Market Panic Escalates, Focus Shifts to DeFi and AI Agent Race

Original Article Title: "Market Panic Escalation, Shift in Focus to DeFi and AI Agent Tracks | Frontier Lab Crypto Market Weekly Report"

Original Source: Frontier Lab

Market Overview

Key Market Trends

Overall Market Summary

The current market is in a state of extreme panic, with the sentiment index dropping from 53% to 7%. In addition, the hawkish stance of the Federal Reserve (reducing rate cut expectations from 4 to 2) triggered approximately $1 billion in forced liquidations, indicating a significant deleveraging process in the market.

DeFi Ecosystem Development

The DeFi sector experienced its first TVL decline in nearly two months (-2.21%), but stablecoin market caps continue to grow (USDT +0.55%, USDC +1.44%). This indicates that despite the market correction, foundational liquidity continues to flow in, with yield farming projects such as stable income projects gaining traction.

AI Agent

The AI Agent track has reached a market size of $9.9 billion, with investment focus shifting from speculative AI meme coins to infrastructure development. This shift demonstrates that the market is gradually maturing, with projects aligning more towards rationality and practicality.

Meme Coin Trend

The meme coin market heat has significantly cooled off, with funds beginning to withdraw on a large scale. This indicates reduced speculative sentiment in the market, as investors are more inclined to seek projects with tangible utility. This may signify a phased end to the meme coin craze.

Public Chain Performance Analysis

Amid significant market volatility, the public chain sector has shown strong resilience, becoming investors' preferred safe haven, reflecting continued market confidence in infrastructure.

Future Market Outlook

Approaching the Christmas holiday, market liquidity is expected to decrease. It is recommended that investors adopt a defensive allocation strategy, focusing on BTC and ETH. Additionally, attention can be paid to DeFi stable yield and AI infrastructure projects, but caution is advised due to the potential heightened risks during the holiday season.

Market Sentiment Index Analysis

· The market sentiment index fell from 53% last week to 7% this week, entering the extreme fear zone.

· Altcoins performed weaker than the benchmark index this week, exhibiting a sharp decline. Due to leveraged positions, the market saw over $1 billion in forced liquidations, leading to significant deleveraging of long positions. Given the current market structure, it is expected that Altcoins will stay synchronized with the benchmark index in the short term, with a low probability of independent price movements.

· During times when Altcoins are in the extreme fear zone, upward reversals often occur.

Overall Market Trends Overview

· The cryptocurrency market was in a downtrend this week, with the sentiment index in extreme fear.

· DeFi-related cryptocurrency projects showed strong performance, indicating continued market focus on enhancing yield fundamentals.

· AI Agent race projects had high sentiment this week, showing that investors are actively seeking the next market breakout.

· This week, Meme race projects generally declined, with funds beginning to exit Meme coin projects, reflecting a waning enthusiasm for Meme coins in the market.

Hot Race

AI Agent

The overall market was in a downtrend this week, with all races experiencing declines. While most token prices in the AI Agent race were also in a downtrend this week, the discussion in the market was the highest for this race. Previously, most of the market attention on AI Agent was focused on Meme tokens featuring AI Agent, but it is now gradually shifting towards AI Agent infrastructure development.

As traditional VC coin projects were not popular in this cycle and Meme coin projects failed to sustain market growth, the AI Agent race is very likely to lead the next market development. The AI Agent race encompasses not only AI Meme but also AI DePIN, AI Platform, AI Rollup, AI Infra, and many other races that can be combined with AI Agent. Since fundamentally all blockchain projects are manifestations of smart contracts, and the birth of AI Agent is aimed at enhancing smart contracts, the combination of AI Agent and Crypto is ideal.

Top Five AI Agent Projects by Market Cap:

DeFi Track

TVL Growth Ranking

Top 5 Market Projects by TVL Growth in the past week (excluding small TVL projects, with a threshold of $30 million, source: Defilama).

