Essentially, DeFi 2.0 represents the next phase of one of the most influential movements of any age – decentralised finance. Its main focus is dealing with liquidity constraints that plagued DeFi 1.0. Protocols previously relied on external users to provide liquidity through a practice called Yield Farming, which is a process where users earn rewards for providing liquidity to DeFi protocols.
In DeFi 2.0, protocols such as OlympusDAO are constructing their own liquidity directly, building a decentralised reserve currency in the process. This means that users are always able to trade or lend assets without a sudden drop in liquidity or huge price movements.
How Is DeFi 2.0 Beneficial?
There is much more of a business-to-business (B2B) feel to DeFi 2.0, as evidenced by the work in progress by OlympusDAO.
One of the most obvious benefits to DeFi 2.0 is the general interaction with the Ethereum network – under previous conditions, it was slow and cumbersome because of high gas prices and extended wait times.
Here are some examples that differentiate the two:
- DeFi 1.0 typically operates on Layer 1 blockchains like Ethereum, which are often clogged with transactions, especially during times of high demand, leading to delays and higher gas fees.
- As we mention above, DeFi 2.0 is all about optimising liquidity to improve speed and efficiency.
- It adopts Layer 2 solutions, processing payments off-chain before settling them on-chain, turbo-charging transaction speed, lowering transaction costs, increasing scalability, and reducing wait times.
- DeFi 2.0 embraces faster block and transaction processing finality through new consensus mechanisms and hybrid models.
- It embraces cross-chain interoperability. Several projects are able to interact simultaneously, which reduces congestion in turn. In DeFI 1.0, most users were restricted to a single blockchain.
How Does DeFi 3.0 Compare?
There is no rest for the DeFi!
DeFi 3.0 is already out there, building on the innovations of DeFi 2.0. It encompasses the legitmisation and professionalisation of Yield Farming, which increases accessibility and profitability.
It is working to improve long-term protocol sustainability by using native tokens to reduce reliance on external incentives – see OlympusDAO’s OHM model, for example.
There are more effective governance models, a stronger emphasis on cross-chain interoperability, and an improvement on capital efficiency through automated collateralized debt positions and tokenized real-world assets.
FAQs
1. What is DeFi 2.0?
DeFi 2.0 refers to the next evolution of decentralized finance, focusing on scalability, security, capital efficiency, and improved user experiences compared to DeFi 1.0.
2. How is DeFi 2.0 different from DeFi 1.0?
DeFi 2.0 aims to solve issues like liquidity mining inefficiencies, governance centralization, and scalability, with more sustainable and innovative protocols and features.
3. What are some key features of DeFi 2.0?
Key features include improved governance models, enhanced scalability, greater capital efficiency, better user incentives, and advanced liquidity mechanisms like protocol-owned liquidity (POL).
4. What is Protocol-Owned Liquidity (POL)?
POL is a model where DeFi protocols own and control their liquidity instead of relying on external liquidity providers, ensuring more stable and sustainable liquidity.
5. Why is DeFi 2.0 important?
DeFi 2.0 improves the sustainability, scalability, and security of decentralized financial systems, addressing shortcomings of DeFi 1.0 to drive long-term growth and adoption.
