Résumé

DeFi 2.0 is a movement of projects responding to the problems of DeFi 1.0. DeFi aims to make finance accessible to as many people as possible, but has encountered difficulties in terms of scalability, security, centralization, liquidity and accessibility to information. DeFi 2.0 wants to combat them and make the experience more user-friendly. If the project is successful, DeFi 2.0 could help reduce the risks and complications that deter crypto users from using it.

We already have a variety of DeFi 2.0 use cases working today. Some platforms allow you to use your LP tokens and yield farming tokens as collateral for a loan. This mechanism allows you to get additional value while still getting rewards through the pool.

You can also take out auto-pay loans where your collateral earns interest for the lender. This interest allows the loan to be repaid without the borrower having to pay interest. Other use cases include insurance against compromised smart contracts and non-permanent losses (IL).

Decentralization and DAO governance are increasingly popular in DeFi 2.0. However, governments and regulators may end up having an influence on the number of projects launched. Keep this in mind when investing, as the services offered are subject to change.

Introduction

It's been almost two years since DeFi (decentralized finance) gained popularity in 2020. Since then, we've had incredibly successful DeFi projects like UniSwap, decentralization of trading and finance, and new ways to earn interests in the crypto world. But as we experienced with Bitcoin (BTC), there are still problems to be solved in such a new field. In response, the term DeFi 2.0 has become popular to describe a new generation of DeFi decentralized applications (DApps).

In December 2021, we are still waiting for an exponential rise in DeFi 2.0, but we can already see the beginnings of it. Understand what you need to pay attention to in this article and why DeFi 2.0 is necessary to solve the current problems facing the DeFi ecosystem.

What is DeFi 2.0?

DeFi 2.0 is a movement that attempts to upgrade and resolve issues encountered during the original DeFi wave. DeFi was revolutionary because it was able to provide decentralized financial services to anyone with a cryptocurrency wallet, but it still has weaknesses. Crypto has already seen this process with second generation blockchains like Ethereum (ETH) improving on what Bitcoin was doing. DeFi 2.0 will also need to respond to new compliance regulations that governments plan to introduce, such as KYC and AML.

Let's take an example. Liquidity pools (LPs) have proven to be very effective in DeFi, as they allow liquidity providers to earn fees for staking token pairs. However, if the token price ratio changes, liquidity providers risk losing money (non-permanent loss). A DeFi 2.0 protocol could provide insurance against this, for a small fee. This solution provides more incentive to invest in LPs and benefits users, stakers and the DeFi space as a whole.

What are the limits of DeFi?

Before we explore the use cases of DeFi 2.0 in more detail, let's take a look at the problems it's trying to solve. Many of these problems are similar to problems faced in general by blockchain technology and cryptocurrencies:

1. Scalability: DeFi protocols on blockchains with high traffic and gas fees often offer slow and expensive services. Simple tasks can take too long and cost you money.

2. Oracles and third-party information: Financial products that depend on external details need higher quality oracles (third-party data sources).

3. Centralization: An increasing degree of decentralization should be a goal of DeFi. However, many projects still do not have DAO principles in place.

4. Security: Most users do not manage or understand the risks present in DeFi. They stake millions of dollars in smart contracts that they don't really know if they are secure. Although security audits are in place, they tend to lose relevance as updates are made.

5. Liquidity: Markets and liquidity pools are distributed across different blockchains and platforms, which divides liquidity. Providing liquidity locks in the funds and their total value. In most cases, tokens staked in liquidity pools cannot be used elsewhere, creating capital inefficiency.

Why is DeFi 2.0 important?

Even for experienced HODLers and crypto users, DeFi can be intimidating and difficult to understand. However, it strives to reduce barriers to entry and create new earning opportunities for cryptocurrency holders. Users who would not be able to get a loan from a traditional bank could gain access via DeFi.

DeFi 2.0 is important because it can democratize finance without compromising risk. DeFi 2.0 also attempts to resolve the issues mentioned in the previous section, thereby improving the user experience. If we can do that and provide better incentives, then everyone wins.

DeFi 2.0 use cases

We don't need to wait for DeFi 2.0 use cases. There are already projects providing new DeFi services on many networks, including Ethereum, Binance Smart Chain, Solana, and other smart contract-enabled blockchains. Here we'll look at some of the most common ones:

Valorize the funds invested

If you have already staked a pair of tokens in a liquidity pool, then you have received LP tokens in return. With DeFi 1.0, you can stake LP tokens with yield farming to generate gains. Before DeFi 2.0, the value chain ended there. Millions of dollars are locked in vaults providing liquidity, but there is room to further improve capital efficiency.

