Introduction: The Outbreak of a Trust Crisis

In November 2025, the DeFi industry experienced a rare "perfect storm." Within a week, Balancer lost $128 million, Stream triggered $285 million in bad debts, four stablecoins went to zero, and the entire stablecoin market shrank by $2 billion. Almost simultaneously, Uniswap launched a fee switch proposal that had been in the works for two years, and the market erupted in cheers.

The explosion of these events exposed systemic issues in DeFi regarding security, transparency, and governance, while the fee switch proposal represented a typical industry response to these problems—addressing the crisis through financial engineering and redistribution of interests.

Is this response effective? The core argument of this report is: The current crisis facing DeFi is not a valuation crisis, but a value creation crisis. When the fundamental issue of the industry lies in its inability to continuously create value for users, capital operations like buybacks and fee switches not only fail to solve the problem but may actually accelerate the crisis.

Part One: The Clash of Forces—Explosions and Buybacks

Why the Power of Destruction Outweighs the Efforts of Construction

Balancer's TVL plummeted by 50% in a single day, and Stream caused four stablecoins to go to zero, far exceeding the direct impact of the losses. This rapid contagion proves that: Once trust collapses, the power of destruction spreads exponentially.

At the same time, the buyback plans that the industry had aggressively promoted over the past year have almost all failed. Aave continued to buy at an unfavorable time, forming a high-level takeover, while MakerDAO, despite strong fundamentals, saw its price only at one-third of its historical peak.

A profound asymmetry emerges here: Construction is linear, slow, and requires continuous investment; while destruction is exponential, instantaneous, and can wipe out all accumulation. Buybacks attempt to solve demand-side issues (security trust, user growth) through supply-side optimization (token burn), while explosions directly destroy the foundation of demand.

Systemic Misjudgment Behind Buyback Failures

1. Treating Symptoms as Causes. The protocol believes that the low token price is the problem, so it resorts to buybacks to boost the price. However, the low price is merely a symptom; the real cause is stagnation in business, user loss, and declining competitiveness.

2. Confusing Short-term Stimulus with Long-term Value. Buybacks may lead to short-term price increases, but if there is no improvement in business, the price will quickly fall back. The market will not sustain higher valuations due to buybacks; prices are ultimately determined by growth and narrative.

These misjudgments point to a common root: Viewing DeFi as a purely financial game while ignoring that it is essentially a technology product that needs to continuously create user value. Hyperliquid creates a positive flywheel through product optimization → user growth → trading volume growth, while buybacks are merely icing on the cake. Other protocols that only have buybacks without business growth turn buybacks into a "Ponzi scheme supported by savings."

Part Two: Uniswap's Dilemma—The Trap of Zero-Sum Games

The Misunderstood Fee Switch

The Uniswap fee switch proposal drove token prices up over 40%, but this optimism is based on a fundamental misunderstanding. The market sees this as a buyback plan, but in reality, it reallocates 17-25% of LP income to the protocol. This is a zero-sum game—every dollar of protocol revenue is taken from LPs.

This cognitive difference pushes all previous buyback failure issues to the extreme. Earlier cases theoretically did not harm existing stakeholders, while the Uniswap fee switch actively creates a civil war between LPs and token holders—sacrificing the foundation of the protocol (LPs providing liquidity) to please protocol shareholders (UNI holders).

The Overlap of Triple Crises

Timing Issues: Uniswap launched the fee switch amid the aftermath of explosions and deepening trust crises. When the market needed answers on "how to ensure fund safety," it was offered a plan on "how to redistribute profits."

User Loss: On the Base chain, Aerodrome's yields are already several times that of Uniswap, and the gap will widen further after the fee switch is activated. Rational LPs only look at yields and will not stay due to brand loyalty.

Cyclical Dilemma: If the fee switch leads to liquidity outflow, it may create a negative cycle—LP earnings decline → liquidity decreases → trading slippage increases → user experience worsens → trading volume declines → protocol revenue falls below expectations → more LPs leave.

The Essence of Zero-Sum Games

When viewed in a larger context, the Uniswap fee switch represents a dangerous trend: When the industry cannot create incremental value, it turns to existing value games.

