What is DeFi 2.0?
DeFi 2.0 is the second generation of Decentralized Finance that gives users more autonomy and serves as a new source of passive income. This article delves into everything related to DeFi 2.0 and its significance in the tech world.
Every tech-oriented innovation brings new models and revolutionary concepts with itself.
Decentralized Finance (DeFi), a blockchain-based innovation, is no exception. The world is already discussing DeFi 2.0, the following generation of DeFi protocols that emerged soon after DeFi was born.
Let's thoroughly comprehend what DeFi 2.0 is all about as the new era of upgraded concepts and renamed models for decentralized finance approaches.
What is DeFi 2.0?
DeFi 2.0 aims to address the risks associated with DeFi transactions. These risks include cryptocurrency volatility, security concerns within smart contracts, and a lack of accountability to repay debts.
DeFi 2.0 adds insurance to protect liquidity providers (LPs) that finance a liquidity pool with crypto assets from losses caused by fluctuating prices. Similarly, by ensuring smart contracts, it helps to limit the risks posed by flawed smart contracts.
DeFi 2.0 also assures that no critical errors occur in smart contracts by requiring open-source communities or insurance companies to do security assessments on the contracts.
Why does DeFi 2.0 Matter?
Decentralized finance version 2.0 ushers in a new era of revolutionary DeFi protocols that tend to address the drawbacks of the earlier generation. The iteration of DeFi provides fresh ideas and solutions, which can only mean advancement for the DeFi industry while giving customers brand-new, exciting tools to help them achieve financial freedom.
Scalability and user interface problems have been a significant barrier for the early DeFi protocols because most DeFi solutions are built on the Ethereum blockchain. Utilizing decentralized products is difficult for users, especially beginners, due to the complexity of the model structures.
The high gas fee and long wait times to conduct transactions have been a significant concern in the DeFi industry, driving many people away from using DeFi platforms. However, DeFi 2.0 is intended to implement the infrastructure required to address Ethereum's scaling concerns.
Another significant obstacle the DeFi space faces is that most assets are immobile and underutilized due to liquidity issues. DeFi protocols, without a doubt, have a low utilization rate due to inadequate liquidity solutions.
Although, the Automated Market Maker (AMM) provides exclusive access to working capital. The model is inefficient since AMM's design prevents liquidity from being concentrated. Meanwhile, DeFi 2.0 enables deposited funds to be fully utilized. Thus, it opens the door for a healthy cash flow that efficiently supports and sustains projects.
Other current DeFi protocol concerns that its next version wants to address include oracles and intermediary information, centralizations, security issues, and many more.
Technology and Innovation Behind DeFi 2.0
DeFi 2.0 was made possible by the shortcomings of DeFi 1.0. The objectives of DeFi 2.0 also highlight promising information about technological advancements that could help to fix the problems with DeFi 1.0. However, it is critical to understand how DeFi 2.0 works. What technologies are driving the transition to DeFi 2.0? Here are some unique solutions that have helped DeFi 2.0 grow.
DeFi users, especially beginners, face formidable challenges when interacting with the Ethereum network. On the other hand, many users cannot access DeFi services due to long wait times and high gas prices. How can DeFi 2.0 protocols address this issue?
One of the first responses may draw attention to Ethereum alternatives such as BSC, Solana, or Polygon. These blockchain networks can provide layer two scalability and help drive the adoption of DeFi solutions. The next generation of DeFi solutions will be heavily focused on scalability issues.
The widespread interest in DeFi is driven primarily by the prospect of lucrative money-making opportunities. However, it is essential to note that DeFi is also an option for some users seeking financial independence and self-sufficiency. The same is not true of the decentralized finance models used today, though. DeFi 2.0 would prioritize decentralization for users in its advancements in decentralized Finance.
Existing DeFi solutions include groups that control the entire protocol, raising concerns about their integrity. The recent evolution of Decentralized Autonomous Organizations (DAOs) provides critical advantages for improving DeFi models. DAOs can address the issue of centralization by putting protocol governance in the hands of the user community.
Another essential factor underlying the growth of DeFi 2.0 in crypto is liquidity mining, especially with the massive increase in DeFi activity in 2020. Yield farming, also known as liquidity mining, provided a solid foundation for new DeFi protocols.
DeFi 2.0 could now be built on massive amounts of liquidity for launching and maintaining operations while minimizing slippage. Yield farming is the most effective method for raising funds for DeFi projects. To avoid consequences, DeFi 2.0 projects must also take note of the concerns in long-term yield farming and token supply.
Benefits of DeFi 2.0
The second generation of DeFi promises a slew of new features to make the DeFi ecosystem more accessible to consumers. Users can purchase insurance on individual smart contracts using DeFi 2.0 to limit the risks associated with compromised smart contracts.
Furthermore, DeFi 2.0 protects users from the possibility of temporary loss. Finally, the second generation of decentralized Finance reduces the risks connected with lending operations and eliminates the need for loan interest.
Another particular benefit to the DeFi sphere is the lowering of transaction costs. As a result, the industry benefits from low gas prices and quick transaction times. Furthermore, DeFi 2.0 offers an efficient supply of liquidity. Protocols that require liquidity can gain access to it quickly.
