Encryption Six Protocol Chaos: HyperEVM Declares War on Ethereum

Ethereum is back with DeFi once again, with Aave/Pendle/Ethena making loop lending a leverage amplifier. Compared to the on-chain stack in DeFi Summer that was benchmarked against ETH, the leverage rise curve supported by stablecoins like USDe is much smoother.

We may enter a warm long cycle, and the examination of on-chain protocols will be divided into two parts. One involves more types of assets, as external liquidity will be more abundant under the expectation of interest rate cuts by the Federal Reserve; the second is to examine the limit values of leverage multiples, corresponding to the process of safe deleveraging, that is, how individuals can exit safely and how the bull market will end.

This article focuses on on-chain protocol interaction, and the examination of external funds can refer to the previous article: New changes in the crypto power structure: the iron vault of the custody institution Anchorage.

Crypto Six Protocol: Interaction between Ecology and Tokens

There are countless on-chain protocols and assets, but under the Pareto principle, we only need to focus on parameters such as TVL/trading volume/token price. More specifically, we should pay attention to the few indispensable entities in the on-chain ecosystem and examine their relationships within the ecological network, balancing individual importance, ecological connectivity, and the highest growth potential of new protocols.

Image Description: DeFi TVL Overview

Image source: @zuoyeweb3

In the composition of DeFi TVL, Ethereum accounted for over 60% of the DeFi TVL in July, while Aave also accounted for over 60% of the Ethereum ecosystem TVL. This is the 20% in the Pareto principle, and the remaining protocols must have a strong connection with the two to be included as main passive beneficiaries.

With the flywheel of the "Three Musketeers of Circular Loans" starting, the correlation between Ethereum, Aave, Pendle, and Ethena goes without saying. Adding Bitcoin to the mix, WBTC, ETH, and USDT/USDC are the de facto foundational assets of DeFi. However, similar to Lido, USDT/USDC only possess asset attributes and lack ecological value, while Plasma and Stablechain are just beginning to compete.

To make a slight distinction, a protocol can have multiple values. For example, Bitcoin primarily has asset value, meaning everyone needs BTC, but no one knows how to utilize the Bitcoin ecosystem. This is not to say that BTCFi is a scam (just a playful remark).

ETH/Ethereum has dual value; everyone needs both ETH and the Ethereum network, including the EVM and its extensive DeFi stack and development facilities.

Based on the further classification of assets and ecological values, we examine the degree of "necessity" of each leading protocol. Each asset attribute deemed necessary earns one point, and each ecological value deemed necessary earns one point. The following table can be summarized:

Pendle/Aave/Ethena/Ethereum/HyperEVM/Bitcoin are the six strongest protocols in terms of linkage, and any two of them can be coupled with each other, requiring at most one additional protocol or asset for linkage.

Let us explain briefly:

1. Ethena <> HyperEVM: USD has been deployed to the HyperEVM ecosystem.

2. Pendle <>< HyperEVM: $kHYPE and $hbHYPE ranked first and third on the trend list.

3. Aave <> HyperEVM: Hyperlend TVL accounts for 25% of HyperEVM ($500M vs. $2B), which is a friendly fork of Aave, promising to distribute 10% of profits to Aave.

4. BTC/ETH are the two coins with the largest trading volume on Hyperliquid, and can be deposited and withdrawn through Unit Protocol.

5. Pendle, Aave, and Ethena have already integrated, but the asset attributes of USDe are recognized, and the ecological value of $ENA is slightly inferior.

6. Pendle's new product Boros is based on funding rates for trading, with BTC and ETH contracts as the top choices.

7. Aave requires WBTC and various types of ETH, such as staked ETH, especially since the ecological value of Ethereum as an infrastructure is needed by Aave/Pendle/Ethena, which is the on-chain support for ETH prices.

8. The most special aspect here is that the Ethereum ecosystem unidirectionally requires BTC, while the Bitcoin ecosystem does not require any external assets.

9. Ethena has no relation to Bitcoin/BTC.

10. 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 links. The introduction of any other ecosystems and tokens requires more hypothetical steps, such as Lido, which ranks second in TVL, and its relationship with Hyperliquid and Bitcoin is very weak. Additionally, after Pendle "abandoned" LST assets to invest in YBS, Lido's on-chain ecological linkage attribute in Ethereum will weaken.

