Mimo Capital Is Moving from DeFi 1.0 to 2.0
Decentralized finance (DeFi) is one of the most innovative trends in the financial services sector. Its systems give humanity access to tools that support the self-management of money. It is also a game-changer, sheltering its users from the perils of the legacy financial system’s boom and bust cycles.
The sector’s growing total value locked (TVL) figure is proof that DeFi is not a passing trend.
On the contrary, its innovation and resilience have received nods from unexpected circles, such as Aussie Senator Jane Hume.
Hume, the Australian Minister for Women’s Economic Security, says that DeFi is a movement for change here to stay.
“If the last 20 or 30 years have taught us anything, all innovation begins as disruption and ends as a household name”, says Hume.
“Decentralized finance underpinned by blockchain technology will present incredible opportunities ‑ Australia mustn‘t be left behind by fear of the unknown,“ she says.
The decentralized finance sector has a total value locked of $207 billion.
Popular protocols such as Curve, Lido, Anchor, and MakerDAO are growing despite the ongoing down market in DeFi chains. A growing and stable TVL indicates that users trust the DeFi premise. It is also proof that DeFi users recognize its substantive value-add.
While it is true that DeFi has a bright future, it is not just fear that keeps users away from DeFi’s disruptive protocols. Instead, DeFi 1.0’s reactive space presents an unstable growth ecosystem.
In their early adopter stage, most dApps struggle to build a liquidity moat-like MakerDAO or Aave have done. These high failure rates drive many potential DeFi users away. Other factors hampering DeFi mass adoption are third-party risks and the sector’s inaccessibility.
What is DeFi 1.0?
DeFi 1.0 refers to decentralized finance protocols that launched in or before 2020. These dApps were part of the mid-2020s DeFi Summer when the sector had explosive growth. Its TVL, for instance, rose from $600 million in January 2020 to $5.8 billion by August 2020. Four months later, TVL crossed $30 billion.
The first DeFi 1.0 protocols, such as Uniswap, brought the decentralized finance space much-needed liquidity. Uniswap, for instance, built a user-friendly Ethereum-based decentralized exchange (DEX) that would ease the ERC20 token swaps.
Its peer-to-peer automated market makers (AMMs) protocol users could swap tokens but still retain the custody of the ERC-20 crypto assets in their wallets. Compound and Aave brought more disruption to the space via their unique lending and borrowing protocols.
Decentralized lending protocols enhanced access to permissionless operating capital and on-chain interest for deposits. In addition, MakerDAO built a decentralized stablecoin that would act as a buffer against the mainstream digital currency’s legendary volatility.
The Dai stablecoin by MakerDAO is one of the oldest and most successful decentralized stablecoins. It has inspired other decentralized stablecoin projects, such as PAR of the Mimo Protocol. PAR is a Euro-pegged overcollateralized algorithmic stablecoin. It is a crypto asset-backed stablecoin backed by a robust DeFi protocol and the Mimo governance token.
MIMO is the Mimo Protocol’s governance and utility token and is a bridge between the legacy finance world and the decentralized space. Mimo’s smart contracts vault mint PAR stablecoins from Ether and other collateral deposits.
DeFi 1.0’s meteoric success has shed light on weaknesses that could hamper its growth. However, its greatest risk lies in its failure to provide sustainable liquidity. This failure arises because DeFi 1.0 dApps reward liquidity providers with liquidity provider tokens.
These tokens attract liquidity that bootstraps these projects and supports their lending, borrowing, and DeX swaps processes. But unfortunately, most DeFi 1.0 liquidity providers are a fickle lot. They are not invested in the future of a dApp and only chase yield.
DeFi’s highest attraction is its high yields. Savers can access more interest in its protocols than traditional investment and saving products. For example, you can earn a 2% to 17% yield rate on crypto-asset deposits, while most bank savings accounts offer near negative interest rates on savings. Some risky DeFi protocols may provide annual percentage yield rates as high as 35%.
DeFi 1.0 shortcomings
The yield farming craze brought DeFi 1.0 to life, but its high APYs and yields attracted the ‘degen,’ whale investors and Ponzi scheme-like projects. The whale investor would abuse the yield farming process, buy tokens for price manipulation then withdraw their liquidity without notice, bringing many dApp to their knees.
The whale investor would then switch their liquidity between platforms earning the highest returns for their liquidity. The professional whale yield farmer can push token prices to the stratosphere and bring them crashing down in weeks.
Decentralized finance 1.0 has also created an ‘Ape Tax .’Many gullible investors join the ecosystem, hunting profit like they would in a casino. Driven by an irrational desire to make massive profits instantly, they will move their liquidity from one protocol to the next whenever they fail to score big.
Such investors eventually lose all their liquidity due to poor decision-making. Some yield-hungry investors have lost thousands of dollars in DeFi 1.0 protocols due to greed, impermanent loss, slippage, and ‘pump and dump’ tokens.
At least 70% of all Uniswap v3 liquidity provider positions do not last a month, proving that DeFi protocols have a liquidity challenge.
DeFi 1.0 protocols also have a variety of governance challenges. As an illustration, Curve’s large liquidity providers can offer bribes to smaller Curve tokens (CRV) holders for more vote-locked Curve tokens (veCRV).
With more veCRV in their hands, these large LPs can, for instance, vote to have more CRV rewards in the pools of their choice — some dApps support protocol-level bribes. For example, Curve has the bribe.crv.finance portal that caters to CRV bribe transactions.
