The Renaissance of DeFi has ended
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The Renaissance of DeFi has ended
DeFi enters the Baroque era, with a strange, grand, and vibrant market on the horizon.
Navigating Web3 tides with focused insightsAuthor: Wajahat Mughal
Translated by: Alex Liu, Foresight News
Last year, the call for a "DeFi Renaissance" spread widely, as the DeFi sector experienced a period of recovery and renewed interest.
This resurgence was led by protocols such as AAVE, Uniswap, Lido, Maker, Ethena, Morpho, and Pendle, which continued to scale and contribute the vast majority of total value locked (TVL) in the crypto space. DeFi had just emerged from its most difficult phase: the collapse of one of the largest stablecoins, UST; the downfall of major centralized exchange FTX; and repeated blows from hacks, exploits, and de-peg events throughout the previous bear market. The past few years have brought dramatic changes, giving rise to what is now called the "DeFi Renaissance."
Years of DeFi development — cited from Arthur0x's article "DeFi Renaissance: Make DeFi Great Again"
These protocols survived brutal bear markets and continued building, improving, and innovating upon their original foundations in decentralized exchanges (DEX), money markets, and staking.
There are multiple reasons behind DeFi’s revival, including the following:
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Mainstream protocols battle-tested: Applications have withstood multiple disasters from the last cycle, including USDC de-peg, stETH de-peg, full boom-bust cycles, and high-yield/high-interest environments in traditional finance.
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Stronger product offerings: Whether it's high-yield stablecoins (Ethena), capital-efficient DEXs (Fluid / Uniswap V4), or innovations in money markets (Euler, Morpho, AAVE, etc.).
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Shift toward sustainability: Reducing reliance on token emissions by generating revenue while optimizing tokenomics of native DeFi tokens.
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Growth in stablecoins: Total supply now reaches $267 billion, surpassing the previous cycle peak and setting a new all-time high. Although Tether and Circle dominate, yield-bearing stablecoins continue to grow.
One reason for the flourishing DeFi revival is that these protocols can work together to create unique DeFi tools, highlighting the advantages of tokenization and monetary "Lego-like" composability. A prime example is the collaboration between Ethena, Pendle, and AAVE to create the PT-USDe collateral asset type.
Only one of three Ethena PT markets on AAVE has reached a cap of $2 billion
In June this year, the combined size of this position was $1.3 billion. Just months later, it has surged to over $3.3 billion—accounting for more than 2% of existing DeFi TVL through a single instrument alone. And this is merely the tip of the iceberg of DeFi’s achievements over recent years.
DeFi Overview as of August 2025 - DeFillama
Current overall DeFi TVL stands at $150 billion, only 15% below the previous peak. Some might argue that the prior cycle data was inflated due to ETH peaking near $4,800 and massive growth from now-defunct stablecoins like UST. Excluding these two variables, DeFi would clearly surpass last cycle's levels. With the DeFi revival firmly established over the past few years, I believe DeFi is entering a new chapter.
The Renaissance era is over.
DeFi Baroque Era
In European history, the 15th–16th centuries were marked by art, science, literature, and culture ushering in modernity—the Renaissance period, characterized by balance and clarity. This was followed by the Baroque period, whose cultural and artistic expressions blended grandeur and complexity, aiming to evoke awe, suspense, and depth.
This is precisely where today’s DeFi market is headed: simplicity is in the past; strange, grand, and dynamic markets are here.
"Girl with a Pearl Earring" — also known as the Northern Mona Lisa
DeFi is innovating across specific categories in every domain, impacting each existing field — derivatives.
The traditional finance market for derivatives, with a notional size of $600 trillion, merely indicates the scale of this space. For DeFi, derivatives are reshaping the landscape, leading many to ask: How?
Below are some pioneers driving the next iteration of DeFi markets.
