MEV attacks. The application of intents is already expanding beyond spot trading into lending (Morpho V2), perpetuals (Symmio), and bridges (Across).
Modular and Cross-Chain Lending: The New Frontier
Euler Total Borrowed and Available Supply
Euler has been a dominant force in the lending sector in 2025, posting an astonishing 1280% growth. Its success is built on modularity that surpasses even Morpho Blue, featuring:
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EVC (Euler Vault Connectors): Enabling cross-vault borrowing between isolated markets.
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EVK (Euler Vault Kit): Providing extensive customization, including multiple oracle choices, custom interest rate models, and unique governance options.
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JIT Liquidity: Facilitating more efficient liquidation processes.
However, the market’s ambition now extends to seamless cross-chain interoperability — a challenge once attempted by the since-exploited Tapioca protocol. Morpho v2 is emerging as a powerful solution, introducing intent-based primitives for peer-to-peer loans. This allows for more efficient price discovery for rates (including fixed rates), flexible loan terms, integrated compliance, and the cross-chain compatibility that the market demands. While the highly anticipated Aave v4 is expected to address this, detailed plans for its cross-chain functionality remain unconfirmed. A newer contestant that pushes the boundary even further is Soul Protocol, currently on testnet, which aims to enable cross-platform borrowing (e.g., supplying collateral on Aave on Ethereum to borrow on Compound on Arbitrum).
Perpetual Futures: The Lucrative Arena of Privacy and Performance
Hyperliquid New Users and Trading Volume
Perpetual exchanges remain one of the most competitive and profitable sectors in DeFi. Hyperliquid, for example, generates over $700 million in annualized revenue and is consistently among the top five highest-earning protocols while eroding CEX market share. However, its radical transparency has drawn criticism, most notably regarding liquidation hunting of large traders like James Wynn. While Hyperliquid’s founders argue that transparency levels the playing field for market makers and leads to tighter spreads, the risk of being front-run or counter-traded is a significant net negative for whale traders. This has created an opening for newcomers like Defx and Aster, which emphasize privacy through features like hidden orders.
The competitive moat here is narrow; established players can integrate these features, as seen with Drift‘s plans to integrate BAM for private transaction sequencing. Other similar solutions are emerging, such as Silhouette, which builds advanced privacy features on top of Hyperliquid, and Vooi, which aggregates multiple existing perpetual exchanges into a unified, feature-rich trading terminal.
The Super App Thesis: Consolidating the Fat-Front-End
MetaMask Revenue and Aggregator Volume
The mantra “whoever controls the front-end, controls the money flow” is driving a race to build “Super Apps.” Platforms like Robinhood, Base App, Jupiter, Phantom, Defi App and Infinex aim to become the single point of interaction for users. The on-chain user experience remains fragmented and complex, plagued by issues like gas token management, wallet proliferation, and multi-signature cross-chain transactions. Effective wallet abstraction solves these pain points, offering immense convenience. In exchange, these front-end platforms capture value through small service fees — a lucrative model that outsources protocol-level maintenance. The integration of Hyperliquid into the Phantom wallet, which generated nearly $1 million in new revenue for Phantom within the first month, is a testament to this model’s power. Similarly, MetaMask’s native swap feature commands a 0.875% fee, facilitating approximately $50 billion swap volume since launched, capturing significant revenue despite zero-fee alternatives like LlamaSwap existing.
Solving Impermanent Loss: The Holy Grail for Liquidity
GammaSwap Total Value Locked
“DeFi Summer” during 2020-2021 saw higher relative trading liquidity, despite total market cap having grown by 36%, partly because many LPs had not yet fully priced-in the risk of impermanent loss (IL). As awareness grew, liquidity provision became less attractive as IL was often greater than the trading fees received, pushing users away from providing liquidity and simply practicing buy-and-hold. The key to unlocking the next wave of DeFi liquidity is to mitigate or eliminate IL for core assets like ETH and several protocols are working to tackle this “holy grail” problem:
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GammaSwap: Yield Token, isolating IL by allowing traders to borrow LP positions, effectively transferring the long gamma exposure to speculators.
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Yield Basis: Aims to nullify IL by applying a constant 2x leverage to an LP position and rebalancing through a “squaring the square root” methodology.
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Flying Tulip (by Andre Cronje): Proposes a redesigned AMM that automatically adapts between constant product and constant sum models based on real-time volatility to reduce IL and improve capital efficiency.
The Great Value Migration: Real-World Assets (RWA), and PayFi
Ether.Fi Cash Spend Volume
While DeFi has spent years creating native value, the tokenization of Real-World Assets (RWAs) represents a massive importation of value from traditional finance. As the macroeconomic environment shifts towards anticipated interest rate cuts, capital is expected to flow from lower-yielding treasuries into higher-yield private credit and other tokenized risk assets. Major players are positioning themselves to capture this trillion-dollar market: Robinhood is leveraging the Arbitrum stack for tokenized stocks, Kraken is adopting xStocks that on Solana, and Coinbase is likely to build on its native Base chain. This influx will create immense opportunities across existing DeFi shovels such as AMMs and lending markets, enabling novel strategies that blend traditional assets with DeFi’s composability.
