DeFi could lift crypto market from current bear phase: Bitwise

DeFi ecosystem appears ripe for strong growth

DeFi tokens could play a pivotal role in driving the next phase of the crypto market recovery, Bitwise CIO Matt Hougan wrote in a note to investors on Tuesday.

Hougan argued that while bear markets often suppress investor optimism, they also create conditions where structural industry improvements can emerge unnoticed. He suggested that recent developments within DeFi may signal a fundamental shift in how crypto assets generate value.

“One of my highest-conviction beliefs is that the next crypto bull market will be focused on fundamentals. Crypto investors are tired of promises; they want to see real users, revenues, and value. DeFi fits the bill,” he wrote.

Hougan highlights a governance proposal from Aave Labs, introduced last week, as a key pointer to the change. The proposal, titled “Aave Will Win,” seeks to redirect 100% of revenue generated from Aave-branded products directly to the protocol’s decentralized autonomous organization (DAO) treasury, governed by token holders.

In exchange, Aave Labs will receive a funding package comprising stablecoins, token allocations, and milestone-based grants to support the development of the next-generation Aave V4 protocol and to transfer intellectual property rights to the community.

“This proposal aims to complete the Aave token’s journey from a governance-only asset into something that looks much more like equity in a high-growth financial services business,” Hougan added.

Hougan also examined structural weaknesses that have historically limited the investment appeal of DeFi tokens. He noted that many early DeFi assets were designed primarily as governance tools, allowing holders to vote on protocol changes but offering limited economic participation in revenue generation.

While this approach enabled decentralized protocols to operate, it weakened the link between protocol growth and token valuation, a mistake he believes the industry is now attempting to correct.

Beyond Aave’s governance reforms, Hougan pointed to rising institutional involvement in DeFi projects as additional evidence of the sector’s maturation. He cited investments by BlackRock in decentralized exchange Uniswap, as well as funding from Apollo Global Management into lending protocol Morpho, an Aave competitor.

These developments reflect growing confidence in DeFi’s long-term business models, particularly as protocols demonstrate measurable user adoption and revenue generation.

“Improving tokenomics. Institutional investment. Strong usage. In bear markets, you want to look for areas that show strength. It sure looks like DeFi is one of them,” he wrote.

These developments signal that the DeFi sector, which currently holds a total locked value (TVL) of over $96 billion, is showing strong growth potential despite the underlying bearish market structure.