There isn’t much interest in knowing the tales of a seasonal movie if you have no idea how the 1st season started out. So, before we go into DeFi 2.0, let go through the tales of DeFi as it were.
Predominantly, Decentralized Finance, DeFi refers to a system by which software written on blockchain makes it possible for buyers, sellers, lenders, and borrowers to interact peer to peer or with a strictly software-based middleman rather than a company or institution facilitating a transaction. However, DeFi had a few obvious limitations listed below:
- Scalability: High gas fees, long waiting time.
- Liquidity: Low liquidity.
Centralization: In spite of the fact that it is “Decentralized Finance”, a majority of existing Dapps are still centralized.
- Capital Efficiency: Technology advancement has increased capital efficiency, but there is still a massive amount of assets not being optimally utilized.
- Security: DeFi contains enormous underlying risks, while security is still mostly unnoticed.
- Oracle Attack: DeFi heavily relies on Oracle. However, there are still projects that do not comprehend their importance and refuse to integrate with a trustworthy Oracle. As a result, a wide range of protocols have got attacked and had to compensate for the losses.
Here Comes DeFi 2.0
DeFi 2.0 is an upgraded version of DeFi attempting to fix the existing weaknesses and leverage the strengths of the current DeFi, which can open even more promising possibilities for users.
Ok, now is the time to review the solutions that have contributed to the growth of DeFi 2.0.
1. Scalability - Layer 1, Layer 2
DeFi users, especially newcomers, interacting with the Ethereum network has been a major obstacle. Expansive gas fees and long waiting time have prevented most users from experiencing DeFi.
2. Liquidity - Yields
To attract more users and capital into the DeFi market, the simplest approach is to help them earn yields. From projects with 10x, 100x ROI, to farming pools with thousands of APY, or airdrops worth thousands of dollars, all contribute to onboarding new users and enriching the liquidity of the market.
3. Centralization - DAO
A solution to this situation is that DeFi projects are having the tendency to put the Decentralized aspect on top priority. DAO (Decentralized Autonomous Organization) - where everyone has the right to vote on the project’s development, has grown dramatically during recent times.
4. Capital Efficiency - The Next Interest
DeFi is growing extremely fast. At the time of writing, the TVL (Total Value Locked) in DeFi has increased to $217B and is continuing to rise.
Here Are Some Of My Predictions About DeFi 2.0:
Many innovations will be created when they are combined together, similar to the current DeFi.
Capital Efficiency is only a branch of DeFi 2.0, so there will be other market waves in other branches. Those waves are not necessarily limited to 1 (the wave of Layer-2 can come after the wave of Layer-1) as well as not necessarily happen at the same time.
The projects working on Capital Efficiency will create a new standard in the market, and TVL usage will become as important as TVL.
Overall, there have not been many effective models, which is our opportunity. The success of projects like OHM, SPELL will be considered the catalyst to boost the next market wave and put users’ Capital Efficiency to the next level.
There is a high chance that top projects will stand their ground as they can optimize liquidity sources and prevent the circumstance of users withdrawing assets.
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