Starting with Hyperliquid
Readers are likely familiar with Hyperliquid and its accomplishments, but perhaps not its future plans or the unique tools being built on top of it.
CoreWriter — Unified Execution Layer
Hyperliquid features a dual-state execution environment atop its consensus layer: HyperCore and HyperEVM. HyperCore is the high-performance engine we know, hosting perpetual contracts and orderbook-based spot markets. HyperEVM is a completely different environment housing Hyperliquid’s smart contract layer. Both share state, but previously, HyperEVM smart contracts could only read data from HyperCore. CoreWriter changes this entirely.
Both HyperCore and HyperEVM are built on top of the HyperBFT consensus layer
This is Hyperliquid’s core innovation distinguishing it from other chains. CoreWriter enables HyperEVM smart contracts not only to read HyperCore data but also to execute trading instructions—including trade orders, staking, transfers, and vault management.
This opens the door for HyperEVM protocols to access the largest on-chain orderbook and its liquidity, creating unprecedented and unique DeFi mechanisms.
Examples of CoreWriter integration:
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DEXes leveraging both AMM and orderbook liquidity to improve capital efficiency
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Creating complex delta-hedging strategies via perpetual contracts
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CLAMMs hedging impermanent loss using perpetuals when funding rates are favorable
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Combination strategies utilizing both options and perpetuals
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Tokenized funding rate strategies on HyperEVM
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While liquidations are typically executed via AMM, CoreWriter allows money markets to use orderbooks for liquidation, improving capital efficiency
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Custody-free tokenized vaults containing HLP
Kinetiq is one example already applying this technology. Kinetiq uses a decentralized validator staking mechanism with a scoring system, with all operations automatically completed via smart contracts between HyperEVM and HyperCore. This enhanced trust gives liquid staked tokens (LSTs) like kHYPE a competitive edge.
Within weeks of mainnet launch, Kinetiq rose to become the top HyperEVM app by TVL
Another innovation involves introducing new types of collateral assets—the team behind felix protocol (unconfirmed) is reportedly exploring this direction. Specifically: enabling tokenized perpetual positions to be used as collateral in money markets, opening up fully derivative-backed DeFi yield mining opportunities.
Felix’s Morpho instance remains one of the most attractive money markets on HyperEVM
CoreWriter is just one of several innovations bringing DeFi into a stranger, more complex, and composable Baroque era. Another key innovation from Hyperliquid follows:
HIP-3: The Uniswap Moment for Perpetuals
Hyperliquid’s next innovation is creating permissionless perpetual markets via HIP-3. With 1 million HYPE (worth ~$38 million at time of writing) and an oracle, anyone can deploy a new permissionless perpetual market on Hyperliquid. This creates an entirely new market—we could call it “Perpetuals as a Service” (PaaS).
The true “Uniswap moment” for perpetual contracts has arrived: any perpetual market can now be created, including:
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Stock perpetuals
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Index perpetuals
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Forex market perpetuals
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Commodity market perpetuals
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Pre-IPO market perpetuals
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Real estate perpetuals
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Other niche new markets
This also means: if a protocol’s token isn’t listed on HyperCore perps or CEXs, a trading pair can now be permissionlessly created on the most commonly used on-chain market. Traditional finance indices like the S&P 500 could go live immediately after launch and potentially become Hyperliquid’s largest markets. Stocks like $NVDA, $HOOD, $TSLA can be “perpetualized,” creating new instruments for these tech giants. Market creators will also earn 50% of trading fees from their instruments.
HIP-3 opens doors to new markets like stock perpetuals
As DeFi users, some of these niche markets are particularly appealing—especially once perpetual positions are tokenized via CoreWriter and used across other HyperEVM applications. In time, we may see real estate perps, prediction market perps, even orange juice futures. However, attracting market makers to such markets may be difficult, so mainstream markets are more likely to emerge first.