VaultCraft (VCX): (Recommendation Score: 2 stars)

· Project Introduction: VaultCraft is a crypto project built on the Algorand blockchain, aiming to reduce participants' costs in storing and bootstrapping the network. VaultCraft's design leverages Algorand's Proof-of-Stake consensus protocol.

· Latest Developments: This week, VaultCraft launched an stETH 4X leverage Looper based on Lido Finance, supporting Base, Arbitrum, Optimism, and Ethereum's multi-chain deployment. Through Chainlink CCIP, it achieved direct staking from L2 to the mainnet, offering users over 7% APY, established a partnership with Matrixport, securing a 1000 BTC custody business, leading to a rapid TVL growth. It also formed strategic partnerships with Safe and CoWSwap.

Hyperliquid (HYPE): (Recommendation Score: 5 stars)

· Project Introduction: Hyperliquid is a high-performance decentralized finance platform focusing on providing perpetual contract trading and spot trading services. Built on its high-performance Layer 1 blockchain utilizing the HyperBFT consensus algorithm, it can process up to 200,000 orders per second.

· Latest Developments: This week, the overall market experienced significant volatility. Before Wednesday, the market continuously hit new highs; after the conclusion of the Federal Reserve meeting on Thursday, there was a sharp decline. The intense fluctuations created an excellent trading environment for users looking to participate in contract trading for high returns. Consequently, many on-chain users joined Hyperliquid for trading, leading to an open interest exceeding $4.3 billion. In response to market demand, Hyperliquid added leverage trading for various popular coins like VIRTUAL, USUAL, PENGU, supporting up to 5x leverage, attracting numerous on-chain users to engage in trading.

Resolv (Unlaunched): (Recommendation Rating: 2 Stars)

· Project Overview: Resolv is a Delta-neutral stablecoin project that revolves around the tokenization of market-neutral portfolios. The architecture is based on economically viable and independent sources of income not tied to fiat. This allows for competitive returns to be distributed to the protocol's liquidity providers.

· Latest Developments: This week, Resolv completed integration with Base, significantly reducing transaction costs and improving transaction speed. Resolv also introduced lending services for USR, USDC, and wstUSR through Euler Finance, launched the USR-USDC liquidity pool on Aerodrome, adjusted Spectra YT rewards to 15 points daily, optimized the reward mechanism, initiated the Grants program, confirmed the first batch of 3 winners, and strengthened the platform's competitiveness in the DeFi space through deep collaboration with projects such as Base, Euler Finance, and Aerodrome.

Babylon (Unlaunched): (Recommendation Rating: 5 Stars)

· Project Overview: Babylon is a project aimed at leveraging Bitcoin's security to enhance the security of other Proof of Stake blockchains. The core idea is to activate idle Bitcoin assets through a trustless staking mechanism, addressing the contradiction between Bitcoin holders' asset security concerns and participation in high-yield projects.

· Latest Developments: Despite the significant market price fluctuations this week, BTC has remained strong and at a high level. Coupled with widespread optimism about BTC's future development, more holders are resolutely holding and seeking to unlock BTC liquidity, leading to an increased interest in BTC-based yield projects. This week, Babylon deepened the application of ZK scalability technology through collaboration with Layeredge and established a strategic partnership with Sui to advance modular ecosystem development.

Lista DAO (LISTA): (Recommendation Rating: 3 Stars)

· Project Overview: Lista DAO is a BSC-based liquidity staking and decentralized stablecoin project designed to provide users with crypto asset staking rewards and lending services for the decentralized stablecoin LISUSD.

· Latest Developments: This week, Lista DAO introduced Gauge Voting and Bribe Market features, allowing veLISTA holders to participate in LISTA emission decisions for liquidity pools. It also announced strategic partnerships with 48Club_Official and defidotapp, especially in exploring new opportunities in the BNBChain ecosystem. Additionally, through the LIP #012 proposal, Lista DAO advanced the integration of PumpBTC as an innovative collateral asset. Lista DAO also attracted users through weekly rewards of approximately $230,000 in veLISTA and high APR compounding incentives, offering a competitive 5.25% lending rate. This week, Lista DAO collaborated with FDLabsHQ for a $7,000 USDT Winter Event and provided slisBNB and clisBNB airdrop opportunities for BNBChain holders.

