DEFI 2.0: THE SECOND GENERATION OF DEFI PROTOCOLS

One of the key innovations of blockchain technology is Defi. Decentralized finance brought about a revolution in the financial realm.

It resolved the persistent flaws of the centralized financial structure. Defi introduced transparency, automation and efficiency into the financial world. It works on the advantages of the permission less and trustless ecosystem powered by smart contracts.

Defi helps you establish a credible business ecosystem backed by automated liquidity, transparent protocols, enhanced security and globally accessible financial services.

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The story of Defi doesn't end here. In the last few months, there has been a surge in liquidity focused Defi projects. Tech firms, financial institutions and investors are rapidly shifting to Defi systems. All these have given birth to a new term – Defi 2.0.

Defi 2.0 is the subset of Defi 1.0 which aims to solve the liquidity and scalability issues of Defi 1.0.

Is Defi 2.0 the next big thing? Or is it just hype to push forward the Defi structure?

Read on to find out!

Limitations Of Defi 1.0 & The Need For Defi 2.0

Renowned Defi projects like Uniswap, Aave, Bancor, MakerDAO, and Compound were the torch bearer of Defi. Compound and Aave offered easy on-chain lending and borrowing.

While the Defi protocols like Uniswap, Automated Market Maker, and Bancor were the ones that established the foundation of a mature Defi ecosystem. They were the first to allow users to swap tokens without giving up custody.

MakerDAO, another prominent Defi project introduced decentralized stablecoins allowing investors to beat the volatility of the cryptocurrencies. Fiat backed stablecoins offered users the flexibility to access lending and borrowing services, hold funds and use in transactions.

Everything seems perfect with Defi until you have a closer look. Defi platforms are still struggling with high fees, liquidity issues, extended wait times, scalability issues and inefficient asset use. Developers are still not able to fully utilize the potential of Oracles in Defi. It makes Defi protocols prone to cyber attacks resulting in people losing their funds.

The next generation Defi aims to resolve the existing flaws with the current Defi model. Let us have a look at the prominent issues with Defi 1.0.

Liquidity Mining

The majority of Defi protocols do not offer long term and sustainable incentives for liquidity providers. The investors holding their funds in the liquidity pools get nothing more substantial than tokens.

Moreover, most of them cash out their tokens and rewards on a daily basis. This results in the sale of native Defi tokens that dilutes the supply.

The simple solution to the liquidity problem is yield farming. In yield farming, users can provide liquidity for an exchange pair and get LP tokens in return. They can then stake the same LP token for maximum returns.

Yield farming solves the liquidity problem by bootstrapping significant funds for Defi projects and avoiding slippage simultaneously. Thus the focus of Defi 2.0 will be long term yield farming and token supply.

Liquidity

The Defi ecosystem requires liquidity to function properly. Most of the Defi protocols lock up funds in liquidity pools to offer instant funds to borrowers.

However, this also gives rise to financial rigidity as the tokens are locked in the liquidity pools and cannot be used anywhere else. Moreover, if the price ratio of assets locked in LPs changes, liquidity providers risk losing money.

Defi 2.0 can help investors provide greater incentives and insurance to invest in LPs. It would boost the growth of the Defi space as well as benefit stakers, investors and borrowers.

Scalability

Defi platforms encounter huge network congestion during peak hours. It not only slows down the transaction speed but also increases the network fees.

Most of the Defi projects are built on the Ethereum network. The Ethereum blockchain witness huge traffic which results in slow transaction speed and high gas fees. These two are the main reasons people shy away from Defi.

However, the launch of layer 2 scaling solutions like Polygon, Solana and BSC can help resolve scalability issues. It will also drive the next wave of Defi services adoption.

Oracles

Defi financial products depend on third-party sources of data providers like Oracles. The inadequate use of Oracles in Defi protocols largely impacts the performance of Defi protocols. There is an eminent need for more mature and high quality Oracles.

Centralizations

The core foundation of Defi is decentralization. However, majority of Defi platforms have still not introduced a DAO governance mechanism.

Several Defi projects have to compromise with Decentralization for security and scalability concerns.

Defi 2.0 will focus on prioritizing DAO to restore the users' trust, financial independence, self sufficiency and control.

Benefits of Defi 2.0

Here are some of the notable benefits of Defi 2.0.

• Unlocking the value of staked funds
• Smart contract insurance for liquidity providers
• Creating insurance funds to safeguard against impermanent loss
• Broader flexibility for asset staking
• Attractive incentives and rewards for users

• Prioritizing DAO governance & policy rights
• Unlimited scope for technological and financial innovations

Conclusion

Defi 2.0 will be a transformational evolution of the Defi space. It will push forward the growth of Defi space in future.

You can too be a part of the Defi evolution and transform your existing business model towards growth with our credible Defi development services.

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