DeFi 2.0 goes further and uses these LP farming tokens as collateral. This could be a crypto loan from a lending protocol or tokens issued in a process similar to MakerDAO (DAI). The exact mechanism changes with the project used, but the idea is that your LP tokens should keep their value unlocked so they can be used in new yield-generating opportunities.

Assurance de smart contract

Doing thorough due diligence on smart contracts is difficult unless you are an experienced developer. In this regard, you can only evaluate part of a project. This creates great risk when investing in DeFi projects. With DeFi 2.0, it is possible to obtain DeFi insurance on specific smart contracts.

Imagine you are using a yield optimizer and you have placed LP tokens in its smart contract. If the smart contract is compromised, you can lose all your deposits. An insurance scheme can offer you a guarantee on your deposit for a fee. Note that this will only be for a specific smart contract. Generally, you will not receive a refund if the liquidity pool contract is compromised. However, if the yield farming contract is compromised but covered by insurance, you will likely receive a refund.

Insurance against intermittent losses

If you invest in a liquidity pool and start liquidity mining, any change in the price ratio of the two tokens you deposited may result in financial losses. This process is known as intermittent loss, but new DeFi 2.0 protocols are exploring new methods to mitigate this risk.

For example, imagine adding a token to a one-sided LP where you don't need to add a pair. The protocol then adds its original token as the other side of the pair. You will then receive the fees paid by the swaps in the respective pair, and the same will apply to the protocol.

Over time, the protocol uses its fees to build an insurance fund to protect your deposit against the effects of intermittent loss. If there are not enough fees to reimburse the losses, the protocol can issue new tokens to cover them. If there is a surplus of tokens, they can be stored for later or destroyed to reduce supply.

Automatic repayment loans

In general, taking out a loan involves the risk of liquidation and the payment of interest. But with DeFi 2.0, this is not necessarily the case. For example, imagine you take out a loan worth $100 from a cryptocurrency lender. The lender offers you $100 in cryptocurrency, but asks for $50 as collateral. Once you provide your deposit, the lender uses it to earn interest to repay your loan. Once the lender has earned $100 with your cryptocurrency plus an additional bonus, your deposit is refunded. There is also no risk of liquidation here. If the token as collateral loses its value, it simply takes longer for the loan to be repaid.

Who controls DeFi 2.0?

With all these features and use cases, you have to wonder who has control over it all. Well, there has always been a trend towards decentralization with blockchain technology. DeFi is no exception to the rule. One of the first DeFi 1.0 projects, MakerDAO (DAI), set a standard for the movement as a whole. Today, it is increasingly common for projects to give voice to their community.

Many platform tokens also function as governance tokens that give their holders voting rights. It is reasonable to believe that DeFi 2.0 will bring more decentralization to the space. However, the role of compliance and regulation is increasingly important as they play catch-up with DeFi.

What are the risks of Defi 2.0 and how to avoid them?

DeFi 2.0 shares many of the risks of DeFi 1.0. Here are some of the main risks and what you can do to protect yourself.

1. The smart contracts you interact with may have backdoors, weaknesses, or be hacked. An audit is never a guarantee of the safety of a project either. Do as much research as possible on the project and understand that investing always involves risk.

2. Regulators can affect your investments. Governments and regulators around the world are interested in the DeFi ecosystem. Although regulations and laws can provide security and stability to cryptocurrency, some projects may have to modify their services when new rules are created.

3. Non-permanent loss. Even with IL insurance, this is still a significant risk for anyone wishing to get involved in liquidity mining. Risk can never be completely reduced.

4. You may encounter difficulties accessing your funds. If you are using the UI of a DeFi project's website, it may be a good idea to locate the smart contract on a blockchain explorer. Otherwise, you will not be able to make a withdrawal if the website goes down. However, you will need some technical expertise to interact directly with the smart contract.

To conclude

Although we already have many successful projects in the DeFi space, we are yet to see the full potential of DeFi 2.0. The subject is still complicated for most users, and no one should use financial products without understanding them. There is still much work to be done to create a streamlined process, especially for new users. We have seen success in new ways to reduce risk and generate APY, but we will have to wait and see whether or not DeFi 2.0 delivers on its promises.

Disclaimer: This article is intended for educational purposes only. Binance has no connection with and does not support these projects. The information provided by Binance does not constitute investment or trading advice or recommendation. Binance does not take responsibility for your investment decisions. Please consult a professional before taking financial risks.