The Holy Grail of DeFi in My Heart

Author: timzz

In the past, the dominance of the dollar relied on the U.S. military and American propaganda to lead the world’s finance.

Today, blockchain serves as the new U.S. military and propaganda.

The large-scale on-chain integration of U.S. stocks and the future issuance of hybrid assets (a new asset type combining traditional and crypto assets) have ushered in a new development phase for DeFi. After the emergence of new assets, the first beneficiaries are trading protocols. With the fee switch activated on Uni, its Fully Diluted Valuation (FDV) has tripled in the past few months. This article mainly discusses where the trend will head after trading and the Holy Grail of DeFi in my heart.

Why DeFi is Needed

Before discussing DeFi, let’s first talk about why it is needed.

In the past, maintaining the dollar’s hegemony relied on the U.S. military and propaganda. The dollar’s share of global foreign exchange reserves is shown in the chart below. Although its share has dropped from 65% to 58% over the past decade, it remains the dominant currency among international reserve currencies. In the last decade, with the issuance of U.S. debt reaching 40 trillion, the fiscal deficit for 2025 is projected to be 1.8 trillion, and the fiscal deficit for 2026 is expected to exceed 2 trillion. The ratio of fiscal deficit to GDP is now far greater than the GDP growth rate (~5.8% vs ~1.9-2.2%), and some economies are already derisking from the dollar and U.S. debt. For the dollar, blockchain may serve as another lifeline. The U.S. can use blockchain technology to distribute dollar-denominated debt and related assets, while the issuance, trading, lending, and derivatives of stablecoins around DeFi are the main effective substances in this lifeline. (Detailed discussion: https://x.com/timzz_sleep/status/1942134973584040433)

Foreign exchange reserves

The development of things is often not linear. Back in 2017, there was hope that Security Token Offerings (STOs) could bring new narratives and funding to the digital currency industry. It wasn't until 2026, with the rise of AI stocks and the tokenization of stocks by Binance and Robinhood, that this narrative truly began. In recent weeks, both the SEC and CFTC have been releasing corresponding innovation exemption bills. Regarding the Clarity Act, my thought is "better late than never," because blockchain is the new U.S. military and propaganda. The question to consider is not whether to manufacture arms, but who will manufacture them.

The Five Core Business Models of DeFi

After all this, let’s get to the main topic------the Holy Grail of DeFi in my heart.

The five core business models of DeFi are: stablecoin/asset issuance, lending, asset management/yield aggregation, trading, and derivatives.

According to the revenue rankings of protocols from DeFillama, there are 5 stablecoin issuers among the top 15, accounting for 79.8% of the 30-day revenue of the top 15 protocols; next is DEXs, accounting for 11.8%, as trading often captures the first wave of growth from asset issuance; derivatives are dominated by Hyperliquid, accounting for 6.6%; followed by lending, which accounts for 1.8%. The small share here is mainly because the profit for protocols comes from the interest spread on loans, with most of the interest from borrowers going to lenders, and protocols only capturing a portion as profit. Since we are in the early stages of a bull market, asset management and yield aggregator protocols have not yet entered the top 15, but it is expected that in the future, protocols similar to money market funds in traditional banks will enter the top 15.

Revenue by protocol top 15 - Defillama

The Holy Grail of DeFi is the Right to Mint Currency

Stablecoin/asset issuance generates income directly from reserve assets or excess collateral loan interest. After scaling, the marginal cost is extremely low, and it has a first-mover advantage.

Currently, based on issuance volume, the top three are Tether, Circle, and Sky.

Both Circle and Tether’s stablecoin issuance models use short-term U.S. Treasury bonds and U.S. dollars as collateral, then issue corresponding stablecoins. The majority of the protocol's profits come from SOFR, which is substantial in a high-interest environment. However, there is also the possibility of a situation similar to that around 2021, where SOFR and short-term Treasury yields drop to 0, significantly impacting the protocol's profits.

Sky’s stablecoin issuance mechanism primarily comes from over-collateralization, following a DeFi-native model. In recent years, due to the increase in SOFR rates, Sky has increased the proportion of Real World Assets (RWA) in its collateral structure. Compared to Tether and Circle, it is more flexible, able to shift between RWA and DeFi based on market conditions. Additionally, the subDAO governance model also enhances the protocol's resilience.

Stablecoins face the impossible triangle: decentralization, capital efficiency, and price stability. Tether, Circle, and Sky each have advantages in the impossible triangle. However, only Sky operates in a relatively decentralized manner rather than being a single entity.

"Central Banks" Issue Assets, "Commercial Banks" Distribute Assets

The Holy Grail of DeFi is the right to mint currency, and the distribution of assets after minting is also a top priority for major "central banks." This distribution includes the liquidity of stablecoins, trading, lending, payments, etc.

The distribution of USDT has a first-mover advantage, with trading on major CEXs and payments in non-North American regions serving as barriers for USDT.

The distribution of USDC includes Coinbase, derivatives trading on Hyperliquid, etc. The question here is whether it can continue to sustain itself after removing implicit subsidies, and the future competition barriers for Circle after many "USDC" issuances.

The distribution of USDS/DAI comes from a deep integration of various DeFi channels, relying on subDAOs like Spark for expansion. The subDAO model allows Sky to retain the functions of a central bank while mobilizing other independent teams to serve the expansion of USDS/DAI as the main line.

Spark relies on the "central bank" as a "commercial bank," possessing a relatively complete capital distribution model (Spark liquidity layer + Sparklend lending), and establishes a foreign exchange layer for stablecoins through USDS, providing liquidity exchange for emerging stablecoins like RLUSD and pyUSD.

DeFi is Just Beginning

DeFi is just beginning. The next four years will be a period of deep integration between DeFi and U.S. finance. The U.S. will distribute U.S. assets through blockchain, and the winners in U.S. stocks will convert part of their profits into BTC and gold assets, creating a cycle of mutual growth.

DeFi "central banks" and the commercial banks relying on them will experience a significant period of development.