In conclusion, we can see that this week the projects with the fastest TVL growth are mainly concentrated in the stablecoin yield sector (governance pools).

Overall Performance of the Sector

· Steady Growth in Stablecoin Market Cap: USDT increased from last week's $145.1 billion to $145.9 billion, a growth rate of 0.55%. USDC increased from last week's $41.5 billion to $42.1 billion, a growth rate of 1.44%. It can be seen that despite the market downturn this week, both the non-US market-driven USDT and the US market-driven USDC have shown growth, indicating that the overall market is still experiencing continuous inflow of funds.

· Gradual Increase in Liquidity: As the risk-free arbitrage interest rate in traditional markets continues to decline due to ongoing rate cuts, the arbitrage interest rates of on-chain Defi projects have been gradually increasing along with the appreciation of cryptocurrency assets. Reverting to Defi would be a very good choice.

TVL of Various Defi Sectors (Source: https://defillama.com/categories)

· Fund Situation: The TVL of Defi projects has risen from last week's $54.1 billion to the current $52.9 billion, showing negative growth for the first time in nearly two months, with a decline of 2.21%. The main reason is that this week the entire market experienced a significant downturn, resulting in many contracts and loans being forced into liquidation, leading to a decrease in the TVL of the Defi sector. This breaks the trend of continuous growth of nearly two months. In the next two weeks, particular attention should be paid to the overall TVL changes to see if the downward trend continues.

In-Depth Analysis

Drivers of the Increase: The core driving factors of this round of growth can be summarized as follows: entering a bull market cycle has driven the increase in liquidity demand, which in turn has pushed up the basic lending rate levels, amplifying the profit potential of arbitrage cycles in Defi protocols.

Specifically:

· Market Environment: Bull market cycle has brought about an overall increase in liquidity demand

· Rate End: The base lending rate rises, reflecting the market's pricing expectations for funds

· Yield End: The yield spread of the arbitrage strategy widens, and the protocol's endogenous yield significantly improves. This transmission mechanism strengthens the intrinsic value support of the DeFi sector, forming a benign growth momentum.

Potential Risks: Due to the recent upward trend in the market, investors have been more focused on yield and leverage in borrowing, overlooking the downside risk. However, this week, as the Fed unexpectedly reduced its planned interest rate cuts for next year from 4 to 2, the market experienced a rapid decline, leading to the liquidation of over $1 billion in contracts and borrowing assets, resulting in losses for investors. This liquidation risk could potentially trigger a chain reaction of liquidations, causing prices to further decline and more assets to be liquidated.

Other Track Performance

Public Chains

Top 5 Chain TVL Growth in the Past Week (excluding smaller chains), data source: Defilama

Hyperliquid: This week, the overall market experienced violent fluctuations. Before Wednesday, the market continuously set new highs. After the conclusion of the Fed meeting on Thursday, there was a significant drop. The intense volatility created a very favorable trading environment for users looking to participate in leveraged trading for high returns. As a result, many on-chain users joined Hyperliquid to engage in trading, causing Hyperliquid's open interest to exceed $43 billion. Responding to market demand, Hyperliquid introduced leverage trading for multiple popular coins such as VIRTUAL, USUAL, PENGU, supporting up to 5x leverage, attracting many on-chain users to participate in trading.

Bitcoin: This week, the market reached new highs in the first half of the week but then experienced a significant decline after Thursday. The entire market saw substantial price drops, with BTC having a relatively smaller decline compared to other projects. Users, seeking to hedge, flocked to buy BTC. At the same time, market participants became more bullish on BTC's future price increase, holding BTC more firmly. Consequently, users chose to deposit their BTC into the BTCFi project to earn additional returns. This movement led to an increase in Bitcoin's TVL.

