What Is DeFi 2.0?
DeFi 2.0 is the second generation of DeFi applications built on earlier DeFi inventions such as yield farming, borrowing, and governance. DeFi was revolutionary in introducing peer-to-peer (P2P) financial services to everybody with an internet connection and a digital wallet, but it still has its flaws. The cryptocurrency space has already experienced this process, with second-generation blockchains like Ethereum and Cardano improving on the Bitcoin network.
Consider this example. Liquidity pools (LPs) have shown their success in DeFi by enabling liquidity providers to receive fees for staking token pairs. Nevertheless, when the price ratio of the staked tokens changes, the liquidity providers may suffer impermanent losses. A DeFi 2.0 protocol can offer insurance against this loss for a small fee. In doing so, the protocol offers more incentive to invest in LPs.
Summary of Important Points
- DeFi 2.0 is the second generation of DeFi applications built on earlier DeFi inventions.
- It aims to solve the hitches of DeFi 1.0 by providing better incentives and improving user experience.
- DeFi 2.0 is important because it democratizes finance without trading-off risk.
What Makes DeFi 2.0 a Better Version?
To understand what makes DeFi 2.0 a better version, let’s first discuss the drawbacks of DeFi 1.0.
The first drawback of DeFi 1.0 is usability. Since UX and UI complexity makes it challenging for new users to use DeFi products, many active DeFi users are experienced crypto investors and traders. DeFi products and services must be easy to use for both experienced and amateur users to achieve total financial inclusion.
Secondly, scalability issues complicate DeFi 1.0 further. High transactional charges and slow processing speeds hinder the mass adoption of DeFi protocols. Almost all DeFi 1.0 applications were built on the Ethereum blockchain. Due to the high number of users, Ethereum has been experiencing scalability issues for a long time.
That being said, there are two primary reasons that DeFi 2.0 is superior:
1. DeFi 2.0 Is Easy to Use
The cryptocurrency industry looked for ways of making itself simple for average users by fixing its plot, and it became a household name. DeFi 2.0 is trailing that path to achieve financial inclusion by educating its users and integrating with standard financial platforms. DeFi 2.0 protocols have simple front-end features and contain guides for new users. Besides, most DeFi 2.0 projects have layer-2 and layer-3 models that further simplify them.
2. DeFi 2.0 Mitigates Risk
DeFi 2.0 prevents impermanent loss by introducing insurance covers that also apply to smart contracts. Besides, there are open-source firms conducting security audits to ensure smart contracts are free from bugs and other exploitable weak points. The issue of low liquidity is solved using cross-chain bridges connecting networks. This gives DeFi investors access to liquidity pools outside their native blockchains.
DeFi 2.0 also prevents financial risks often associated with DeFi 1.0, turning it into a financial model never seen before. For instance, earlier DeFi lending platforms resemble their traditional counterparts, except for a decentralized model. Individuals borrow assets from lenders with interest after placing a high amount of collateral.
In DeFi 2.0, there are self-repaying loans using collateral for yield farming to settle loan balances. When the earnings fully repay the balance from yield framing, the borrower can access their collateral.
Are There Projects Already Using DeFi 2.0 Services?
Yes, several projects are using DeFi 2.0 services currently. They include:
- MakerDAO The MakerDAO token holders are responsible for making rules governing $DAI, MakerDAO’s native stablecoin. Rarible is a DAO governance and yield generation project that relies on NFT sales.
- Yearn Finance Users can yield and lend funds on the Ethereum network. However, it is only available to non-US citizens.
How Can You Invest in DeFi 2.0?
Though there are numerous ways of investing in DeFi 2.0, using DeFi 2.0 platforms and tokens are the most common.
- Buying Tokens If you want to invest in DeFi 2.0, you can buy and hold a native token of a project with good potential. As it grows, the value of your investment will also grow.
- Using DeFi 2.0 Platforms Secondly, you can invest in DeFi 2.0 using protocols that provide the features you want. Since DeFi 2.0 improves usability and mitigates the risks of DeFi 1.0, you can’t miss out on a project that meets your needs.