DeFi 2.0: An Introduction To Second Generation DeFi Protocols
Posted By : Priyansha Singh | 28-Jul-2022
Everything You Need To Know About DeFi 2.0
In comparison to the walled gardens of traditional finance, the existing DeFi solutions furnish a more ubiquitous range of benefits as well as financial tools for customers. However, with that said, the very nascency of its ecosystem has subsequently led to some considerable shortfalls such as impermanent loss and drawbacks with liquidity mining that makes it indispensable for many users to compromise on risks.
This is where the role of DeFi 2.0 comes into play.
DeFi 2.0 serves as a movement of projects improving on the problems associated with DeFi 1.0 that brought decentralized finance to the masses, however, struggled with security, scalability, centralization, accessibility to information, and liquidity. It aims to combat these issues and make the overall ecosystem and customer experience more protected and user-friendly.
In this blog, we will elucidate the working mechanism of DeFi 2.0 and explain how it will matter for users and businesses alike in the years to come. So, let’s get started.
Understanding DeFi 2.0
Unlike the earlier generations of DeFi applications which were essentially geared towards users, the latest innovations have a substantial B2B focus. DeFi 2.0 protocols emphasize and capitalize on the fact that the first generation of DeFi solutions successfully created – garnering a massive user base and developing new ways of architecting the next-gen DeFi apps. And the goal of these new generation protocols is to protect and empower the sector’s long-term viability.
Moreover, the sector’s heavy reliance on third-party providers as well as token incentives to secure liquidity and DeFi’s invisible correlation with traditional finance as well as the global economy have become the fundamental issues now hindering the sector from becoming sustainable. So, the entire intent of DeFi 2.0 and beyond is to address and mitigate these issues.
DeFi 2.0 Use Cases | Overcoming Challenges Pertaining To DeFi 1.0
DeFi 2.0 use cases have already started to find dominance in the decentralized space as well as related FinTech industries. There are already new projects offering intuitive DeFi services across a plethora of networks. It includes popular blockchain networks such as Ethereum, Solana, Cosmos, IPFS, Theta, and other smart contract-capable blockchains. DeFi 2.0 protocols are subsequently resolving the following DeFi 1.0 challenges with the following use cases:
Collateral is essentially an item of worth that is used for obtaining any loan. For example, collateral for getting a home loan could possibly be the home you intend to purchase. In this context, almost all DeFi lending transactions necessitate collateral equalling 100 percent of the actual loan value. Also, this restriction does not merely limit who can apply for any DeFi loan but also keeps a close tab on who is willing to accept one.
- Requirement of a private key
Private keys are unique codes that digital wallet owners require to prove their wallet ownership as well as access their funds. In order to store your digital assets, you would primarily need a wallet that can altogether be made secure with a private key. However, the problem associated with using wallets in DeFi is that if the wallet owner loses his key, the funds become inaccessible. Furthermore, if a key is lost once, it can not be recovered. DeFi 2.0 protocols aim to solve this problem in related projects.
In DeFi, liquidity pools have proven to be exceedingly beneficial and profitable. They furnish liquidity providers with the opportunity to earn incentives in return for staking pairs of tokens. However, if there are any alterations in the price ratio of tokens, liquidity providers even have a chance of losing their money.
In DeFi 2.0, there is a provision for availing insurance against any risk, against which only a small fee is charged. This does not only just help in encouraging investments in liquidity pools but is also beneficial for users, stakeholders, as well as the DeFi platform used.
- Ethereum’s dominance
Most DeFi solutions were built and based on Ethereum, after all, it was the first blockchain protocol to introduce transformative DeFi services. However, with ever-increasing figures of Ethereum users, the platform is facing significant transaction delays and as a result, transaction fees are also rising continually. In the way of DeFi’s mass adoption, problems and inefficiencies like these started to create potential obstacles.
Now with DeFi 2.0 – an evolved version of DeFi 1.0 in place, other popular, robust, and scalable blockchains such as Solana, Polkadot, Cardano, etc have also started to step inside the DeFi landscape, propelling DeFi 2.0 services to enter the mainstream market.
- Smart contracts insurance
Unless you are an experienced developer, doing enhanced due diligence on smart contracts can often be difficult. Without this knowledge, it sometimes leads to potential risks when investing in DeFi projects. However, with DeFi 2.0, it is possible to acquire DeFi insurance on particular smart contracts.
Please note that if the liquidity pool contract is compromised, in such cases, you will not get a payout typically. But in case the yield farm contract is compromised and yet covered in insurance, you will likely get the payout.
- Unlocking the value of staked funds
If a token pair is staked in a liquidity pool, LP (Liquidity Provider) tokens are received in return. With DeFi 1.0, LP tokens could be staked with a yield farm in order to compound the profits. Before DeFi 2.0, this was processed as far as the chain went for extracting the value. All over the world, millions of dollars are locked in vaults offering liquidity, however, there is a possibility to further amplify the capital efficiency.
DeFi 2.0 has taken this step further as it leverages these yield farm LP tokens as collateral. This could either be a loan from a lending protocol or to mint tokens in processes just like MakerDAO. The related mechanism alters by project but the entire notion is that your LP tokens should have their total value unlocked for new possibilities whilst still generating APY (Annual Percentage Yield).
DeFi Platform Development With Oodles Technologies
At Oodles Technologies, we offer comprehensive DeFi app development solutions to businesses across the globe. As an established blockchain development company, we enable and empower enterprises to overcome the challenges associated with traditional finance with scalable, secure, and robust decentralized app development services. With a team of experienced, highly skilled, and proficient developers, we focus on providing all-inclusive assistance to businesses whilst catering to diverse industry needs and standards. If you are looking for blockchain-based DeFi 2.0 solutions, feel free to get in touch with our experts. We will get back to you within 24 hours.