Reading time: ~2 m
DeFi 1.0 provided an opportunity to invest and exchange cryptocurrencies outside of the traditional centralized financial market. But they are being replaced by a new generation of decentralized initiatives called DeFi 2.0.
What is DeFi 2.0?
DeFi 2.0 is a set of decentralized finance projects that aim to improve on previous DeFi 1.0 protocols. They focus on improving liquidity, scalability, governance, and security.
DeFi 2.0 traces its origins to OlympusDAO based on the OHM token. This organization manages its signing token through a system of policies, and the protocol is supported by assets held in the respective Olympus treasury. The launch took place in March 2021. Olympus showcased a new range of possibilities for DeFi. In the months following its release, many similar DAOs and projects were developed, marking the beginning of DeFi 2.0.
2.0 vs. 1.0
While DeFi 2.0 and DeFi 1.0 offer two separate ideas, it’s worth remembering that they stem from the same general theory. Both DeFi 1.0 and DeFi 2.0 are iterations of a single concept: the idea that blockchains enable a decentralized financial ecosystem that bypasses the traditional centers of the financial world.
“DeFi” generally refers to a set of decentralized applications that use smart contracts and secure networks of oracles to conduct finance without intermediaries. Version 2.0 stays true to this central premise, but makes adjustments to overcome some of the major weaknesses of DeFi 1.0. While the 2.0 ecosystem is far from perfect, several key improvements are already evident.
Creates stronger bonds between users
DeFi protocols version 2.0 are essentially decentralized financial applications that seek to connect users who contribute liquidity. These apps promote the types of horizontal connections that foster strong relationships. This, in turn, will lead to the creation of a decentralized yet interconnected DeFi ecosystem.
Enables optimized management models
Governance is a key issue in any decentralized endeavor, and DeFi 2.0 is based on better administrative solutions. In DeFi 2.0 protocols, community members collaborate to make decisions and create policies. This democratic process allows structures to develop without relying on a single arbitrator.
Includes convenient incentive schemes
DeFi 2.0 projects use creative incentive programs to acquire and maintain sufficient capital. Incentives not only help solve the liquidity problems that DeFi 1.0 suffered from, but also strengthen connections between users, thereby fostering the creation of more collaborative communities.
Use cases
There are several unique features of DeFi version 2.0 that make it more attractive to crypto investors. These new ideas, from smart contract insurance to self-sustaining loans, are laying the foundation for a sustainable DeFi ecosystem.
Smart contract insurance
DeFi 2.0 protocols allow investors to hedge their smart contracts. This is an important source of protection, especially for new investors. Many would like to place LP tokens in a smart contract, but fear that the contract could be compromised. They know that a compromised contract cannot be fixed on the blockchain, they lack the technical expertise to protect their investment on their own. The insurance policy allows you to place tokens without any problems. Not only does this help individual investors, but it also encourages capital inflows into the protocol.
Non-permanent loss insurance
With DeFi 1.0, users who have locked two tokens in the protocol in order to start mining liquidity can lose out if the price ratio between the two tokens fluctuates.
DeFi 2.0 projects are implementing new measures to mitigate this inherent risk. Some protocols use fee revenues to insure users against irreparable losses. They may also mint new coins to make up for losses. All of these policies make DeFi a safer option for crypto investors.
Self-paying loans
The DeFi 2.0 ecosystem allows for a financial maneuver where loans pay off. The lender can provide the user with a loan in exchange for collateral in the form of a small deposit. This deposit is then inverted by the lender, who continues to receive interest. Once the lender has earned the full value of the original loan, they return the deposit and the borrower ultimately does not have to repay the loan.
However, DeFi 2.0 also has its risks.
Risks
Even the best DeFi 2.0 projects have inherent flaws and investors should be aware of any potential pitfalls before staking tokens.
Hacker Threats
Crypto investors cannot be completely sure that the smart contracts they interact with will not be hacked. The project should be carefully researched before staking tokens, as hacking may occur. However, smart contract insurance can help limit damage in the event of illegal activity.
Government Decrees
Many governments will try to impose restrictions on version 2.0 protocols. The future activities and profits of an investor may be affected by rules and restrictions that do not yet exist.
But despite the above risks, version 2.0 is worth investing in.
How to invest in DeFi 2.0
There are several ways to do this.
Farming
As with older projects, DeFi 2.0 protocols use yield farming to generate liquidity from users. However, they go even further, allowing investors to use tokens as collateral for loans. This feature in farming makes the protocols more attractive to investors.
Lending
Self-paying loans are great opportunities for both lenders and borrowers. Providing loans in exchange for paying interest is a great way to make a profit under the DeFi 2.0 protocol.
Providing liquidity or extracting liquidity
Providing liquidity gives cryptocurrency holders an easy way to profit from their holdings. With this method, holders transfer a portion of their cryptocurrency to a liquidity pool so that users can trade against it. In exchange, the holder who provides the currency receives a commission. These types of simple win-win transactions allow protocols to raise liquidity while users make a profit.
Trading on decentralized exchanges
DEXs allow you to conduct cryptocurrency transactions outside of banks. DEXs often have lower fees than centralized exchanges. They also allow for margin trading and other attractive types of cryptocurrency transactions.
Results
Thus, DeFi 2.0 offers more options for users than DeFi 1.0. With their help, you can make a profit in various ways. They are likely to replace DeFi 1.0 in the next 4-6 years, as they have more secure and wider functionality. At the same time, they also have their own risks that should be taken into account when investing.
Author: Vadim Gruzdev, analyst Freedman Сlub Crypto News
#DeFi