Many DeFi users that support governance token bribing processes may not understand the critical value of these tokens in protocol control. Token governance directly influences the future of a DeFi protocol and the whole system.
Bribes, however, support Governance Extractable Value (GEV) at the expense of the system. In addition, they centralize these protocols and encourage opportunistic behavior.
What is DeFi 2.0?
Decentralized Finance 2.0 seeks to rectify some of the challenges that hamper the DeFi 1.0 ecosystem. DeFi 2.0 protocols kicked off their operations in 2021, with protocols such as Tokemak leading the charge.
These platform champion Protocol-Owned Liquidity (POL), eliminating the migratory LP challenge with one genius stroke. DAOs, rather than the individual LPs, own all protocol-owned liquidity. Some platforms use bonds to build protocol-owned liquidity. Tokemak accomplishes this by means of liquidity pools known within the protocol as a network of reactors. Users deposit a single asset into a TOKE reactor, which generates TOKE tokens in return. The funds within the TOKE reactor are split among several trading platforms and currency pairs.
The DAO of TOKE owners decides which projects are whitelisted to obtain their own reactors, as well as where the funds should be invested. To gain voting powers for a reactor, you must first stake TOKE in a specific one. The entire network is also reliant on TOKE as collateral.
Unlike DeFi 1.0, DeFi 2.0 can mitigate losses via smart contract insurance. Then DeFi 2.0 platforms use scalable Layer 1 networks such as the BSC, Avalanche, Solana. As a result, DeFi users can access open financial services that are affordable and fast.
Then, while DeFi had a cold relationship with its users, DeFi 2.0 protocols are building close user relationships with its liquidity providers. DeFi 2.0 protocols are DAOs. Community-driven implementation and development will support the achievement of milestones and lower opportunistic behaviors amongst token holders.
The Mimo Protocol’s DeFi 2.0 features
The Mimo Protocol, for instance, is leveraging Snapshot, a DeFi space voting system, in its voting processes. Snapshot is a DeFi platform that supports off-chain ‘vote signaling’ and fee-less voting. All that Mimo enthusiasts need, besides respecting the governance framework, to cast a vote on Mimo’s proposals is a wallet address and MIMO tokens. Connect your wallet to Snapshot’s website and vote on the protocol’s proposals.
Snapshot’s decentralized voting systems alleviate bribery and centralization of DeFi protocols. Consequently, whales that do not have the protocol’s future at heart cannot manipulate or skew governance by voting for their self-interests.
Now Mimo can seek out members who hold their governance token when making governance decisions. Then, DeFi 2.0 protocols focus on capital efficiency. In contrast, DeFi 1.0 lending protocols have a low liquidity utilization ratio. This is because they have more lenders than borrowers. The AMM’s liquidity pool may attract liquidity, but most of this liquidity lies dormant.
The low level of liquidity utilization arises from the AMM’s liquidity pool design, which hinders the concentration of liquidity. DeFi 2.0 enhances capital efficiency by supporting the total use of the DeFi sector’s massive total value locked volume.
It also eliminates cash flow challenges through bonding. Consequently, DeFi 2.0 will have minimal ‘farm and dump’ frequency and support long-term liquidity provision.
Maintaining a healthy cash flow will support sustainability and bring more investors to DeFi. To illustrate this point, PAR holders can generate passive income from their holdings via Balancer (v2) pools.
Unlike other AMM pools, Balancer V2 is gas efficient and offers easy arbitrage trades. In addition, The Mimo Protocol can customize Balancer V2’s AMM logic and not deal with challenges such as balance accounting, smart order routing, and security checks.
Balancer V2’s AMM logic has all these features neatly packed and ready for use in diverse liquidity pool strategies. More so, its pools offer external smart contracts asset management features. Mimo is also migrating to Uniswap v3 for its DeFi 2.0 capital-efficient pools.
Mimo is migrating Uniswap V3 with Arrakis to give the PAR token holders access to more liquidity provision choices. Uniswap V3 pools have risk/reward liquidity provision customization features. Rather than distribute liquidity evenly on Uniswap V1 and V2’s x*y=k price curve, PAR holders can choose the price range in which they wish to allocate their assets.
Therefore, they will earn fees from Uniswap V3 pools when their price of choice hits the pre-selected price range. You can divide up your crypto assets and place them in multiple price ranges within Uniswap V3 pools. As a result, you will enjoy more capital efficiency and better rewards for exposing your assets to impermanent loss.
Then Uniswap V3 custom price range liquidity positions are not fungible but non-fungible ERC721 tokens (NFTs). Additionally, they do not incur a 0.30% flat fee with Uniswap V1 pools. Uniswap has multiple fee tiers that charge 0.05% on PAR and other stablecoin pools.
Non-correlated pools will incur a 0.30% fee, while exotic non-correlated pairs will pay a 1% fee. PAR stablecoin holders will therefore enjoy higher returns on their capital through Uniswap V3. It also has a user-friendly interface to help PAR holders design their investment strategies.
DeFi protocols have become a haven as global economies come to risk due to growing imbalances and perils from international shocks, clashes, and crises. Decentralized applications (dApps) eliminate centralization from financial processes through financial protocols such as decentralized exchanges (DEXs). DeFi 2.0 will enhance liquidity provision and efficiency protocols and bring the DeFi to the masses and its bright future.