What is DeFi 2.0?

Decentralized Finance - or DeFi - surfaced as a digital financial solution that does not rely on third parties such as central banks or governments. Its popularity skyrocketed in recent years (alongside crypto and blockchain), but because it’s still in its early stages of development, there have been several DeFi-related issues that the industry is attempting to resolve.

This is where DeFi 2.0 comes into play.


Table of contents

What is DeFi 2.0: definition and expectations 🚀
Increased Operational Liquidity
It is not a stablecoin
Genuine decentralization
Scalability, lower costs and better UX  
A new security level
What is DeFi staking
Opportunities 

What is DeFi 2.0?  And what does it promise? 🚀

DeFi 2.0 aims to improve the first iteration of DeFi technology. The goal for the next generation of decentralized finance is to improve the current flawed DeFi system. As a result, DeFi 2.0 promises increased scalability, security, and liquidity.

On the other hand, DeFi 2.0's purpose is also to comply with and adapt to government requirements, as there are plans to introduce regulatory and compliance laws for DeFi operations in the near future.


Before we move on to DeFi 2.0, let's go over the basics

The primary distinction between DeFi transactions and traditional transitions is that decentralized finances do not necessitate the use of intermediaries such as banks. Codes are used to specify how potential disputes should be resolved.

Some DAOs (Decentralized Autonomous Organizations) were among the first to achieve success and become market examples. Uniswap was arguably one of the most well-known.

These DAOs make use of smart contracts, in which users define the conditions under which they should be executed. It makes use of web3 and blockchain technology to bring to the table loans, insurance, investments, and other transactions.

👉 Read more: Is Decentralized Finance going to eat the world?

Also, the global market cap for DeFi has expanded to over 150 billion dollars by the end of 2021. 


DeFi 2.0 liquidity 💱

Despite this gigantic amount of money, one major problem regarding decentralized contracts is long-term liquidity.

On DeFi 1.0, platforms incentivize liquidity mining, which means their tokens depend on people mining and lending money (or crypto) to a protocol in exchange for tokens as an incentive. 

The issue with this is that users can simply cash out. If a large investor cashes out, a huge chunk of the liquidity will be depleted, and the protocol native token will crash.

As a result, when you receive payment for a DeFi loan, your token may be completely undervalued.

Protocol-Controlled Liquidity (PCL) is a DeFi 2.0 solution to this problem. Olympus (OHM), for example, owns 99.5% of its liquidity, thereby safeguarding the value of the reserve backing. It functions as a guarantee to the person performing the operation.

Olympus accomplishes this through the use of a Decentralized Reserve Currency, which protects the crypto value through a treasury controlled by Olympus. It currently has a balance of over 750 million dollars.

👉 Read more: How investors can earn money with web3


Decentralized bank 💲

The Olympus process works by accumulating native tokens such as Ethereum (ETH) or Uniswap (UNI), allowing users to exchange their native tokens for discounted OHM tokens.

This enables Olympus to establish a treasury. In a blockchain environment, it's similar to a bank, however, decentralized. 

Breaking a DAO of this type is much more difficult with reserves in both native tokens and bank tokens.

The main difference between the first and second DeFi processes is that instead of users lending their tokens to provide liquidity, decentralized protocols assume this role by accumulating tokens as treasuries. It works as follows:

DeFi 2.0 is not based on stablecoins 💵

Stablecoins, which are cryptocurrencies linked to a basket of assets such as the dollar, euro, or even gold and other cryptocurrencies, are commonly used in DeFi operations. However, it is more common to use stablecoins backed by US dollars.

Well, DeFi 2.0, on the other hand,  is “against it” because it does not want to keep us tied to inflationary centralized systems and regulatory risks.

Some platforms are innovating by issuing their own floating reserve currency – again, Olympus is an example.


True decentralization ✔️

Despite the fact that decentralization is the core value of DeFi projects, the truth is it does not always occur.

DeFi's, under a proper structure, are governed by DAOs and managed by the token holders' community.

Many projects, however, fail to implement these principles, which might have a direct influence on DeFi operations. As a result, the proposal of DeFi 2.0 is to promote projects to be governed more democratically, i.e. in compliance with DAO governance.


DeFi 2.0 offers scalability at a lower cost and a better user experience 😎

It is a fact that DeFi 1.0 protocols are generally expensive, slow, and difficult to use.

