Ethereum's DeFi Sector May Be the First to Surge in the Rotation Cycle

In the cryptocurrency market, rotation cycles are a common pattern of capital flow, especially during bull markets. As Bitcoin (BTC) prices rise first, funds often gradually spill over into major public blockchains such as Ethereum (ETH) and their ecosystem projects. This not only pushes ETH's price higher but also injects momentum into sub-sectors such as DeFi, Layer2, and AI. Driven by the Pectra upgrade and strong inflows into ETH ETFs, market funds are now shifting from BTC into the ETH ecosystem. Based on the logic of rotation cycles, the funds spilled over into Ethereum are most likely to benefit the DeFi sector first. This article reviews leading DeFi projects for reference only. Nothing here constitutes investment advice, so please do your own research.

What Is a Rotation Cycle?

A rotation cycle is a mysterious pattern of capital flow in the Web3 industry, mainly referring to the sequential movement of funds across different assets. Typically, at the start of a bull market, funds first flow into Bitcoin. As "digital gold", BTC is often the first to break new highs, attracting both institutional and retail investors. Later, as BTC's growth slows, capital begins to spill over into major public blockchains like Ethereum. This is because ETH, as the leading smart contract platform, offers a richer application ecosystem, such as DeFi and NFTs, and carries a higher beta (volatility amplification effect). Finally, funds rotate further into sub-sectors within the ETH ecosystem, including emerging fields such as Layer2, AI, and meme coins.

This cycle has repeated throughout history: During the 2021 bull market, after BTC surged first, ETH skyrocketed from $1,000 to $4,800, driving DeFi TVL from $20 billion to $250 billion. In 2025, the rotation cycle began again –– After BTC surged past $100,000, ETH ETFs saw over $50 billion in net inflows, channeling funds toward ecosystem projects. Some KOLs believe this cycle will last until the end of 2025, with ETH ecosystem projects potentially delivering 3–10× returns. However, investors must remain cautious of macro risks such as U.S. Federal Reserve policy shifts. Overall, rotation cycles could magnify the growth potential of the ETH ecosystem, so investors should pay attention to the flow of funds from mainstream to peripheral sectors.

Benefiting from U.S. Regulatory Policy, the DeFi Sector May Be the First to Surge

DeFi (Decentralized Finance) is the core of the ETH ecosystem and is highly sensitive to U.S. macro policies. In 2025, the Trump administration's pro-crypto measures (such as the GENIUS Act stablecoin legislation) and the SEC's clearer regulations on RWAs (Real World Assets) drove DeFi TVL growth by more than 50%. As the foundation of DeFi, stablecoins hold a 58% market share, driven by institutional adoption. RWA projects attract TradFi funds through the tokenization of traditional assets (e.g., U.S. Treasury bills, real estate). Core DeFi protocols offer lending, DEXs, and other services, benefiting from lower gas fees after ETH upgrades. These sectors are the first to gain in rotation cycles because they provide real yields (5–20% APY) and draw in conservative funds spilled out of BTC. Below is a list of leading tokens (based on market share and TVL):

Stablecoin Projects

USDT (Tether)

USDT is one of the earliest stablecoins, issued by Tether, pegged 1:1 to the U.S. dollar, and backed by reserve assets (such as cash and bonds) to maintain its stability. It is primarily used for trading, remittances, and DeFi liquidity and is the most widely adopted stablecoin in the crypto market.

Market Share and TVL: As of August 15, 2025, USDT accounted for 60.78% of the market cap, with its market share typically ranging between 60–70%. Its market cap exceeded $155 billion, while the total stablecoin market size stood at around 250-280 billion. Its circulating supply (comparable to TVL) dominated the market, representing 70–80% of trading volume.

Advantages: Highest liquidity and supports multi-chains (e.g., Tron, Ethereum), with low transaction fees; extensive global adoption, especially in emerging markets; improved reserve transparency, making it ideal for high-frequency trading and risk hedging.

USDC (USD Coin)

USDC is jointly issued by Circle and Coinbase, pegged to the U.S. dollar and backed by bank reserves with regular audits to ensure transparency. It is primarily used for institutional-grade trading, payments, and DeFi applications and is seen as the representative stablecoin for regulatory compliance.

Market Share and TVL: As of August 15, 2025, USDC accounted for 24.12% of the market cap, with market share typically ranging between 24–30% and a market cap of about $55–68 billion. It ranked second in the stablecoin market. Its circulating supply is widely used in CeFi and DeFi, with significant growth in 2025.