Ventuals is among the first teams publicly promoting Pre-IPO markets built on HIP-3. It leverages industry-leading off-chain data sources to obtain accurate valuations and creates perpetuals around global private leaders like OpenAI, SpaceX, Stripe, and Anthropic.
Ventuals testnet market page
Such specialized markets are pushing DeFi innovation forward: one market, one oracle, one dream.
Derivative-Backed Stablecoins
Derivatives are also driving innovation in stablecoins—not through payment stablecoins (Tether and Circle operate their own systems), but through yield-bearing stablecoins.
This space is growing rapidly, and USDe exemplifies the evolution of uniquely high-yield stablecoins. We’re tired of the flood of Treasury-backed stablecoins offering mediocre 5% APY.
Perpetual contracts, through funding rates, have enabled one of the best delta-neutral strategies in recent years. Resolv is another example of a high-yield delta-neutral stablecoin. Its tiered system lets users choose yield levels based on risk appetite. Combined with protocols like Pendle, even more complex and unique tools can be created—PTs (Principal Tokens) especially catch my attention, essentially creating fixed-rate income products backed by derivative yields.
Liminal, built on Hyperliquid, offers funding rate strategy services within its app. Users deposit stablecoins and automatically earn funding rate yields. While not stablecoins themselves, these derivative-backed products offer stablecoin-denominated high yields surpassing those of real-world assets (RWA) like Treasuries.
Stablecoins can sometimes be more imaginative: Neutrl creates synthetic dollar products via OTC arbitrage and perpetual hedging, currently offering over 30% APY on $40 million TVL (currently private access only).
How do they achieve this?
Neutrl acquires SAFTs (Simple Agreements for Future Tokens) and token trades from foundations and investors seeking liquidity, with most transactions deeply discounted relative to spot prices. Their advantage lies in accessing deals through capital networks and partners, then hedging via perpetuals. Risk management includes diversified trades, backing by other stablecoins, extra buffers, and third-party custody.
These new types of markets allow users to access unprecedented high yields. OTC trading was once exclusive to niche players, but now ordinary on-chain users can benefit via Neutrl.
Specialized stablecoins come in many forms: GAIB’s AI GPU derivatives, USD.AI’s AI infrastructure debt-backed stablecoin, Hyperbeat’s tokenization of DeFi strategies using USDT (technically qualifies as a stablecoin).
New Derivative Tools Based on Options
For a long time, discussions about poorly designed options products persisted. Those days are over—on-chain options now offer unique vehicles for expressing exposure: from trading-focused products and high leverage to yield-generating strategies.
Straddles are essentially long volatility plays
Rather than opening the entire options world at once, protocols are focusing on niche areas, building high-quality products before expanding. As a result, a series of options protocols have emerged, offering products never seen before on-chain.
Last week, tools like 0dte (options expiring within 24 hours) hit record-high notional trading volumes. Why are these tools useful? Simply put: the speculation potential is astonishing.
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Extremely high leverage (up to hundreds of times nominal leverage)
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No liquidation risk when buying calls/puts
Traders can access 0dte options markets for major assets like BTC, ETH, SOL, and HYPE via the IVX protocol. These are among the best leverage tools available today, including the highest-leverage products for assets like HYPE.
BTC with 400x leverage, no liquidation, no funding rate
What truly excites me is how each protocol focuses on its niche: Rysk Finance, for instance, concentrates on options yield strategies (covered calls), again advancing DeFi innovation through derivatives. While there have been options yield products before, current implementations represent a qualitative leap in user experience and sustainable mechanisms.
Gamma Swap’s yield tokens are a newer product, creating unique derivatives atop AMMs. Their novel yield tokens represent the quintessential derivative of DeFi’s new Baroque era: using borrowed Uni V3 positions, yield tokens act as synthetic assets with spot-like underlying exposure, yet remain unaffected by impermanent loss typical of AMM LP tokens.