BSC: This week, BNB Chain introduced new projects to the ecosystem such as Seraph_global, SpaceIDProtocol, and cococoinbsc, actively advancing the integration of AI and Web3 in the gaming sector and strongly supporting the development of Meme projects. Through the Meme Heroes LP program, $CHEEMS and $HMC projects were provided with $50,000 in liquidity support. Additionally, a daily Memecoin airdrop plan was launched featuring projects like GOUT, MALOU, BUCK, and $WHALE, along with the kickoff of a $200,000 Meme Innovation competition.

AILayer: AILayer's activities this week were primarily focused on community operations and ecosystem partnerships. They collaborated with OrochiNetwork for a Giveaway event, launched a Mini App leaderboard event to increase user engagement, continuously engaged the community through interactive activities like "Would You Rather Challenge" and "Riddle of the Week," and hosted an EP31 AMA event with the theme "How AILayer is Revolutionizing Bitcoin with AI," showcasing the project's vision for combining AI and blockchain.

Mantle: Mantle achieved a significant milestone this week by integrating Compound III, bringing $USDe lending functionality to users and supporting ETH and BTC as collateral assets. They expanded the Mantle Scouts Program to 40 top industry Scouts, launched the Mantle Meetup program, introduced the large-scale incentive event Moe's Rager with a total of up to 1 million MNT, and successfully attracted over 110,000 users through the Yield Lab project, generating a total of 2.5 million transactions and bringing on-chain traffic to Mantle.

Gainers Overview

Top 5 Market Token Gainers in the Past Week (excluding tokens with very low trading volume and meme coins), data source: Coinmarketcap

This week's gainers list exhibited a sector-focused trend, with most of the rising tokens belonging to the public chain sector.

UXLINK: UXLINK reached a strategic partnership with DuckChain this week and received investment support from UFLY_Labs to jointly build the Social Growth Layer (SGL). The user base on the LINE platform exceeded 2 million users, while UXLINK hit an all-time high in the Upbit trading pair. UXLINK launched a large-scale airdrop event totaling $500,000, covering over 20 Web3 projects, and continued to attract new users through joint activities with exchanges like OKX.

USUAL: This week, Usual introduced an innovative USD0++ holder incentive treasury and delta-neutral strategy, offering users APY returns of up to 76%-82%. It maintained a stable high-yield performance in Curve's USD0/USD0++ and USD0/USDC pools, averaging over 50% returns. Usual's TVL saw rapid growth recently, climbing from $750 million to $800 million, with a 44% increase in TVL after the third-week reward program ended and a 28% decrease in minting rate, creating a deflationary effect on the USUAL token. The Usual team emphasized that 90% of the token allocation goes to the community, following a transparent operation model with the DAO retaining 100% of the revenue.

MOCA: This week, Moca released version 3.0, introducing the concept of "Integrated Accounts" and launching the AIR Kit to address the fragmentation of Web3 user identities. Moca formed a significant partnership with SK Planet to integrate Moca into the OK Cashbag app, reaching 28 million users in South Korea. The MOCA token is set to be listed on the two major Korean exchanges, Upbit and Bithumb. Through deep cooperation with Nifty Island and the introduction of the Fixed Mode to optimize the MocaDrop mechanism, Moca significantly improved user experience and ecosystem participation.

HYPE: The overall market experienced intense volatility this week, reaching new highs before Wednesday and undergoing a significant decline after the conclusion of the Fed meeting on Thursday. The sharp fluctuations created an excellent trading environment for users seeking high returns through futures trading, leading to many on-chain users joining Hyperliquid for trading. The open interest of Hyperliquid's futures contracts surpassed $4.3 billion this week. Hyperliquid responded to market demand by adding leveraged trading for popular coins like VIRTUAL, USUAL, and PENGU, supporting up to 5x leverage and attracting many on-chain users to participate in trading.

