Introducing DeFi 2.0: The Second Generation of DeFi

Filip Dimkovski
By Filip Dimkovski
Joel Taylor
Edited by Joel Taylor

Published April 30, 2022.

Silver Ethereum logo on a black background

DeFi, or decentralized finance, is a new approach to finance, effectively changing the way we’ve been borrowing, lending, and transferring money. Thanks to the power of innovation & cryptocurrency, working with assets is now easier than ever, as there is no intermediary to oversee the transactions. The beginning of DeFi raised many questions, but now, it has grabbed the attention of millions throughout the world, as it's potential is impossible to ignore.

Getting into further detail, decentralized finance works on blockchain technology, the same technology that’s behind cryptos. Since they are decentralized in nature, there is no need for any governing body or a middleman to oversee the process and it can be used by everyone. The best part is that DeFi is just as safe as traditional finance. If you want to learn more about DeFi and how it works, continue reading.

The Limitations of DeFi 1.0

DeFi 1.0 is the “version” of DeFi we have today. Even though it’s a revolutionary technology, it does have weaknesses, limitations, and flaws. The following are the limitations of today’s DeFi world, and they're important when it comes to understanding DeFi:

Weak Usability

One of the biggest problems of DeFi is that it’s not beginner-friendly. Unless you’re experienced with crypto and know the ins and outs of public & private wallet keys and transactions, DeFi might be a problem. This is primarily because most DeFi platforms today should improve their user interfaces.

Relatively Small Liquidity

Unlike centralized exchanges, most DEXs (decentralized exchanges working on DeFi’s principles) don’t have enough liquidity. This is partly because the option of using fiat cash is completely cancelled out. At a CEX like Binance, you can exchange your fiat cash for crypto for a small fee. At a DEX, you can only deposit and withdraw cryptos.

The Fees Could Be Lower

As of May 2022, the vast majority of DeFi platforms (DEXs) are on the ETH blockchain. Although ETH has announced its transfer from proof-of-work to proof-of-stake, its gas fees will be high until it transfers fully. Because of these gas fees, transferring and working with coins is expensive.

The Rise of DeFi 2.0

The DeFi 2.0 movement’s goal is to not only retain, but also improve all the key features of DeFi is built on - lending, yield farming, borrowing, and transferring crypto. The goal is to add new features as well, like loss insurance for liquidity providers, as well as making smart contracts even “smarter”.

The movement has plenty of goals to accomplish, but its primary one is improving the foundation that DeFi 1.0 has set, and only then adding new features. The following are the key features that DeFi 2.0 will improve on:

  • Improving scalability
  • Providing a better user experience for beginners
  • Making self-repaying loans.
  • Reducing fees & making it cheaper to work with crypto.
  • Providing insurance for both lenders and borrowers.

Now that you know what DeFi aims to accomplish, check out the list below for the biggest upcoming DeFi 2.0 projects:

  • Olympus DAO (DAO)
  • Convex Finance (CVX)
  • (yvWETH)

Risks of DeFi 2.0 and How to Prevent Them

Although DeFi 2.0 aims to address the vast majority of issues DeFi 1.0 has, it’s still a new technology, meaning it has risks. Some of the most common risks of DeFi 2.0 are:

Changing Regulations

More and more countries have started accepting crypto as a part of everyday finance, which is why regulation will probably come into place. This has its benefits too, offering better stability, smaller price movements of DeFi coins, as well as improved security, yet it goes against the basic principles of DeFi - decentralization and anonymity, which is the biggest difference between DeFi and TradFi.

Comprised Smart Contracts

Someone who is new to the crypto world can easily fall prey to faulty smart contracts. Still, this is a very fixable issue and one that DeFi 2.0 aims to address - improving the user experience for beginners and making it easy to work with crypto.

Risks of Losing Your Money

DeFi aims to construct internal insurance structures on the blockchain, making it safe for both borrowers and lenders. However, this doesn’t mean that your assets are 100% safe. Hackers & scammers often take joy in finding the cracks in new technologies, so we would highly recommend being careful with your wallet, addresses, and your crypto.