These tools are about to unlock composability: through cross-application integrations (such as listings on Euler or Morpho money markets), and inevitable listings on Pendle, we’ll gain exceptional and unique ways to express ETH exposure.
Fixed-rate single-asset AMM V3 liquidity pool earning yield on staked ETH—yes, the Renaissance is truly over...
Options come in many forms: Time Swap’s V3 also excites me—it introduces time-bound tokens, tokenizing time periods to provide extensive functionality for YT/PT (yield tokens / principal tokens). This offers multiple advantages over current yield tokenization systems: improved capital efficiency, reduced fragmentation, and enhanced flexibility in yield trading.
The End of Impermanent Loss
Regarding new tools, DeFi’s next innovation in AMMs comes from Yield basis—transforming crypto assets into productive yield-generating instruments through unique leveraged hedging.
Impermanent loss is an inherent characteristic of AMM mechanisms
In traditional AMMs, if you provide $10,000 wBTC and $10,000 USDC, when BTC price doubles, your position won’t double (because the position grows at √BTC price ratio under the xy=k formula). But if you stake wBTC to borrow $10,000 to form an LP position, and dynamically rebalance so that debt ($10,000) always represents 50% of collateral ($20,000), automatically adjusting debt at a 50% collateralization rate when BTC price moves, you ensure your position’s total value scales proportionally with BTC price.
Yield basis exclusively uses crvUSD to enhance utility, and more importantly, grants control over interest rates.
The key lies in the rebalancing mechanism: the re-levered AMM offers LP tokens to arbitrageurs at a slight discount, who add crvUSD to reduce debt and adjust position size. Similarly, when prices rise, the re-levered AMM offers crvUSD at a premium to LP token depositors, allowing arbitrageurs to buy more BTC to restore the 2x leveraged position.
ybBTC brings much-needed innovative yield solutions to BTC. Simulations by Curve founder Michael Egorov show great promise for ybBTC. For me, double-digit yields would already count as success—though if deposits reach billions, yield dilution becomes questionable (which would still be a massive win for Yield basis, Curve Finance, and all on-chain BTC traders).
Funding Rate Products
Funding rates have become one of the most interesting tools for enhancing yields via delta-neutral positions. As alt asset funding rates soar (especially for high-demand assets like HYPE, FARTCOIN, PUMP), the basic trade of buying spot and shorting perps (basis trade) has become one of the best opportunities this cycle. As mentioned earlier, Ethena, Resolv, and even Liminal are leveraging this to offer yield tools.
Boros from Pendle is another innovator in this space, introducing a new tradable derivative for funding rate yields: going long pays a fixed rate but receives the market’s floating funding rate, while going short does the opposite.
Boros opens up entirely new possibilities: locking in fixed funding rates is highly significant for VCs, funds, traders, and protocols like Ethena/Resolv, enabling them to secure yields over a given period. This will spawn more composable strategies—including fixed-rate markets.
Where to Next?
The above examples represent only a fraction of the stunning innovations emerging in today’s DeFi world. The pace of development is unprecedented, with teams continuously learning and evolving from industry challenges to build truly powerful products. Most are driven by derivatives, underscoring the defining traits of this new era of DeFi. Derivatives will push DeFi to new heights—first by surpassing the previous cycle’s TVL peak, and ultimately reaching the trillion-dollar mark (seven times the current scale).
These protocols have only revealed the tip of their potential. Over the next 6–12 months, they will stand alongside established giants (AAVE, Uniswap, Lido, etc.), pushing the industry to new heights.
As DeFi continues to evolve and mature, numerous exciting markets remain to be developed: on-chain forex, Sharia-compliant DeFi, fixed-rate money markets, undercollateralized lending, privacy solutions, and more. These areas will transition from niche to mainstream, while existing domains—especially derivatives—will move from mainstream to dominance over the entire financial market.
One thing is certain: DeFi has entered the Baroque era, and the future will only get more exciting.
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Wajahat Mughal