Major DeFi 2.0 Projects
Some of the major DeFi projects are:
Olympus DAO is a DeFi 2.0 movement pioneer known for its revolutionary protocol-owned liquidity (POL) approach. The platform operates as a self-governing decentralized autonomous organization (DAO) with OHM as its native token. According to Olympus, this coin might become the reserve money for decentralized Finance. OHM tokens are backed by stablecoins like DAI and FRAX, allowing them to retain price stability.
Olympus allows token holders to vote on crucial issues in the same way that any other DAO does. Staking OHM tokens might also assist users in earning money on the site. Users can acquire sOHM tokens by staking, which can be used on various DeFi sites. By burning your sOHM tokens, you can turn them into OHMs.
Users can create LP tokens, issue bonds with them, and then purchase OHMs at a discount. Members of the Olympus DAO can also make money by selling bonds.
Abracadabra.money, another key DeFi 2.0 initiative on our list, is essentially a lending platform. You can utilize interest-bearing tokens like yvUSDC and yvWETH as collateral for borrowing or minting Magic Internet Money (MIM), a dollar-pegged stablecoin.
This enables users to convert their interest-bearing tokens into marketable assets. The platform's interest rates are stable, and borrowing costs are low. SPELL, the platform's governance tokens, can be used to vote on proposals and earn a platform fee by staking them.
Convex Finance is a decentralized finance platform based on a stable exchange Curve Finance (CRV). This platform benefits both liquidity providers and stakeholders. Convex allows Curve Finance's liquidity providers to receive more incentives without locking up their CRV tokens.
Furthermore, the site has no withdrawal costs and charges very low-performance fees. Similarly, staking enthusiasts can utilize Convex to stake their CRV tokens and get a portion of the enhanced payouts.
One of the early titans of decentralized Finance was MakerDAO, which led to numerous inquiries about DeFi 2.0. It is run by the owners of DAI, the native stablecoin linked to the dollar. Investors find MakerDAO intriguing because of its stability and innovation.
A DeFi 2.0 protocol at the forefront of the movement is Alchemix. While its straightforwardness makes it incredibly user-friendly, its array of cutting-edge features draws fervent investors. Self-repaying loans, DAOs, and future yield are just a few of the opportunities the protocol provides, all of which should entice cryptocurrency owners to consider it.
Use Cases of Defi 2.0
New DeFi services are being offered by numerous projects on numerous networks, including Ethereum, Binance Smart Chain, Solana, and other blockchains that support smart contracts. Here, we'll examine a few of the most typical:
Unlocking the Value of Staked Funds
You would have gotten LP tokens if you had ever staked a token pair in a liquidity pool. You can stake the LP tokens with a yield farm using DeFi 1.0 to increase your profits. Before DeFi 2.0, this was where the value extraction process came to an end. Although millions of dollars are locked away in safes to provide liquidity, there is still room to increase capital efficiency.
By using these yield farm LP tokens as collateral, DeFi 2.0 goes one step further. This could apply to a cryptocurrency loan from a lending protocol or the creation of tokens using a MakerDAO-like process (DAI). The specific technique varies depending on the project, but the goal is that your LP tokens' value should be unlocked for new opportunities while continuing to produce APY.
Smart Contract Insurance
Performing enhanced due diligence on smart contracts is challenging unless you're an expert developer. Without this information, you can only evaluate a project in part. This poses a significant level of risk when funding DeFi initiatives. With DeFi 2.0, you can get DeFi insurance for particular smart contracts.
Assume you use a yield optimizer and have LP tokens staked in its smart contract. You could lose every cent you've invested if the smart contract is breached. For a fee, you can get a guarantee on your deposit with the yield farm from an insurance project. It should be noted that this will affect only one smart contract. You will often not be paid if the liquidity pool contract is breached. However, if the yield farm contract is breached but insured, you will most likely receive a pay-out.
Impermanent Loss Insurance
If you join a liquidity pool and start mining liquidity, any change in the price ratio of the two tokens you locked may cause financial losses. This is known as impermanent loss, but new DeFi 2.0 protocols are experimenting with new ways to mitigate this risk.
Consider adding one token to a single-sided LP where a pair is not required. The protocol then adds their native token to the pair as the other side. You and the protocol will receive fees paid by swaps in the respective pair.
The protocol utilizes their fees to develop an insurance fund over time to protect your deposit from the effects of temporary loss. The protocol can create new tokens to compensate if there aren't enough fees to cover the losses. Tokens in excess can be saved for later use or burned to reduce supply.
Self Repaying Loans
Taking out a loan typically involves the risk of liquidation and interest payments. With DeFi 2.0, this does not have to be the case. Assume you borrow $100 from a cryptocurrency lender. The lender offers you $100 in cryptocurrency in exchange for $50 in collateral.
The lender uses the money you deposit toward paying off your loan. Your deposit is returned once the lender has earned $100 with your cryptocurrency plus a premium. There is also no threat of liquidation. If the collateral token loses value, the loan will take longer to repay.
Concerns about existing decentralized finance models have a variety of implications for users and developers. Aside from the basic answers to the question "What is DeFi 2.0?" it is critical to look beyond and discover potential improvements. The primary goal of DeFi 2.0 with improvements over existing DeFi 1.0 solutions is to address the shortcomings of DeFi 1.0.
DeFi 2.0 seeks to fuel the future growth of decentralized Finance. DeFi 2.0 addresses many notable issues with existing DeFi models, such as scalability and access barriers. Furthermore, DeFi 2.0 solutions can potentially implement true 'decentralization' in DeFi services.