We are coming to Defi 2.0? It will be the next step for Defi?
Defi 2.0 is an upgraded version of the current Defi (provisionally known Defi 1.0) and addresses the existing limitations and takes full advantage of the strengths of Defi 1.0.
Hello everyone, I’m Neo — Admin — Community Manager of Optimus Finance and Growth Marketing of LECLE Vietnam.
Have you ever heard the keyword “Defi 2.0”? I think that we all heard it for a moment. So why do we have Defi 2.0? On the other hand, why is it significant and important? I will share my understanding with you. Let’s get started!
1. What is DeFi 2.0?
Understanding in an easy way, Defi 2.0 is an upgraded version of the current Defi (provisionally known Defi 1.0) and addresses the existing limitations and takes full advantage of the strengths of Defi 1.0.
Decentralized Finance (DeFi) will allow us to be accessible and use Decentralized Applications (DApps) whenever and wherever, without being under the control of any organization.
A question here what are the existing limitations?
2. The existing limitations of DeFi 1.0
Some of the existing limitations we can see are:
Scalability: high traffic + expensive gas fees + waiting for a long time to complete a transaction ⇒ affect users’ experience and become cost-inefficient. At the moment, we can see Blockchain Layer-1s
gradually are resolving this case such as ICON, BNBChain, Near, …but there are some chains haven’t been radical.Oracle: DeFi depends on heavily Oracles. However, there are some projects that do not understand their importance and refuse to integrate with a trustworthy Oracle. As a result, a wide range of protocols have got attacked and had to compensate for the losses.
Security: DeFi contains enormous underlying risks, while security is still mostly unnoticed. According to Chainalysis’s reports, almost 97% of all cryptocurrency stolen in the first three months of 2022 has been taken from DeFi protocols (Read it here)
Liquidity: Liquidity is like the “blood” of any market. In DeFi, it still remains low.
Centralization: Although it is “Decentralized Finance”, a majority of existing Dapps are still centralized. Some projects still don’t have DAO principles in place.
Capital Efficiency: Technology advancement has increased capital efficiency, but there is still a massive amount of assets not being optimally utilized.
How can we resolve them? What is the solution here?
3. The solution for DeFi’s limitation cases
Something bad will be better if we have the best solution to solve them, right? Now let’s review some solutions that have made the growth of DeFi 2.0.
3.1.Scalability — Layer 1 and Layer 2
For anyone interacting with the Ethereum network has been a main limitation. Was once expensive gas fees and waiting for a long time has prevented us from experiencing DeFi on Ethereum. But at the moment, the gas fee on Ethereum is lower, under 5$ (Ethereum Gas Tracker). How can users experience DeFi without having to face scalability issues of Ethereum or the other chains?
⇒ The rise of other Layer-1.
That is the reason why the cash flow goes to the other chains such as BNBChain, Polygon, Solana, Near, ICON, … can provide what we need the most to experience.
3.2. Liquidity — Yields
Address this matter, or in other words, attract people and capital into the DeFi market, the simplest way is to help them earn yields.
3.3. Centralization — DAO
The fact that everyone comes to DeFi to make profits, they also join DeFi to catch the freedom and be independent of any third parties. However, almost of DeFi projects are still controlled by a team, a group or an organization leading to a loss of our faith in decentralization.
To resolve this case, DAO (Decentralized Autonomous Organization) — We can make meaningful decisions with voting power on the future of the protocol, the project’s development, etc…has been developed recently.
3.4. Capital Efficiency — The next interest
If there is so much money flowing into Defi to make TVL more considerable, what will we do with it?
Most of the assets in Locking remain static and unused.
AMM: Although AMM is the “Liquidity Pool” of DeFi and can attract a huge amount of TVL, and mostly unused.
Lending: Possess a low Utilization ratio, or in other words, there are much more lenders than borrowers.
Aggregator: after depositing the assets into Aggregator protocols and receiving Aggregator tokens, can’t use those tokens elsewhere, the lack of utilities.
And many factors lead to assets being used in an optimal way.
4. Capital Efficiency will change the whole Defi?
We will take a look some the other aspects of the Defi’s limitation
The limitation of Liquidity Mining:
We’ve all known about Liquidity Mining when we join Defi. Ordinarily, after launching a project, there will be a Liquidity Mining program to attract users. Nevertheless, it has become “a double-edged sword” as the Liquidity Mining program can only attract new users and assets in a short term, which ends up in the situation:
if APY decreases ⇒ Farmers dump tokens ⇒ The cash flow will move away.
At the moment, this model has been used by both existing and new DeFi projects. This is not good for the cash flow when users only focus on farming ⇒ dumping ⇒ farming ⇒ dumping and they don’t intend to contribute to the existence and development of the project.
TVL is considered too heavy:
The TVL index is being emphasized too much as a standard for the Defi protocol. Most of us only pay attention to the TVL without any understanding and how the TVL can be converted into revenue is another aspect.
The projects focusing on Capital Efficiency will enable DeFi to:
Optimize TVL: Allow the deposited assets to be taken to the fullest advantage.
Create a healthy cash flow: preventing an unhealthy cash flow will make projects more sustainable and adopt more supporters like Olympus DAO,…
So we should:
Find out Capital Efficiency when researching projects.
Instead of focusing on TVL, we should pay attention to how the project takes to the fullest advantage of the TVL. Each model will have a different way to optimize the TVL and it will be the key for us to consider.
Find out and understand projects that lead to Capital Efficiency.
Uniswap v3 (UNI): The first AMM to create the Concentrated Liquidity model, multiplying Capital Efficiency of providing liquidity.
Olympus DAO (OHM): The mechanism of swapping LP tokens for Bonds, reducing the frequency of the farm and dump situation, and creating sustainable liquidity.
Abracadabra (SPELL): Allow using yield tokens (yvYFI, yvUSDC, xSUSHI,…) as collateral to borrow the stablecoin MIM, opening a new lending market.
Tokemak (TOKE): Reduce Impermanent Loss as the protocol acts as a market maker and navigates liquidity.
Curve (CRV) + Convex (CVX): Apply Incentive + Game Theory to direct the governance in a positive way + optimize Curve’s enormous liquidity.
Popsicle Finance (ICE): Help users manage their liquidity more efficiently.
And other developing projects.
5. Closing thoughts
Taking full advantage of Capital Efficiency will create a new standard. We should use TVL will become as important as TVL.
The success of projects like OHM, SPELL,… will be considered to boost the next market wave.
There will be many innovations created when they are incorporated together, same as Defi 1.0.
And I think we are in Capital Efficiency, like Defi 1.5 or something like that, just a part of DeFi 2.0. We will see other parts of Defi 2.0 and all of those parts will create Defi 2.0.
This post is for educational purposes only. All materials I used were the different reference sources. Hope you like and follow us and feel free to reach out to us if there is an exchange of information. Cheer! 🍻
#defi2 #defi #blockchain #crypto