VELO: Velodrome this week announced a partnership with Sony Block Solutions Labs to expand Velodrome to the Soneium platform, a next-generation Layer 2 solution built on the Optimism Superchain. Significant progress has been made in liquidity development, with inkonchain locking 2.5M veVELO and providing $1.4M in incentive funding. Additionally, liquidity support has been provided for Mode Network's governance token.

Meme Token Price Leaderboard

Data Source: coinmarketcap.com

This week, the Meme project was significantly impacted by the market downturn. It did not follow the overall market uptrend in the first half of the week, and after a drop on Wednesday, it experienced a sharp decline following the overall market trend. As a result, there were very few instances of Meme tokens showing price increases this week. It is evident that the current market focus and capital are not in the Meme coin sector.

Social Media Highlights

Based on the top five daily growths from LunarCrush and the top five AI scores from Scopechat, the statistical data for this week (12.14-12.20) are as follows:

The most frequently mentioned topic was L1s, with the following tokens making the list (tokens with very low trading volumes and meme coins excluded):

Data Source: Lunarcrush and Scopechat

According to data analysis, this week's highest social media attention was on L1s projects. After the Fed announced a substantial cut in next year's interest rate hike expectations from four times to two times on Thursday, there was a significant drop followed by the overall market downturn. The decline in various public blockchains was smaller compared to other sectors. In general, during a market-wide decline, the performance of various public blockchains tends to be better than other sectors. While most market participants invest their funds in BTC and ETH as safe havens during a downturn, a significant portion is still invested in various public blockchains. When the downturn ends and an uptrend occurs, public blockchains generally tend to rise before other projects.

Market Theme Overview

Data Source: SoSoValue

According to the weekly return rate statistics, the Cefi track performed the best, while the Gamefi track performed the worst.

· Cefi Track: In the Cefi track, BNB and BGB have a significant share, accounting for 86.07% and 5.45% respectively, totaling 91.52%. This week, Binance continued to list new tokens, introducing influential tokens daily, bringing in a considerable amount of traffic. Meanwhile, BNB outperformed the market, decreasing by 2.58%, which was better than BTC and ETH. Additionally, Bitgit has recently shown remarkable performance by continuously listing hot tokens. Its token BGB saw a contrary 37.93% increase this week, thereby boosting the overall performance of the Cefi sector.

· Gamefi Track: In this year's cycle, the Gamefi track has not received much market attention, resulting in scarce funds and traffic inflow. This lack of attention has caused the Gamefi track to lose its previous wealth effect, leading to a decreasing level of interest. IMX, BEAM, GALA, SAND, and AXS dominate this track, accounting for a total of 82.14%. The performance of these coins was weaker than the market this week, resulting in the Gamefi track's poorest performance.

Next Week's Crypto Major Events Preview

Thursday (December 26) U.S. Initial Jobless Claims for the Week

Next Week Outlook

· Macro Factors Analysis

Next week will enter the Christmas holiday in the United States, with few macro data releases. In past years, when entering the Christmas and New Year holidays, markets led by the United States have experienced decreased buying power and increased market volatility.

· Sector Rotation Trend

Although the DeFi track is currently in a tough market environment, investors generally expect a market-wide rise in the first quarter of next year. As a result, most investors are still unwilling to sell their tokens. Simultaneously, in order to increase token holding returns, they are actively participating in yield farming projects to enhance their earnings.

The AI sector's AI Agent track has received continuous attention from the market, with the market size reaching $9.9 billion. The acceleration of the integration of Web2 and Web3 ecosystems, the data network, and functional AI Agents with existing encryption products has been expedited.

· Investment Strategy Recommendation

Maintain a defensive configuration, increase the allocation of top assets BTC and ETH to enhance asset hedge properties and hedge risks, while also participating in some high-yield yield farming Defi projects. It is recommended that investors remain cautious, control positions strictly, and manage risks effectively.

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