DeFi 2.0: A Comprehensive Guide

DeFi 2.0: A Comprehensive Guide

Blockchain
June 21, 2022 by Diana Ambolis
194
The obvious question that must have been running through your head is what exactly is DeFi 2.0. It’s essentially the second generation of decentralized finance protocols, with the goal of correcting the shortcomings in the first. Decentralized finance services are accessible to almost everyone with a crypto wallet. DeFi 1.0, on the other hand, has
DeFi 2.0: A Comprehensive Guide

The obvious question that must have been running through your head is what exactly is DeFi 2.0. It’s essentially the second generation of decentralized finance protocols, with the goal of correcting the shortcomings in the first. Decentralized finance services are accessible to almost everyone with a crypto wallet. DeFi 1.0, on the other hand, has a set of constraints that DeFi 2.0 intends to address with a novel concept. Protocol-Controlled Liquidity, or PCL, protocols would be used in DeFi 2.0 to solve liquidity issues.

The new DeFi 2.0 in crypto would have a business-to-business or B2B model orientation as its main focus. Surprisingly, the first generation of decentralized finance products bolstered the industry’s roots by attracting a large user base. Early DeFi solutions also set some important criteria for future developers to follow in order to construct new DeFi solutions. DeFi 2.0’s major purpose is to safeguard the long-term viability of decentralized finance.

DeFi 2.0’s goal

As previously stated, the primary goal of DeFi 2.0 protocols is to address the issues that exist with DeFi 1.0. The most crucial aspect of DeFi 2.0 would be to ensure that the DeFi movement continues. For liquidity, decentralized finance relies on third-party suppliers and token incentives. DeFi, on the other hand, has no connection to traditional banking or the global economy.

These issues could significantly impact the long-term viability of decentralized finance. The focus of DeFi 2.0 and subsequent enhancements would be on overcoming these difficulties. OlympusDAO, one of the first DeFi 2.0 projects, offers unique ways of maintaining long-term liquidity. Furthermore, the protocol-controlled value processes can aid in the empowerment of DAOs.

DeFi 2.0 is powered by technology and innovation.

DeFi 2.0 was clearly motivated by the shortcomings of DeFi 1.0. At the same time, DeFi 2.0’s objectives reveal hopeful insights about technological advancements that will help DeFi 1.0’s issues be resolved. It is, nevertheless, critical to understand how DeFi 2.0 works. What are the technologies that are propelling DeFi 2.0 forward? Here are some of the important solutions that have aided in the development.

Scalability

DeFi users, especially beginners, have significant challenges while interacting with the Ethereum network. However, many consumers are unable to use DeFi services due to long wait periods and high petrol expenditures. What role can DeFi 2.0 protocols play in resolving this issue? One of the first responses might mention Ethereum alternatives like BSC, Solana, or Polygon. These blockchain networks can provide layer 2 scalabilities and help to accelerate the adoption of DeFi systems. In fact, the next generation of DeFi solutions will strongly emphasize scalability.

Centralization

The prospect of significant money-making opportunities is what has sparked enormous interest in DeFi. However, it’s worth noting that DeFi can be a viable option for those individuals seeking financial independence and self-sufficiency. The same cannot be found in the current model of decentralized finance solutions. Decentralization for users would be a primary goal with DeFi 2.0’s developments in decentralized financing. Existing DeFi solutions have groups in charge of the entire protocol, which raises questions about their reliability. In recent years, the growth of Decentralized Autonomous Organizations, or DAOs, has provided significant benefits for enhancing DeFi models. DAOs can alleviate the issue of centralization by putting protocol governance in the hands of the user community.

Mining for Liquidity

Another major aspect supporting the expansion of DeFi 2.0 in crypto is liquidity mining, especially given the large increase in DeFi activities in 2020. New DeFi protocols could be built on a solid base of yield farming or liquidity mining. It could now take advantage of the vast amounts of liquidity available for beginning and maintaining operations while minimizing slippage. In fact, yield farming is the most effective method for generating the finances required for DeFi initiatives. At the same time, DeFi 2.0 initiatives must consider long-term yield farming and token supply in order to avoid negative outcomes.

Also, read – Understanding Blockchain’s Layer 3 Protocol

Protocols that use DeFi 2.0 as an example

One of the first instances of a DeFi 2.0 solution is OlympusDAO. The native token, OHM, and the support of a selection of assets with Olympus Treasury make up the decentralized currency reserve system. OlympusDAO seeks to develop a policy-guided currency system with the use of the DAO to ensure the management of native tokens as one of the main examples of a solution for decentralized finance in DeFi 2.0. OlympusDAO handles bonds in the same way that discounted token sales are handled. Investors can sell their assets to the Olympus Treasury in exchange for OHM tokens at a discounted rate instead of earning interest. Unless the token’s price rises, investors must bet their discounted OHM in order to receive reasonable profits.

According to the ROI share, Olympus offers a wide selection of bond kinds. Olympus has a number of significant bond examples, including:

  • DAI bond FRAX bond
  • the wETH bond
  • Bond issued by OHM-FRAX LP
  • Bond issued by OHM-DAI LP

With its excellent structure, OlympusDAO’s reputation as a pioneer in its protocols is cemented. The OlympusDAO protocol uses the DAO to enable high-level internal control and management of the organization, as well as freedom from capital inefficiencies and OHM token instability. According to estimates, the OlympusDAO protocol controls and manages approximately 99 percent of the liquidity in the OHM-DAI bond.