We base the highest 7 of BTC to categorize 6 types of assets into three nodes according to their influence on other protocols. Please note that this is not a depiction of the asset value, but a ranking of their importance within the ecosystem:

BTC/ETH is the strongest infrastructure, with BTC excelling in value attributes, and ETH's ecological status being unshakeable. If we include Solana to calculate the degree of connection, we will find it does not compare to the connection of Hyperliquid/HyperEVM to Ethereum. The core reason is the trading attributes of Hyperliquid itself, which, combined with HyperEVM, aligns more closely with the EVM ecosystem.

• Within Ethereum, the interaction between Lido/Sky and the existing six protocols is insufficient.

• Besides Ethereum, Solana/Aptos and the existing six protocols have insufficient interaction.

However, Solana needs to support its own DEX in order to be compatible with more external assets, which naturally requires an additional assumed step. SVM's compatibility with the EVM ecosystem will also be more difficult. In a word, everything about Solana must develop independently.

Image description: Connectionism image Source: @zuoyeweb3

However, in the relationship network, the synergy of the Ethereum ecosystem is the strongest. 1 USD of Ethena comes from hedging with ETH, and then enters Pendle and Aave for value circulation, while the Gas Fee generated on it becomes the value support of ETH.

In addition to Bitcoin naturally relying on BTC to achieve value self-circulation and self-flow, ETH is the closest to a value closed loop. However, this is the result of proactive efforts, and the combination of Hyperliquid/HyperEVM is still in progress. Whether it can complete the linkage between trading (Hyperliquid) + ecosystem (HyperEVM) and $HYPE remains to be seen.

This is a hypothetical process of increasing entropy, where BTC only needs itself, ETH needs the ecosystem and tokens, and $HYPE needs trading, tokens, and the ecosystem.

Does the expansion of DeFi have an end?

As mentioned earlier, Hyperlend needs to share profits with Aave. Aave's influence is not limited to this; in fact, Aave is the main actor in the circular loan initiated by Pendle and Ethena, playing a leveraged role in the entire circular system.

Aave is the closest to becoming the on-chain infrastructure of Ethereum, not because its TVL is the highest, but due to a comprehensive consideration of security and capital volume. The safest way to launch a lending model on any public chain and ecosystem is to use a compliant fork of Aave.

Image description: Aave and Hyperlend profit-sharing settings image

Source: @zuoyeweb3

In the Hyperlend fork template, a 10% profit sharing is the baseline, in addition to allocating 3.5% of its own tokens to Aave DAO and 1% to stAave holders, meaning Aave sells itself as a service to various ecosystems, which is where its ecological value and token value are linked.

But it is not without competitors; Maple has already expanded to HyperEVM, and new lending protocols like Fluid and Morpho are also competing fiercely with new assets like YBS. As the strongest competitor in the Ethereum EVM ecosystem, HyperEVM may not always remain peaceful.

In terms of proactivity, Bitcoin and HyperEVM are absolute extremes. HyperEVM is siphoning traditional transaction types onto the chain through HIP3, facilitating liquidity between HyperCore and HyperEVM via CoreWriter, and supporting its front-end agents through Builder Code.

In addition, it utilizes Unit Protocol and Phantom to connect the funds of the Solana ecosystem, siphoning all on-chain liquidity, which is also a way to expand infrastructure.

In summary:

• 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 lending model and treasury strategies to create a third pillar of stablecoins starting from $ENA and $USDe, $USDtb. The primary use of USDT/USDC remains trading and payments, while USDe aims to become a risk-free asset in the DeFi space.

• Aave has already become the de facto lending infrastructure, closely tied to Ethereum.

• Bitcoin and Ethereum represent the limits of the blockchain economic system, and their level of expansion is the foundation for the growth of Decentralized Finance. That is, how much of the BTC scale can be migrated to DeFi, and how much growth potential does DeFi still have.

• Hyperliquid/HyperEVM has already been closely integrated with existing DeFi giants in the ecosystem. Although its TVL is far inferior to Solana, its growth prospects are greater. The story of Solana is about defeating the EVM system from the perspective of a public chain.

Conclusion

The six crypto protocols examine the degree of interconnection among them. This does not imply that other protocols lack value; rather, a high degree of collaboration will exponentially increase the freedom and utilization of funds, thus benefiting everyone and achieving mutual prosperity.

Of course, a loss will affect everything, which requires examining the subsequent development of DeFi anchor switching—from ETH to YBS. As a high-value asset, ETH is more aggressive in terms of leverage, while YBS, like USDe, is naturally more price stable (not value). DeFi Lego built on this foundation is more solid, and excluding extreme decoupling situations, theoretically, it can make the curves of leveraging and deleveraging milder.

The seats in the Crypto Pantheon are limited, and the new chosen ones can only forge ahead, befriending existing deities and building the strongest protocol network to earn a place for themselves.