Whenever innovation stagnates and user growth slows, protocols tend to "optimize" through financial engineering—adjusting fee structures, designing complex token economics, and introducing various buyback and burn mechanisms. The common characteristic of these operations is: redistributing existing value rather than creating new value.

The success of Hyperliquid proves another path: supporting buybacks through product innovation → user growth → real revenue growth. This is an incremental game, a positive-sum game, where all participants can benefit because the pie is getting bigger.

In contrast, the fee switch represents an existing value game, a zero-sum game. The pie does not get bigger; it is merely re-sliced. This game may satisfy UNI holders in the short term, but in the long run, it will inevitably harm the foundation of the protocol.

Part Three: The Path to Breaking the Value Creation Deadlock

From Valuation Crisis to Value Creation Crisis

What DeFi currently faces is not a valuation crisis (low token prices), but a value creation crisis (inability to continuously create value for users).

The distinction between the two is crucial. If it were a valuation crisis, financial engineering solutions like buybacks and fee switches would indeed be reasonable. But if it is a value creation crisis, these operations are like searching for fish in a tree—they consume resources but cannot solve the fundamental problem and may even accelerate the crisis.

DeFi's TVL has returned to 89% of its historical peak, but token prices have generally only recovered by 20-40%. This divergence indicates that while funds are flowing back, confidence has not. Users are willing to use DeFi to earn returns but are unwilling to hold DeFi tokens because they do not believe these protocols can continuously create value.

The explosion events deepened this skepticism. When protocols that have undergone top-tier audits still lose hundreds of millions, when 70% of funds in supposedly "decentralized" projects are in black boxes, and when Curators earn high commissions without bearing responsibility—the problem in DeFi is not the token price, but the system's credibility.

Transparency as Competitive Advantage, Not Cost

The collapse of Stream provides a clear lesson: in a trust crisis environment, transparency is a differentiated competitive advantage. When Stream attracted users with high yields from 70% black box funds, it not only collapsed when the black box failed but also dragged down the entire ecosystem. This created a market opportunity—the demand for transparency far exceeds supply. After the collapse of Stream, the market saw a surge in demand for stablecoins with high transparency, even if their yields were lower. In an environment lacking trust, transparency itself is a product.

Protocols should proactively enhance transparency rather than passively respond to regulation. Positioning it as the core of market identity—"We are the most transparent DeFi protocol"—is more valuable in the current environment than "We have the highest yields."

Governance Mechanisms with Equal Power and Responsibility

In DeFi governance, power and responsibility are often separated. Early DeFi protocols pursued "decentralization," often interpreting it as "power dispersion," while neglecting the dangers of "responsibility dispersion." The result is a proliferation of "power without responsibility" roles—they can influence protocol decisions, manage user funds, and design strategies, but when problems arise, they bear no losses.

The core principle of the solution is: Power must be commensurate with responsibility, and returns must be commensurate with risk. Any role that holds power must stake a significant proportion of funds, establish automatic forfeiture mechanisms, and implement delayed profit distribution. When a Curator's own funds are exposed to risk, they will be more cautious in evaluating each strategy. This alignment of interests is more effective than any moral constraint.

Conclusion: The Moment of Choice

The DeFi industry now stands at a crossroads.

One path is to continue the capital game—more buybacks, more complex token economics, and more sophisticated profit distribution mechanisms. We have already seen the endpoint of this path: Aave, MakerDAO, and Pancake have not been able to sustain token prices solely through buybacks and deflation.

The other path is to turn towards value creation—investing resources in safety, transparency, user growth, and product innovation. This path is more challenging, requiring genuine technological breakthroughs and long-term investment, with longer return cycles. But Hyperliquid proves that this is the only sustainable path.

The time window is closing. The next explosion may come faster and with greater destructive power. Before trust completely collapses, the industry still has the opportunity to complete a paradigm shift.

Ultimately, the spring of DeFi will not belong to the protocols best at financial engineering, but to those that truly create value for users, respect risk, pursue transparency, and improve governance. Buybacks and fee switches can be means, but they should never be the end. The true goal is singular: to establish a credible, usable, and sustainable decentralized financial system.

This report's data has been edited and organized by WolfDAO. For any inquiries, please contact us for updates.

Written by: Nikka / WolfDAO (X: @10xWolfdao)

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