Within this trend, “PayFi” — the use of stablecoins for payments — is gaining traction for remittances, FX settlement, and credit card processing through protocols like Huma Finance and Clearpool. Under the hood, the crypto-card sector is also booming. While Gnosis Pay established itself as the leading player, Ether.fi has become one of the fastest-growing crypto cards in 2025, facilitating over $20 million in transaction volume by offering compelling cash back up to 3% and up to 10% yield on stablecoin balances.
The Diversification of DeFi-Native Yield for Stablecoin
Total TVL of On-Chain Asset Allocators
The consensus benchmark “risk-free” rate in DeFi is the yield from ETH staking, currently ~2.6%. However, the sources of stablecoin yield have diversified dramatically beyond simple lending or stable-pair LPing. New categories of DeFi-native yield include:
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Funding Rate Arbitrage: Delta-neutral strategies offered by Ethena (sUSDe) and Resolv (RLP and USR).
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Protocol Revenue Share: Stablecoins like Curve’s scrvUSD, Aave’s sGHO, and Liquity’s sBOLD that distribute a portion of the protocol’s borrowing interest to holders. Additionally, sBOLD holders also received liquidation gain from Liquity V2. F(x) Protocol’s fxSAVE earns yield from trading fees, reserve yield, and LP fees.
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Perpetual Exchange Market Making: Yield-bearing LP tokens like Hyperliquid’s HLP and Gains’ gUSDC, which are exposed to trader PnL as a counterparty.
As these opportunities multiply and increasingly complex, yield aggregators and strategy vaults are becoming essential. Platforms like Level USD (strategy allocation across blue-chip lending protocols), Gauntlet USD Alpha (adaptive yield optimization), and Summer.fi (risk-profiled yield vaults) help users navigate this complex landscape.
DeFAI: Integrating AI with On-Chain Execution
Theoriq’s Mindshare
The convergence of AI and DeFi (“DeFAI“) is one of the most controversial narratives of 2025. The ultimate vision is an AI agent that can execute complex, conditional instructions like:
“Swap 2/3 of my ETH to USDC when ETH hits $10k, and use the proceeds to buy Pendle’s sUSDe tranche maturing within 100 days if the fixed APY is above 10%.”
The primary obstacle is the inherent probabilistic nature and risk of “hallucination” in Large Language Models (LLMs). While methods like RAG and reinforcement learning can help, still the most viable path for financial transactions involves deterministic workflows. Protocols like Theoriq, Infinit, Almanak, Magic Newton, and Wayfinder are creating environments where experts can build predictable, custom transaction routes or “agents.” The moat for these platforms will be determined by their economic incentives, integration scope, and customization flexibility. The potential for a DeFi expert or KOL to offer a complex, one-click leveraged farming strategy to followers for a small commission is immense.
Given that AI-related CAPEX among hyperscalers grew by 65% year-over-year in Q2 2025, the DeFAI narrative is poised for significant market attention, regardless of the final value delivered by these early-stage protocols.
The Evolution of Capital Formation: Beyond the Launchpad
X Crypto-Related Activities
Early launchpads required staking of platform tokens, exposing participants to undesirable price volatility. Pump.fun disrupted this with a permissionless bonding curve model that dominated the memecoin space but suffered from bot-sniping and limited configuration. Its lack of a defensible moat was proven in July 2025 when Let’s Bonk surpassed it as the leading launchpad on Solana.
The next wave is more sophisticated. Zora is using Uniswap v4 hooks to allow creators to launch tokens with customized fee-sharing models. However, the most innovative models are Capital Launchpad and Attention Capital Markets, pioneered by Kaito and Cookie. These platforms move beyond first-come, first-served (FCFS) or simple staking. Instead, token allocation is determined by a holistic analysis of a user’s:
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Social and on-chain reputation.
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Historical project participation and conviction.
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Geographic region and wallet holdings.
This creates a positive feedback loop, rewarding genuine engagement and capital commitment over mercenary airdrop farming, and forcing participants to perform deeper due diligence.
Conclusion: An Era of Specialization and Abstraction
The DeFi landscape of 2025 is defined by a dual mandate: profound specialization at the protocol level and radical simplification at the user-facing layer.
Successful protocols are required to excel in their specialisation — be it hyper-efficient trade execution, modular cross-chain lending, private perpetuals, or the mitigation of impermanent loss, and create a moat for competition. Simultaneously, the importation of value from TradFi through RWA tokenization and the diversification of DeFi-native yields are blurring the line between on-chain and TradFi, expanding the total addressable market and the opportunity set. Ultimately, while innovation in financial primitives remains critical, the most significant value accrual in the coming cycle may shift to the platforms that successfully master the act of abstraction for user experience. The enduring winners will be those who become the indispensable and most trusted entry point to the entire on-chain economy.