This is why DeFi 2.0 intends to provide a better user experience (UX) as well as easier ways to manage smart contracts and provide liquidity.

Another significant point is that with the arrival of Ethereum 2.0, users expect lower gas fees and faster transaction times. After all, the majority of DeFi operations today are Ethereum-based. As a result, protocols built on Ethereum will probably be more scalable. It means that decentralized finance transactions will be faster and less expensive, as well as more accessible.


DeFi 2.0 takes security to a whole new level 💂

Contracts based on blockchain are generally secure, but there is one drawback to the first generation of decentralized finance:

The majority of DeFi users do not understand how to manage risk in a safe manner. It means they don't know for sure if they're investing in completely safe smart contracts. There is an urgent need to be more transparent.

Of course, smart contracts are audited on a regular basis, but updates and software changes can result in outdated information. Users may become disoriented if there is a technical issue. The goal of the DeFi 2.0 proposal is to make it easier for users to objectively validate the security of a network as they manage amounts of money.


What is DeFi staking? 🤔

Another trend that is emerging alongside DeFi 2.0 is DeFi Staking: a method of locking cryptocurrency tokens into smart contracts in order to earn interest on the capital stored. 

In other words, it is a way to earn interest in the crypto you already own and store.

However, because there is a minimum amount to invest on platforms to stake tokens, some operators pull tokens from multiple people, creating an investment pool in exchange for a fee, making this mechanism more accessible.

Binance, for example, allows users to invest in a DeFi project via their platform without having to manage private keys, acquire resources, or make trades, all of which are time-consuming tasks.

Another successful way to stake assets was created by Lido, a DAO community that builds liquid staking services. There is no minimum amount of tokens required to stake, and the tokens are used throughout the DeFi ecosystem. 

The idea is to use staked assets to generate additional yield. Users of Lido can stake amounts on Ethereum, Solana, Kusuma, or Polygon blockchains.

Based on all of this, there are numerous advantages to enhancing the first generation of decentralized finance. 

DeFi 2.0 can provide:

  • Consistent liquidity provision;

  • Offering more incentives, such as additional yield farm tokens for a loan, for example, lowers the credit provider's risk.

  • Lender risks can be reduced by hiring insurance that covers smart contracts, which can offer deposit guarantees for a fee.

  • Using a self-repaying loan, which allows the lender to use the interest earned on the deposited collateral to pay off the loan over time.


DeFi 2.0 projects

One of the key features of DeFi 2.0 projects is its ability to offer improved user experience, as well as increased liquidity, and more agile blockchains.

Other notable features include DAO communities for staking, faster smart contract execution systems, and better scalability, security, and liquidity. 

As these technologies continue to evolve in the decentralized finance space, DeFi 2.0 projects like Binance Smart Chain, Ethereum 2.0, Solana, and others will play a central role in shaping the future of decentralized finance.


Part of a bigger ecosystem

DeFi is not the only technology to get iterations and updates. Bepro Network, for example, launched a bounty network platform for decentralized development. 

In short, a web3 bounty is a form of reward program which is used to incentivize the development and promotion of decentralized applications. 

This type of bounty typically rewards developers with tokens or cryptocurrencies for completing tasks such as writing smart contract code, building user interfaces, bug testing, or developing products and features. 

The rewards are designed to encourage people to contribute their time, expertise, and knowledge to the development of DAOs and web3 projects.

Learn more about bounties


To summarize what is DeFi 2.0 💭

The new generation of decentralized finance is developing new ways to gain rewards in a more transparent manner. This is due to DeFi 2.0's incentives for improved user experience, increased liquidity, and more agile blockchains.

Gas fees are expected to fall as smart contract execution systems in blockchains become faster, particularly with the arrival of Ethereum 2.0. Furthermore, DeFi 2.0 should improve scalability, security, and liquidity. 

There are also new DAO communities operating on DeFi staking, such as Lido, which may lead to an increase in DeFi 2.0 operations.

With these advancements in DeFi 2.0, projects such as Binance Smart Chain, Ethereum 2.0, Solana, and others will be better able to provide these benefits to users.

Carlos Mendes
Carlos Mendes
blockchaindev
See all

Subscribe to our newsletter

Stay up-to-date with the developer economy and everything related to the ecosystem!

Copyright © 2023 All rights reserved. TAIKAI — Builder Hub