How to Invest in DeFi 2.0

By 

Marcel Deer

 on April 25, 2022. 
Reviewed by 

Joel Taylor

Glowing "DeFi 2.0" lights on circuit board

DeFi is designed to support technology that enables lending, borrowing, staking, hedging, bonding, and other financial services without intermediaries.

While this system is groundbreaking, a few weak links remain and will need to be addressed if DeFi is to continue expanding. This is where DeFi 2.0 comes in.

What Is DeFi 2.0?

DeFi 2.0 is a movement grounded in improving, upgrading, and securing the old ways and problems of DeFi 1.0. The decentralized finance ecosystem has struggled with numerous issues, including security, scalability, liquidity, centralization, and accessibility to important information. If DeFi 2.0 proves successful, it could reduce risk and complications while encouraging more users to have faith in the system.

DeFi 1.0 vs. DeFi 2.0

Liquidity pools have proved to be successful in decentralized finance time and time again, allowing liquidity providers to earn for staking pairs of tokens. Although, if the price ratio of the token was to change due to volatility, the risk of impermanent loss presents itself.

DeFi 2.0 may be able to offer insurance against IL for a minimal fee. Insurance creates more incentive for those considering investing in liquidity pools and benefits stakers, users, and the DeFi space overall.

Another risk of DeFi 1.0 is that no single individual is held accountable for security breaches. So, when funds have been robbed or smart contracts have a severe flaw, there is little you can do about it. Fortunately, DeFi 2.0 plans to mitigate this issue by providing smart contract insurance.

Scalability has been a problem from the start, as protocols on blockchains with excessive traffic and gas fees usually provide expensive yet slow services. DeFi 2.0 may be able to enhance scalability by increasing transaction speeds.

Aside from improved scalability and insurance, DeFi 2.0 is also working toward refining other aspects of DeFi 1.0. Such as self-repaying loans that use collateral from yield farming to pay them off.

These improvements (plus many more) are aimed to create a more user-friendly experience, reduce risks, boost incentives, and revamp the DeFi space in general.

Is DeFi 2.0 Better?

Even the most experienced crypto holders may feel unclear about DeFi, which is why this DeFi 2.0 movement is so important. Decentralized finance doesn’t have to be so challenging and daunting, and DeFi 2.0 is making great strides to make it happen. Therefore, if DeFi 2.0 is successful at upholding its promises of improving the DeFi community, the answer is yes.

How Can You Invest in DeFi 2.0?

There are various ways you can invest in DeFi 2.0, but it’s easier to comprehend when dividing them into two categories.

Buying Tokens

The simplest way of investing in DeFi 2.0 would be by buying tokens. Find the right project and obtain its native token. As the project grows, the value of your investment will follow. If you don’t know where to start, here’s a list of the current most popular DeFi projects:

  • OlympusDAO ($OHM) (one of the leaders of DeFi 2.0)
  • Curve Finance (CRV) & Convex (CVX)
  • Synapse ($SYN)
  • Wonderland ($TIME)
  • Avalanche ($AVAX)
  • Solana ($SOL)
  • Yearn Finance ($YFI)
  • Rarible ($RARI)
  • Abracadabra ($MIM)
  • Alchemix ($ALCX)
  • MakerDAO ($MKR, $DAI)
  • Algorand ($ALGO)

Using DeFi 2.0 Platforms

While DeFi 2.0 may make everything seem a bit more complex, it aims to simplify the process. It allows users to do more with their money simply and straightforwardly. If you want to generate returns, consider protocols that you trust and features that are important to you. Platforms are usually referred to as decentralized applications or dApps.

Here are a few of the features:

  • Yield Farming
  • Lending
  • Liquidity Mining
  • Staking
  • Trading (DEX)
  • DAO Participation
  • Gaming

Risks Associated With DeFi 2.0

Although DeFi 2.0 is a massive step forward, some issues are still looming. Such as:

  • Compromised Smart Contracts Audits don’t always guarantee the safety or security of a smart contract. Do as much research beforehand to ensure the protocol you are investing in is secure.
  • Changing Regulations Rules and services must be adjusted to accommodate new mandates and industry standards. While this offers more stability, it also alters the level of support and compromises the amount of decentralization involved in the process.
  • Impermanent Loss While DeFi 2.0 can offer an insurance safety net for investors, market volatility will always exist.
  • User Experience Suppose the domain of a DeFi project goes down. Users cannot withdraw their assets unless they have knowledge and understanding of interacting directly with the smart contract. Locate the smart contract on a blockchain explorer to prevent this issue.

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