With every iteration, technology keeps getting more efficient. Whether it’s the latest smartphone or the Ethereum Merge in crypto, technology strives to get better with each update. DeFi, or Decentralized Finance, is a blockchain-backed innovation and is no exception to improvement. The world is ready for DeFi 2.0 already, thanks to the innovations that DeFi protocols are bringing.
Let’s dive into what DeFi 2.0 is and what it means for the future generation.
How DeFi Started
But first, how did DeFi come about? Exchanges like Aave, Uniswap, and MakerDAO were the early adopters of DeFi that brought a lot of revolutions in the industry. Bancor and Uniswap were the early decentralized automated market makers (AMMs) that allowed people to swap their tokens without having to involve a third party.
MakerDAO provided a stablecoin for DeFi members to use in transactions without having to give up custody. But even with the innovations, DeFi has some limitations.
The first and biggest problem with DeFi 1.0 is its user experience. It can be a steep learning curve for beginners. Moreover, scalability has always been a major limiting factor of DeFi 1.0’s growth. Coupled with high transaction fees and longer transaction times, it led to a poor user experience.
This is where DeFi 2.0 comes in.
What is DeFi 2.0?
DeFi 2.0 is the second version of DeFi which aims to improve all the limitations that came with its predecessor. Risks like volatility, security, centralization, and lack of accountability are eliminated from DeFi 2.0 to protect people who are willing to transition toward Decentralized Finance.
It also adds insurance to protect Liquidity Providers and brings a new level of accountability to the blockchain world. This will secure the network and stabilize and eliminate the risk of fluctuation in crypto prices.
The main idea is to limit the errors and risks that are related to smart contracts. DeFi 2.0 also promotes open-source communities to secure the overall network and make sure that the smart contracts are risk-free.
It will also solve the Blockchain Trilemma—the problem of balancing security, decentralization, and mass adoption. Etheruem’s high gas fees and slow transaction problems are one of the biggest hurdles to scalability, but DeFi 2.0 aims to integrate new infrastructure that will solve scaling problems.
DeFi faces liquidity issues due to low utilization rates. And even though the AMMs, or Automated Market Makers, provide access to working capital, that model is not perfect. On the other hand, DeFi 2 will enable your funds to be fully used and not compromised in any way.
Hence, a lot of cash flow problems will be solved for the users, and DeFi 2.0 entrepreneurs will be able to play around with their money and be able to sustain their projects.
Goals of DeFi 2.0 - The Future of Decentralized Finance
Decentralize Finance 2.0 aims to solve the problems that came with the first version. Let’s dive into the new innovations DeFi 2.0 brings.
Bringing Decentralization
DeFi 2.0’s main focus is prioritizing decentralization. The evolution of DAOs provides a lot of benefits for DeFi models and aims to eliminate centralization from the world of finance. With new solutions and protocols, it is possible to have a decentralized economy. With brand new tools, methods, and software, DeFi 2.0 will help people achieve their financial freedom in a truly decentralized way.
Scaling
DeFi runs primarily on the Ethereum chain, and scalability has been an issue because of the ever-growing number of Ethereum users. This causes delays in transactions. High transaction fees are also another obstacle to scaling. The next-gen DeFi projects are moving to other blockchains such as Solana and Cardano, which will help with mass adoption.
Liquidity Mining
DeFi 2.0 will also focus a lot on liquidity mining to help new projects raise funds securely. Current protocols are vulnerable to "mercenary farmers" that cause an endless cycle of dumping and selling pressure. New advancements aim to offer stability through innovative approaches such as time-weighted voting systems, bonds, and protocol-controlled liquidity.
Popular DeFi 2.0 Projects
Here are some of the most recent and popular DeFi 2.0 projects bringing innovation to the world of decentralization:
- Convex Finance: Aims to improve investors' experience along with liquidity providers to earn high rewards.
- Synapse: Synapse is a decentralized exchange that provides liquidity to networks and investors that are looking to add more liquidity.
- Algorand: The POS blockchain protocol that aims to solve all problems related to decentralization, scalability, and speed.
- Rari Capital: Aims to provide DeFi to regular people and new investors.
Final Take
DeFi 2.0 will require the support of a huge number of developers and users to achieve mass adoption. The concept however, is fast gaining popularity. The transition may take years to complete but it’s going to be worth it!
