The first wave of decentralized finance, DeFi 1.0, gave people a way to invest and exchange cryptocurrency outside of traditional, centralized markets.
Now, a new generation of decentralized initiatives is taking shape, and it’s already been dubbed DeFi 2.0
A thread.🧵👇
Now, a new generation of decentralized initiatives is taking shape, and it’s already been dubbed DeFi 2.0
A thread.🧵👇
📌What is DeFi 2.0?
DeFi 2.0 is a movement trying to upgrade and fix the problems seen in the original DeFi wave. DeFi was revolutionary in providing decentralized financial services to anyone with a crypto wallet, but it still has weaknesses.
DeFi 2.0 is a movement trying to upgrade and fix the problems seen in the original DeFi wave. DeFi was revolutionary in providing decentralized financial services to anyone with a crypto wallet, but it still has weaknesses.
Crypto has already seen this process with second-generation blockchains like Ethereum (ETH) improving on Bitcoin. DeFi 2.0 also will need to react to new compliance regulations that governments plan to introduce, such as KYC and AML.
The key differences between DeFi 1.0 and DeFi 2.0 have centred on liquidity, scalability, security, and centralization.
📌What are the limitations of DeFi?
1. Scalability: DeFi platforms that experience high periods of network activity can often suffer from congestion. These bottlenecks slow the speed of transactions and make network fees, like gas (in the case of ETH), increasingly expensive.
1. Scalability: DeFi platforms that experience high periods of network activity can often suffer from congestion. These bottlenecks slow the speed of transactions and make network fees, like gas (in the case of ETH), increasingly expensive.
2. Oracles: Financial services that depend on external or off-chain information need a higher quality of third-party data sources (oracles) than what is currently available in web3.
3. Centralization: Many DeFi platforms sacrifice decentralization to allow for higher levels of scalability and security.
4. Security: Most users don't manage or understand the risks present in DeFi. They stake millions of dollars in smart contracts that they don't fully know are safe. While there are security audits in place, they tend to become less valuable as updates occur.
5. Liquidity: Providing liquidity to a pool requires a lock-up of funds and their total value. While separated across disparate blockchains and markets, this financial rigidity often results in capital inefficiency.
📌Benefits of DeFi 2.0
1. Insurance for the impermanent loss:
DeFi 2.0 projects are introducing new measures to mitigate this inherent risk.
Some protocols use the proceeds from fees to insure users against impermanent loss. They can also mint new coins to make up for losses.
1. Insurance for the impermanent loss:
DeFi 2.0 projects are introducing new measures to mitigate this inherent risk.
Some protocols use the proceeds from fees to insure users against impermanent loss. They can also mint new coins to make up for losses.
All of these policies make DeFi a safer option for crypto investors.
2. Self-repaying loans:
A lender can provide a user with a loan in exchange for collateral in the form of a small deposit.
2. Self-repaying loans:
A lender can provide a user with a loan in exchange for collateral in the form of a small deposit.
This deposit is then invested by the lender, who goes on to earn interest. Once the lender has earned the full price of the initial loan, they return the deposit, and the loan recipient ends up not having to repay the loan.
3. Insurance-backed smart contracts:
DeFi 2.0 protocols often allow investors to take out insurance on their smart contracts. This is a significant source of protection, especially for novice investors.
DeFi 2.0 protocols often allow investors to take out insurance on their smart contracts. This is a significant source of protection, especially for novice investors.
4. Offering a wider level of flexibility for staked assets: A standard feature for many DeFi protocols is that when users stake a token pair in a liquidity pool, they will receive an LP token in return.
📌Why Does DeFi 2.0 Matter:
One could argue from both a macro and micro perspective that the purpose of DeFi is similar in its intent to lower the barrier of entry to competitive financial solutions.
One could argue from both a macro and micro perspective that the purpose of DeFi is similar in its intent to lower the barrier of entry to competitive financial solutions.
For example, people who would ordinarily struggle with accessing loans can find non-prejudicial alternatives with MakerDAO or Compound.
However, the current methods needed to benefit from core DeFi-centric activities like lending, staking, or yield farming are still relatively daunting for the average user.
But through simplifying the user experience, providing stronger incentives, aligning with updated regulations, and mitigating against the levels of uncertainty in web3 markets, DeFi 2.0 can help move platforms and resources further along the journey to democratise finance.
📌Wrapping Up
DeFi 2.0 claims to be a solution to DeFi 1.0's shortcomings. While both have the same goal, their protocols matter a lot in terms of their longevity.
DeFi 2.0 claims to be a solution to DeFi 1.0's shortcomings. While both have the same goal, their protocols matter a lot in terms of their longevity.
Regardless, decentralized finance is arguably a good concept, especially for the consumers, but whether DeFi 2.0 will continue to soar is something only time can tell for sure.
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