What is DeFi 2.0 (Decentralized Finance 2.0)?
The first thing to know about DeFi 2.0 is that it is not mainly the introduction of new applications or technologies. In its early stages, DeFi 2.0 has been about dealing with certain issues that plagued the previous phase and seeking means to add liquidity to the infrastructure layer, improve user experience, and maintain a stable industry.
Let’s highlight some of these issues.
Limitations of DeFi 1.0
DeFi at its core operated as a liquidity pooling system. The way it works is that liquidity providers provide crypto assets into a pool that serves as a capital reserve to be used by DEXs, and in return, they are rewarded with the supply of native tokens issued by the protocol.
The first issue with the system was that the native token is usually not sustainable and is susceptible to dumping. Liquidity providers mostly don’t only sell the token for profit, but also recall their initial invested crypto sum as well. DEXs release more tokens to liquidity since they require a larger pool of capital, which raises the number of tokens and the selling pressure.
Liquidity providers suffer losses in the event of unstable crypto prices or a bear market. Because the aim is to make more money, the rewards redeemed aren’t enough to cover the possible loss when the market bleeds red.
While smart contracts automate and execute processes that provide us with decentralized financial options, they are no stranger to faults and cyber attacks, which have also plagued other aspects of DeFi like exchanges and bridges. People hastily deposit funds into smart contracts that they don’t understand and lose money in the process.
DeFi 2.0 vs DeFi 1.0
DeFi 2.0 is an additional layer set on top of DeFi 1.0, with special attention to setbacks that affected overall utility in the last phase.
Under this new phase, liquidity providers (LPs) who fund a liquidity pool with crypto assets will be protected from losses due to volatile crypto prices by DeFi 2.0’s insurance. By ensuring smart contracts, the risks associated with incorrect smart contracts can be reduced as well.
The risk of smart contract fault or compromise is also reduced by mandating insurance providers or open-source communities to do audits on the contracts, which ensures that no critical flaw develops in smart contracts.
DeFi 2.0 secures loan repayment by making them self-repaying through the use of capital utility. Since the lender can utilize the amount, he can return the amount deposited once the collateral has yielded the loan sum plus the interest.
Liquidity providers can also earn money from tokens received, which can be staked using yield farming and compounding. The profit obtained from staked tokens can be used as collateral that pays off the loan and interest within a given period.
Why is it Important To Integration Into DeFi 2.0?
Financial advancement: The DeFi industry has become a mainstream idea, catching the attention of large institutions, international financial regulators, and even governments. Protocols that seek to remain relevant in the ecosystem must adopt emerging technology.
Financial security: Ensuring a safe system can safeguard new crypto users that are exploring financial options within the sphere. A newbie, for instance, may prefer to take a loan from a DEX rather than go to the bank because of the convenience, loan terms, and wealth creation prospects.
Financial democracy: Mitigating the risks involved in the industry increases earning opportunities for crypto users and boosts adaptation of the concept. The goal is to democratize finance with as minimal risk as possible.
DeFi 2.0 Projects
Aave is a leading platform in the DeFi space. The platform is a liquidity pool where users can lend and earn interest on their digital assets. Similarly, users can borrow digital assets and pay a little interest or charge in exchange for the service. A user can deposit his coin in the Aave liquidity pool, which will provide liquidity, and will be compensated with interest. Aave works in the same manner as banks do, allowing users to lend and borrow money. The major difference is that the protocol is decentralized and community-driven.
When a user needs to borrow cryptocurrency, he goes to the Aave liquidity pool and obtains the loan. The borrower must pay slightly more than the amount borrowed in exchange for the loan. Simply put, the Aave finance protocol connects borrowers and lenders looking to borrow and earn interest on digital assets.
THORChain is a DeFi platform that enables users all over the world to trade digital assets between blockchains. THORChain functions similarly to Uniswap, except it is multichain, and ownership and custody of digital assets are not lost during the swapping process. The system is community-driven and decentralized, and it enables the seamless exchange of cryptocurrencies without any intermediary processes or the need to sell them first.
THORChain operates in a straightforward manner. For example, if I have Bitcoin and want to get Ethereum, I just deposit Bitcoin into the liquidity pool and receive its value in Ethereum. Liquidity providers deposit assets in exchange for interest, and traders exchange assets in exchange for a fee.
THORNodes are also utilized to ensure the platform’s functionality as a multi-chain protocol. A Node operator manages each THORNode: there is a separate Node for Bitcoin, a different Node for Ethereum, and so on. The primary role of these THORNodes is to verify that a digital asset was received first and, subsequently, an exchanged asset was returned to the trader.
The Graph is a decentralized data collection and processing program that upcoming decentralized application (dApss) developers can use. The Graph’s primary goal is to supply developers with valuable data gathered from blockchains and smart contracts. The Graph collects data from the blockchain in the same way that Google collects data from the web. Developers can design dApps more precisely and effectively if they have this essential data.
The Graph operates in three stages: data collection, data storage, and data delivery to users.
Data Collection: When a decentralized application creates a smart contract, the Graph Node collects all of the data from the blockchain.
Data Storage: The Graph Node then examines and analyzes the data to store it based on relevance. Data of a specific type will be kept at a specific index known as a Subgraph.
Data Delivery: Finally, if a user queries a specific piece of data, the relevant data is delivered.
Despite the ongoing crypto exchange episode and Sam Bank-Fried’s FTX collapse, some DeFi platforms have earned more than $100,000 this past week, per data from Token Terminal’s leaderboard. DeFi is an ecosystem that is ever-expanding and evolving, with more use cases than ever before. We will be on the lookout for exciting new DeFi projects and the utilities that come with this disruptor of the financial system as we know it.