An Introductory Guide to Defi 2.0

Published by : Pankaj | Mar-24-2022

Defi 2.0

  • Even though the first Defi protocols initiated gaining traction only over two years ago, it might feel like the origin of the decentralized finance movement happened a lifetime ago. The new revolutionary concepts and ideas are always around the corner, and it is the nature of the blockchain developement that things change very fast. So at present, we are already talking about the Defi 2.0, with a wave of ambitious new protocols having ushered in the next phase in DeFi’s evolution.

    The goal of the Decentralized finance (Defi) blockchain-based solutions category is to solve the problems of traditional finance, namely, centralization and the lack of personal autonomy and ownership over individual finances. Since then, with the decentralization of trading and finance, we have had successful Defi exchange projects like UniSwap. It is a trending manner to grab interest in the crypto world. But there are still problems to solve in such a new field, as we experienced with Bitcoin (BTC). Thus Defi 2.0 is an evolution of projects improving on the dilemma of Defi 1.0. The vision of Defi is to take finance to the mass but has grappled with scalability, security, centralization, liquidity, and accessibility to information. As a result, to explain a trending generation of Defi decentralized applications (DApps), the term Defi 2.0 has become more prominent.

    What is Defi 2.0?

    Defi 2.0 is the second generation of Defi protocols, which goal is to correct the problems of the first iteration of Defi. It is a movement to solve the problems seen and update the original wave in Defi.

    Moreover, giving decentralized financial services to anyone with a crypto wallet development Defi was a revolution, but it still has weaknesses. The concept called Protocol-Controlled Liquidity or PCL protocols in Defi 2.0 plans to tackle this problem. It permits the protocols to own the majority of their liquidity.

    Although Defi 2.0 is a new phrase in the blockchain world that refers to a subset of Defi protocols built on prior Defi breakthroughs like yield farming, lending, and other things. Thus various on-chain systems with native tokens experience liquidity constraints which is a crucial focus of notable Defi 2.0 implementations.

    Also, read: Yield Farming | Fuelling the Decentralized Finance(Defi) Space

    What are the Limitations of Defi?

    As we know, everything in this world has its cons and pros, so before going in-depth about Defi 2.0 use cases, let’s explore the problems it’s trying to resolve. There are many issues like the problems blockchain technology and cryptocurrency face in general.

    Scalability

    The high traffic and gas fees with Defi protocol on blockchain often provide slow and expensive services. It is becoming cost-inefficient and takes too long to process a simple task.

    Oracles and third-party information

    Depending on external details, needs higher-quality oracles(third-party, source of data) for Financial products.

    Centralization

    The goal in Defi should be an increasing amount of decentralization. So, many projects still don’t have DAO principles in place. Thus, exploring business potential with blockchain and DAO is the aim of Defi’s next generation.

    Security

    The risk is available in Defi, which most users don’t manage and understand. Thus they don’t know, is safe that they stake millions of dollars in smart contract services. While they tend to become less valuable as the update occurs, there is a security audit in that place.

    Liquidity

    Across different blockchains and platforms, the spread of market and liquidity is with splitting liquidity. Also, providing lock-up funds and their total value is by liquidity. Thus in several cases, the use of staked tokens in the liquidity pool can’t be anywhere else, creating capital inefficiency.

    Also, read: Why to Develop Defi dApps and protocols

    Why does Defi 2.0 matter?

    Defi can be appalling and challenging to understand, even for holders and experienced crypto users. So, for crypto users, it aims to lower barriers to entry and create new earning opportunities. Thus, the users who might not get a loan from a traditional bank might do with Defi.

    Although, without compromising on risk, Defi 2.0 matters because it can decentralize finance. The problem noted in the previous section, Defi 2.0 also, attempts to solve by improving the user’s experience. So if we are capable of doing this and providing better incentives, then everyone can win.

    Also, read: Developing an Advanced Defi(Decentralized Finance) Wallet

    Use cases of Defi 2.0

    There are already several projects providing new Defi services across many networks, including Ethereum, Binance Smart Chain, Solana, and other smart contracts capable of blockchains. So we don’t have to wait for Defi 2.0 use cases. Here we’ll look at some of the most common Defi 2.0 use cases:

    Unlocking the value of the Staked fund

    When users stake a taken pair in a liquidity pool, they will get an LP token in return and this is the standard feature for many Defi protocols. So by staking LP tokens in yield farming, the Defi 1.0 ecosystem permits the user to compound their return further. Thus in vaults providing liquidity, there are millions of dollars locked. But to improve the capital efficiency, there is further potential.

    Moreover, by using yield farm LP tokens as collateral for a loan or to mint more tokens like MakerDao(DAI), Defi 2.0 helps add a further layer of utility and incentives. While in Defi 2.0, the process varies according to the platform.

    Also, read: Building a Defi Token Development Like Safemoon

    Smart contract insurance

    The risk analysis of protocols can be difficult for people with limited technical experience. That is while operating Defi on transparent and open source infrastructure. On smart contracts for users, Defi 2.0 mitigates the obfuscated nature of the market by offering insurance.

    An insurance project with Defi 2.0 can offer guarantees on a deposit, with the yield farm for free. The overall details of these insurance platforms aren’t perfect during an improvement on the risk exposure and depend more on the specific Smart contracts development for Defi.

    Also, read: Blockchain Smart Contract in Insurance | Advantages, and Applications

    Impermanent loss insurance

    If there is any change in the price ratio of the two tokens, locked may result in a financial loss for users who invest in a liquidity pool and engage in liquidity mining. So this process is known as an impermanent loss, and to migrate this risk new Defi 2.0 protocols are exploring new methods.

    To create token pairs with Defi 2,0, the users work with the protocol. In this condition, there can be the addition of a single-sided LP by someone with the protocol also adding their native token as the other side of the pair. In that respective pair, both the protocols and the users will get fees from swaps.

    Also, more: Fintech Space Development with Decentralized Finance(Defi)

    Self-repaying loans

    In general, carrying out a loan involves liquidation risk and interest payment. But Defi 2.0 helps to overcome this pitfall by assigning self-repaying loans. To pay off the loan over time in the self-repaying loan structure a lender can use the interest earned on the deposited collaterals. Thus, there is also no risk of liquidation, and the extended time it takes to pay the loan will be appropriate.

    Also, read: Understanding Defi Flash Loans and How to Make them Secure

    Closing Thoughts

    While in the Defi world, we already have many successful projects, and Defi 2.0 protocols are still very new in the world of decentralized finance. So we’re yet to see the full potential of Defi 2.0. With time, the use of this protocol will shape our future, and we will understand more about it. Thus we have to wait and see Defi 2.0 fully delivers on its promises. If you are willing to deep dive into the Field of Defi, feel free to connect with our Oodles Defi development experts.

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