What Are the Risks of Defi 2.0 and How Can You Avoid Them?

By 

Marcel Deer

 on April 30, 2022. 
Reviewed by 

Joel Taylor

DeFi 2.0 sign with a candlestick graph above and below the sign

When understanding decentralized finance, DeFi 2.0 is essentially a new and improved DeFi 1.0. Think of it as a makeover. This decentralized finance movement tackles the most prominent issues within the ecosystem and attempts to improve accessibility, security, liquidity, and user experience.

DeFi 1.0 vs. DeFi 2.0

DeFi 1.0 has quite a few limitations, and if the DeFi space wants to continue growing, those limitations need to be addressed. Scalability issues, compromised security, barriers to entry, centralized power structures, and lack of ownership of funds are why change and improvement to the system are necessary.

DeFi 2.0 aims to enhance 1.0, and the goal is to fix the problems that currently exist in its operations. Imagine a DeFi world where you could experience quicker transaction speeds, obtain insurance for liquidity pool providers and smart contracts, and access self-repaying loans. That’s the vision of 2.0. Essentially, DeFi 2.0 aims to expand upon and enhance the main features of DeFi.

Risks of DeFi 2.0

These upgrades to the DeFi space undoubtedly sound attractive. They aim to create a more user-friendly experience, reduce overall risk, and boost incentives. However, DeFi 2.0 probably isn't perfect, and it will carry its own set of risks. These risks include:

  • Rough User Experience For example, if the domain of a DeFi project goes down, users wouldn’t be able to withdraw their assets unless they know how to interact with the smart contract directly.
  • Smart Contract Security While audits may occur, they do not always guarantee the safety of a smart contract. Ensure the protocol you are investing in is trusted and secure.
  • Shifting Regulations Updated industry standards and mandates require rules and services to be adjusted.
  • Impermanent Loss (IL) While DeFi 2.0 may introduce insurance to keep investors protected to a degree, market volatility may still cause unexpected and undesirable issues.

How to Prevent the Risks of DeFi 2.0

Perhaps one of the most important things you can do is be thorough. Do your research and make sure whatever projects you consider investing in have a good track record. If they don’t, you are given the opportunity to assume the risk or find something more secure to invest in.

Before finalizing anything, look up reviews and recommendations about particular DeFi services, products, and projects. If you go into something blindly or impulsively, you only have yourself to blame if something goes wrong.

It also doesn’t hurt to locate your smart contract on a blockchain explorer. This will allow you to interact with the smart contract directly in cases where your project domain goes down unexpectedly.

Be smart and keep your digital assets private. These assets are confidential, contain personal data, and must be handled carefully. Utilize multi-factor authentication, as this formidable tool will ensure your information is kept safe. It’s an extra layer of protection from hackers.

Updates are highly recommended, as enterprises introduce patches and updates to improve security. Keeping on top of software updates may also minimize risk.

Is It Safe to Invest in DeFi 2.0?

If you were already willing to invest in DeFi 1.0, then investing in DeFi 2.0 shouldn’t be a problem for you. However, if you were previously on the fence about investing in the DeFi space due to its hang-ups, then DeFi 2.0 may be able to make the ecosystem a bit more user-friendly and secure.

However, it should be noted that many of these risks are to be expected. The DeFi space, in general, is still relatively new. As time progresses, we will uncover and learn more about what’s working or what needs to be changed.

As the great inventor and entrepreneur Steve Jobs once said, “Innovation is to see change as an opportunity, not as a threat.” DeFi 2.0 is certainly changing the game, and investing in DeFi 2.0 is an excellent opportunity for anyone who wants to generate passive income and tap into more financial freedom.

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