Even though the Decentralized Finance (DeFi) protocols began and earned traction just a couple of years ago, it often feels like that it happened a long time ago. This is the nature of blockchain that evolves quickly. Along with it, innovative and revolutionary ideas and concepts always stay at the corner.
DeFi 2.0 will introduce you to a massive wave of new innovative and ambitious protocols that will upgrade the level of DeFi’s evolution. This article is going to cover everything that you need to know about DeFi 2.0.
What DeFi 2.0 is all about?
DeFi products’ core vision is to offer decentralized alternatives to all the traditional financial markets and instruments. Several projects have already utilized the unique characteristics of smart contract development and blockchain technology for introducing a wide range of unique financial services and also made them available easily for an enormous number of users. It is all about democratizing finance and releasing the sectors from their dependence on the banks, regulating bodies, and any other intermediaries.
DeFi protocols are dependable on the liquidity mining pools, and this offers the essential assets to facilitate automated trading. But this leads to another problem. Because the DeFi protocols require borrowing liquidity from the 3rd party providers, such providers are needed to be incentivized by them.
This takes place through the reward programs of liquidity mining, where tokens are being received by the liquidity providers for lending assets. This method helps to acquire liquidity quickly. However, the problem is that token rewards can only motivate the liquidity providers, and so they can leave the protocol as soon as the rewards dry up.
This problem is solved by DeFi 2.0. The 1st gen DeFi applications were user-oriented, but the latest ones focus on B2B. The 1st gen DeFi products are already successful in bootstrapping the industry. For doing this, it developed a user base initially and created the significant DeFi primitives that can be put to use by the future products for developing the next DeFi apps’ wave whose goal is to make the sector sustainable.
While thinking about sustainability, the primary challenge that prevents the sector from becoming sustainable is the reliance of the sector on 3rd party token incentives and providers for securing liquidity and DeFi’s nearly non-existent knowledge of the global economy and traditional finance. DeFi 2.0 seamlessly addresses these challenges and beyond. However, to know more about DeFi, you can seek professional help from an experienced DApps development company.
Empowering DAOs:
DeFi can prove to be beneficial for the DAOs by developing protocol-controlled value mechanisms. However, the movement’s pioneers expect that it is not the only thing that is going to be changed. Reaffirming the B2B focus of the movement, several sectors anticipate that the DeFi product’s new wave will make several useful tools that make things seamless for DAOs to compete with the corporations.
By allowing the DAOs to compete effectively with the convent businesses, it will be a decisive step to strengthen the connection of DeFi and Distributed Ledger Technology (DLT) to the wider economy.
Sustainable liquidity:
The DeFi 2.0 movement is also going to focus on developing mechanisms for sustainable liquidity. OlympusDAO is one such protocol that wants to make a decentralized reserve currency.
OlympusDAO sells OHM, its native token, at a discount through a bonding mechanism. Discount is paid out to the purchasers over a 5 days period. By making use of single cryptocurrency assets like ETH and DAI, OHM can be bought by the users. They can also pay with LP tokens that represent trading pairs including OHM like OHM-WETH and OHM-DAI. This allows OlympusDAO to own its liquidity. At present, 99.5% of its liquidity is owned by OlympusDAO.
OlympusDAO uses OHM stacking to reduce the token’s selling pressure. Olympus Pro was launched recently by OlmypusDAO for allowing other DeFi protocols to make use of the bonding mechanism for acquiring their own liquidity.
Beyond DeFi:
The space of DeFi is hugely self-contained, which is not the same as traditional finance, and it is serving the wider economy. The financial sectors are way more confusing and complicated than we think, and the global economy underpins it ultimately. Also, DLT implementation and integration contribute to the success of DeFi.
Contrastingly, DeFi exists in its own buddle, and its user base, potential apps, liquidity pool, and reach are limited by it inevitably. All these hinder the sustainability of the sector.
But the good news is that some DeFi 2.0 projects realize that the decentralized finances need to be more than just the crypto-asset exchange. Multiple infrastructure layers are stacked on one another, right from the electricity, internet layer, blockchain layer up to the liquidity layer. Ethereum DApps development is also rising with DeFi 2.0.
Conclusion:
Eventually, it depends on you if you want to consider DeFi 2.0 as a fancy term or a generational shift in decentralized finance. But one thing is sure that it indicated the continuous evolution of the huge space of DeFi. Also, the number of projects that comprise the DeFi 2.0 movement is proof that they are the evolution’s most significant part and are known as the bootstrapping phase.