Advantages: Highly compliant, under U.S. regulation; 100% U.S. dollar-backed reserves, and frequent audits; strong TradFi integration, making it appropriate for institutional investors; low risk with minimal volatility.

Sky (MakerDAO)

Sky is the upgraded ecosystem of MakerDAO, issuing USDS (formerly DAI), a decentralized stablecoin that maintains a 1:1 peg to the U.S. dollar through overcollateralization of crypto assets (e.g., ETH) and a governance mechanism. It emphasizes being free from centralization risks and supports DeFi lending.

Market Share and TVL: Market share is around 2–3%, with a combined market cap of roughly $4–7.5 billion (USDS + unupgraded DAI). In DeFi, TVL exceeds $14 billion, ranking third in the stablecoin market.

Advantages: Fully decentralized with no single issuer risk; governed by a DAO that allows users to participate in decision-making; integrates RWAs (e.g., U.S. Treasury bills) to provide additional yield; censorship-resistant, making it suitable for users who value privacy.

RWA Projects

ONDO (Ondo Finance)

Ondo is an RWA platform focused on tokenized U.S. Treasury bills and fixed-income products such as OUSG, offering highly liquid investment instruments to bridge TradFi and DeFi. ONDO holds a leading share of the RWA market.

Advantages: Partners with institutions like BlackRock, with regulatory-friendly products; high yields with low risk; rapidly growing TVL, making it suitable for conservative investors seeking steady returns.

Pendle

Pendle is a yield-tokenization protocol that splits yield-generating RWAs and DeFi assets into PT (principal tokens) and YT (yield tokens) to enable the trading of future yield from assets such as Treasuries. It dominates the RWA yield market.

Advantages: Innovative yield-splitting mechanism that boosts liquidity; multi-chain support with strong yield optimization; seamless integration with DeFi to attract yield farming users.

Chainlink (LINK)

Chainlink is a decentralized oracle network that supports RWA price feeds and cross-chain interoperability, ensuring transparent asset pricing. Already integrated with institutions like BlackRock, it has emerged as a leader in RWA infrastructure.

Advantages: Ecosystem leader with reliable data; CCIP technology supporting cross-chain RWAs; regulatory-friendly with potential for large-scale adoption.

Leaders in DeFi Trading

UNI (Uniswap)

Uniswap is an automated market maker (AMM) DEX that supports cross-chain swaps and low-fee trading. It sets the benchmark for DeFi trading and holds the leading share of the DeFi DEX market.

Advantages: User-friendly without the need for KYC; V4 upgrade boosts efficiency; cross-chain expansion secures its dominance in DEX liquidity.

AAVE

Aave is a decentralized lending platform that supports flash loans and multi-chain deployment. It provides a highly liquid lending market and accounts for over 21% of the DeFi market.

Advantages: Institutional-grade products with strong risk management; multi-chain support and low fees; RWA integration for diversified lending services.

Staking and Restaking

Lido (LDO)

Lido is a liquid staking protocol that supports the staking of ETH, SOL, and other assets, allowing users to receive tokens like stETH while maintaining liquidity. It continues to lead in market share and TVL, though its market share has seen some decline recently.

Advantages: Leader in staking with high liquidity; multi-chain expansion and yield optimization; a core part of the Ethereum ecosystem.

EigenLayer (EIGEN)

EigenLayer is a restaking protocol where users can restake ETH across other networks, allowing them to earn extra rewards while enhancing network security. With a market cap of about $12 billion and rapidly growing TVL, it holds the leading share of the restaking market.

Advantages: Innovative restaking that enhances capital efficiency; shared security model; became central to Ethereum in 2025, with enormous potential.

Conclusion

Amid the rotation cycle, Ethereum's ecosystem is entering what may be "the last great bull market". From DeFi's favorable regulatory developments to Layer 2's technological breakthroughs and the cultural momentum of AI and meme coins, these projects present diverse opportunities. Among them, DeFi is undoubtedly best positioned to directly absorb Ethereum's fund spillovers, making it a focal point for investors. Investors should closely monitor on-chain data, KOL insights, and fund rotation signals. At the same time, the Web3 industry is still developing swiftly with many imperfections, and frequent risk events such as hacks and regulatory shifts should not be overlooked.