Due to the short attention span nature of crypto, as well as the innovation and growth it seeks, the ecosystems have led to a constant stream of new developments. The crypto space is in need of a new thing to be excited about, and Decentralized Finance (DeFi) 2.0 provides just that.
“DeFi 2.0” is one of the hottest keywords in crypto right now, thanks to tokens like OlympusDAO (OHM), Abracadabra (SPELL), and Fei Protocol.
Limitations of Existing DeFi
DeFi 1.0 primarily occurred on the Ethereum blockchain — with the disadvantage that simple DeFi transactions were either too expensive or too slow and not interoperable. As we progress further into understanding DeFi 2.0, it is important to acknowledge the problems that DeFi 1.0 was trying to resolve. Among these are:
● Scalability: High gas prices and long waiting times negatively affect users’ experiences.
● Liquidity : Liquidity is like the “blood” of any market. However, in DeFi, liquidity remains low.
● Centralization: Although it is decentralized finance, most of the existing decentralized applications (Dapps) are still centralized.
● Security: DeFi has significant underlying risks, yet security is still mostly unnoticed.
● Oracle Attack: Oracles play an important role in DeFi. However, there are still projects that do not comprehend the importance of integrating with a reliable Oracle. As a result, a large number of protocols were attacked and were forced to compensate for the losses.
● Capital Efficiency: Technology advancement has boosted capital efficiency, but a large number of assets still aren’t being utilized properly.
DeFi 2.0
As an upgraded version of DeFi, DeFi 2.0 attempts to fix its existing weaknesses, while leveraging its strengths to open even more potential for users.
Thanks to the development of blockchain, people will be able to access Dapps anywhere, anytime, without being controlled by an entity or organization.
Even so, it still has multiple shortcomings, which is why DeFi 2.0 is a necessary supplement.
Solutions provided by DeFi 2.0
Scalability
Getting users connected to the Ethereum network has been a hurdle for DeFi, especially for new users. Due to high gas fees and long waiting times, most users have not been able to experience DeFi.
DeFi also offers a broad range of opportunities, making it extremely attractive. Thus, the question arises: How can users experience DeFi without having to face the scalability issues of Ethereum? The rise of other Layer 1. It was no accident that cash flow went to BSC, Polygon and Solana, which are blockchains that can meet users’ needs most. Potentially, solutions to the Scalability issue will trigger the next market wave.
Liquidity
One of the easiest ways to solve the liquidity problem, or in other words, to attract more capital and users to the DeFi market, is to help them earn yield. Whether it’s 10–100x ROI projects, farming pools with thousands of APY, or airdrops worth thousands of dollars, they all contribute to onboarding new users and enriching the market’s liquidity.
Centralization
Aside from the fact that people join DeFi for profit, they also do so for freedom and to be independent from third parties. Despite this, numerous DeFi protocols remain heavily controlled by a small group, resulting in a loss of faith among users.
To address this issue, DeFi projects are putting a high priority on the decentralized aspect. DAO (Decentralized Autonomous Organization) — where everyone has the right to vote on the project’s development, has grown dramatically during recent times.
Capital Efficiency
Capital Efficiency in DeFi 2.0 has the ability to revamp the whole DeFi. Several ecosystems have announced their Ecosystem Fund to push their growth. At some point, that money has to be used. Besides spending a large amount on developing their products, a large portion will also be used as a way to attract more users into the ecosystem.
By focusing on capital efficiency, DeFi can optimize total value locked (TVL) and maximize the utilization of deposited assets. More so, a healthy cash flow is prevented, and projects will be more sustainable and attract more supporters.
Conclusion
Currently, DeFi 2.0 is happening on layer one. But I suspect it will also affect layer 2 like Arbitrum. The new craze is here, and every day it’s interesting to see which projects are attracting so many users. Hopefully the information above has provided you with a better understanding of DeFi 2.0 and which sector will receive the most attention as well as cash flow in the near future.
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