What is DeFi 2.0? What Does it Resolve?
Ever since DeFi arrived in 2020, finance service providers and banks have been flocking to this space to attract millions of users. In 2022, it’s time to move on from the hangover and address the issues with DeFi 2.0.
With a swathe of brilliant platforms like Uniswap, Sushiswap, Anchorswap, and others, the industry’s adoption of DeFi development services is a testimony of new world order. This means all financial services such as lending & borrowing, staking, deposits, insurance, and customized investments will have a decentralized version.
As of 2022, we are excited about DeFi 2.0 maturing into a full-fledged and competitive finance model.
What is DeFi 2.0 Development?
To put it simply, filling the gaps in DeFi results in a better version called DeFi 2.0. The original DeFi wave came with several problems. DeFi 2.0 is just a movement that is focusing on upgrading and fixing these problems. It will also need to adhere to new compliance regulations and protocols set by governments like AML and KYC.
Initially, DeFi came out as a revolutionary solution for giving out financial services to people using a crypto wallet. But in time industry experts realized that there were still several shortcomings. Crypto DeFi witnessed the same process with the second-gen blockchains like Ethereum started improving on Bitcoin.
For example, LPs ( liquidity pools) have gained a lot of fame in the DeFi atmosphere as liquidity providers can easily earn a fee by staking their tokens. But, in the event of a price change, the liquidity providers directly risk losing money. DeFi protocols provide insurance in such an event by charging a minimal fee. Because of this fix in DeFi 2.0, people now have a higher reason to invest in liquidity pools and it simultaneously benefits everyone -the users, stakeholders, and the DeFi space in its entirety.
What are the drawbacks to DeFi?
Let’s look at the difficulties DeFi 2.0 is seeking to fix before we get into the use cases. Many of the difficulties raised here are similar to those that plague blockchain technology and cryptocurrencies in general:
1. Scalability: DeFi protocols on blockchains with a lot of traffic and large gas prices are notorious for being slow and expensive. Simple chores can become inefficient if they take too long.
2. Oracles and third-party data: Financial products that rely on external details require oracles of better grade (third-party sources of data).
3. Decentralization: In DeFi, greater decentralization should be a goal. Many initiatives, on the other hand, still lack DAO principles.
4. Security: Most users are unaware of or unable to manage the risks associated with DeFi. They put millions of dollars on the line.
Why does DeFi 2.0 matter?
DeFi can sometimes be really overwhelming and challenging for experienced crypto holders and users. It can definitely sometimes be quite tough to understand. Although, it aims to bridge this gap between users and the working knowledge. This directly gives way to more opportunities for crypto holders. A traditional bank may refuse your loan but a DeFi will not. These incentives have allowed DeFi to democratize financing without compromising on security and risks. DeFi 2.0 also aims to improve user experience and provide better incentives as well. This means more winning opportunities for everyone.
DeFi 2.0 use cases
There are several projects that are successfully implementing DeFi 2.0 services across different networks like Solana, Ethereum, Binance Smart Chain, and other smart contract blockchains. Here are the most popular use cases below:
Unlocking the value of staked funds
When you stake a pair of tokens in a crypto liquidity pool, you receive LP tokens in return. With DeFi 1.0 you could stake these crypto tokens with a yield farm that would allow you to compound your profits. This is exactly how far the chain could go to get the maximum value. As a result, millions of dollars worth is still locked up in vaults helping with adding liquidity but this only illustrates the potential for improving capital efficiency.
DeFi 2.0 on the other hand uses these very yield farm tokens as collateral which can be either a crypto loan from a lender or a protocol to mind tokens similar to MakerDAO ( DAI). Although the exact change may differ depending on the use case, the idea is to have liquidity pool tokens that keep unlocking new opportunities while generating APY at the same time.
Smart contract insurance
It can be hard to give due diligence to blockchain smart contracts unless you have an experienced developer on standby. You cannot completely evaluate a project without this knowledge. This is why investing in DeFi projects can be quite risky. Contrary to this, DeFi 2.0 allows users to get insurance on chosen smart contracts.
A yield optimizer can be used to stake LP tokens in its smart contract. This means that in case the contract is compromised, you could end up losing your staking deposit. For a special smart contract, an insurance project can come to your rescue as it offers you some guarantee on your yield farm deposit for a fee. If the LP contract is compromised you won’t get a payout if you aren’t insured. But in case you are, there is a very likely chance that you will receive a payout.
Impermanent loss insurance
A user faces impermanent loss when there’s a change in the price ratio of the two tokens locked in the liquidity pool. This happens during liquidity mining. With DeFi 2.0, financial services providers have an opportunity to mitigate the risks and deliver better services. For example,
Consider adding a single token to a single-sided LP where a pair isn’t required. As the other half of the pair, the protocol adds their native token. The protocol, as well as you, will collect fees earned from swaps in the corresponding pair.
The protocol uses its fees to build up an insurance fund to protect your deposit against the consequences of temporary loss over time. If the fees aren’t enough to cover the losses, the protocol can create new tokens to compensate. Tokens that are in excess might be saved for later use or destroyed to reduce supply.
Taking out a loan usually entails the danger of liquidation as well as interest payments. This doesn’t have to be the case with DeFi 2.0. Take, for example, a $100 loan from a cryptocurrency lender. The lender lends you $100 in cryptocurrency in exchange for $50 in collateral. When you make a deposit, the lender invests it to pay off your loan with interest.
Your deposit is reimbursed once the lender has made $100 with your cryptocurrency plus a premium. There’s also no danger of liquidation here. If the collateral token depreciates in value, the loan will take longer to repay.
DeFi 2.0 Development with Antier Solutions
This is just the beginning. DeFi 2.0 has a promising future and will further strengthen the foundation of crypto finance. While the subject may be a bit complicated to many users, it is time to embrace a growth mindset and build more. At Antier, we have already implemented successful platforms that adhere to the 2.0 mission. Interested? Reach us to know more.