TLDR below. This is not financial advice.
Recently the keyword “DeFi 2.0” has emerged as a phenomenon along with the rapid growth of several tokens such as Olympus DAO, Klim DAO, Abracadabra, Popsicle Finance, etc. So what is DeFi 2.0? How is it different? Why say DeFi 2.0 has the ability to change the entire DeFi today? And what will we need to prepare for the coming giant wave?
DeFi 1.0 is the straight-forward simple things like “I give you $150 worth of ETH. You give me $100 worth of crypto USD.
DeFi 2.0 is more risk understanding. Instead of $150 worth of ETH, maybe just $110 worth of ETH or $150 alt-TOKEN to get the same $100 crypto USD.
How is it different from “DeFi 1.0”? Well…. it’s not so different. Similar mechanisms but with higher risk tolerance.
DeFi is a decentralised finance (or open finance), by leveraging the power of blockchain, DeFi has made it possible for anyone to access and use financial applications anywhere, anytime. not subject to the control of individuals or organisations with centralised power.
However, DeFi currently has many limitations and as the name suggests, DeFi 2.0 is an upgraded version of DeFi, helping to overcome the weaknesses and optimise the advantages of current DeFi. Thereby opening up great potential opportunities for the parties involved.
Current DeFi Limitation
To understand the problems that DeFi 2.0 solves, we must first know what the problems of DeFi are, the prominent limitations of DeFi include:
Scalability: Expensive gas fees, long waiting times greatly affect the user experience.
Liquidity: Liquidity is considered the blood of any trading market, and with DeFi, liquidity is generally low.
Centralisation: DeFi will not make sense without the word “De”, although DeFi aims at decentralisation, but with many projects at the present time, the power still belongs to a small part (still remains).
Security: DeFi is a market with a lot of risks, security in DeFi has not really received much attention compared to their importance.
Oracle Attack: DeFi depends a lot on Oracle, but many projects still do not understand and underestimate the choice of Oracle to integrate. As a result, the project suffered a lot from related attacks.
Capital Efficiency: DeFi with many breakthroughs from technology has helped users use capital more effectively, but at the moment, there is a large amount of assets that are still underutilised. opens up many new development potentials for DeFi.
Actually DeFi 2.0 has started since users and projects realised the limitations of DeFi and developed related solutions. Each solution of outstanding constraints creates strong bullish waves because that is what the market needs.
What does this mean for traders and fundamental investors? Time to upgrade the usual metrics you have been using. It’s different now.
Let’s review our solutions that greatly contributed to the development of DeFi 2.0.
To solve the liquidity problem, or in other words, attract users and new money to DeFi, the simplest method is to help them get a profit (yield). The x10 x100 projects, farms with APY up to tens of thousands, huge airdrops worth thousands to tens of thousands of dollars, all contribute to onboarding new users and creating liquidity for the market.
Ability Of Extension
Surely for DeFi users, especially those who are new to the market, interacting with the Ethereum network is a problem. Expensive transaction fees and long wait times have discouraged many people from wanting to experience DeFi.
Unfortunately, DeFi has many opportunities and has great attraction, so how can users both experience DeFi without suffering from the limitations related to Ethereum’s scalability?
This is when other layers 1 take the throne.
It is no coincidence that money flows to BSC, Polygon and Solana, these chains provide what users need when they need it most. The solution to the problem of scalability is the cause for the next wave of growth.
Centralised — DAO
Let’s start with the case of Uniswap, the project had a proposal to sell a $20 million worth of $UNI tokens to fund the “DeFi Education Fund” for the purpose of lobbying with legislators. However, it is worth mentioning that the Uniswap community almost did not know about this proposal until the last day, and even if someone responded, the number of “Yes” votes is too large, demonstrating the level of Centralised in governance of Uniswap.
We come to DeFi in addition to finding a source of profit, the other part is also because of the freedom and not to depend on third parties. However, there are many existing projects that are still controlled by a small group, thereby gradually losing users’ trust in DeFi.
To solve this problem, DeFi projects are increasingly being developed with the goal of putting Decentralisation first. Decentralised Autonomous Organisations (DAOs), where anyone has the right to vote for common development, have also recorded strong growth in recent times.
DeFi has a very fast growth rate, at the time of writing, the total value of locked assets has reached more than $246 billion and continues to trend up.
However, the current big problem of DeFi is that most of those assets are “stood” and underutilised, we can mention such as:
AMM: Although AMM is considered the source of DeFi liquidity and attracts a lot of TVLs, most of the assets that are brought in are not utilised. This comes from the design of AMM that makes liquidity not centralised.
Lending: The optimal ratio of lending assets (Utilisation ratio) is low, in other words, more lenders than borrowers.
Aggregator: Users after depositing assets into Aggregators and receiving Agtoken back, those tokens cannot be used for other things.
And many other factors that make assets not optimal: like the current farming model, assets are not put in optimal pools, etc.
From the related issues, projects have started to develop suitable products. And there have been successful first names such as Olympus DAO ($OHM) or Abracadabra ($SPELL), etc. from which to step by step launch the next wave, the Capital Efficiency.
Capital Efficiency And The Ability To Innovate DeFi
It’s no coincidence that I say that Capital Efficiency will be the start of the next big growth wave, there are some pretty clear signs to support this opinion.
Too much money is poured in: Ecosystems are constantly launching Ecosystem Fund packages to promote the development of the ecosystem. That amount has to be deployed sooner or later. In addition to helping projects to develop products, a lot will also be used as incentives to attract users to pour money into the ecosystem.
Limited model of Liquidity Mining: When newly launched projects often have a Liquidity Mining program to attract users to use the product. However, this is a “double-edged sword”, the Liquidity Mining program with incentives can attract users and assets in the short term, but almost all come to an end: %APY decreases → Farmer releases tokens → Cash flows out → Selling Pressure increased .
The limitation is, but this model is being used in most new DeFi projects at the moment. Thereby creating a “bad” cash flow when users only pay attention to farm → sell, but have no intention of contributing to the development of the protocol.
TVL is taken too seriously: The cause of the above situation is that the TVL index (Total Locked Value) is too valued and has almost become the industry standard, most users only pay attention to TVL without actually doing it. Understanding TVL is just one thing, the project can take advantage of the number of TVLs to generate revenue is another.
Newly launched products are gradually changing these stereotypes and there have been successful first projects.
Capital Efficiency-focused projects will give DeFi the ability to:
Optimising TVL: Make the assets included in the protocols used to the fullest extent possible.
Generate good cash flow: From the example of Olympus DAO (will be presented later), when limiting bad cash flow will help the project grow more sustainably, the community will also support the project more.
The above article has pointed out the problems that DeFI is facing and new projects are solving them. Effective capital is still the top priority of DeFi 2.0 today, that is, trading volume on TVL (DEX) or Outstanding Loan on Total Lending (Lending/Borrowing) must be higher.
We also have to redefine what a protocol is and how effective it is, and if it does, it will give DeFi access to more funding in the future.