DeFi 2.0: The new era of decentralized finance

Decentralized Finance (DeFi) aims to replicate traditional financial market products (loans, investments, derivatives, structured products, etc.) The year 2020 was a great milestone for the sector, known as “DeFi Summer”, or “DeFi Summer”, in translation. With DeFi platforms gaining more relevance, many attempts to improve their functioning began to emerge. For this reason, 2021 ushered in the era of “DeFi 2.0”, a movement of new decentralized protocols that offer improvements over the problems of DeFi 1.0. Money streaming initiatives are a good example of this. It is also important to say that a growing trend in DeFi 2.0 is the governance and decentralization proposed by DAOs, the Decentralized Autonomous Organizations. As it is still an extremely new movement, DeFi 2.0 lacks an assertive and single definition to describe the technology. However, it is quite evident that the main proposal and concept is to solve a crucial issue for the functioning of decentralized finance: the liquidity of the protocols.

Understanding the DeFi 2.0 proposal

The main objective of DeFi 2.0 is for the sector to be truly sustainable. In this way, it aims to reduce the risks and complications that discourage cryptocurrency users from using Decentralized Finance — including big players and institutional investors. When we think about sustainability, the main challenges that currently “lock in” the industry to become sustainable are: Dependence on liquidity providers for the protocol coming from users. The symbolic rewards incentives (the APR and APY rates, which you should know about), to ensure liquidity of the assets available on the platform. In general, the model proposed by DeFi 1.0 was not proving to be fully effective, as liquidity providers often kept their funds locked in the protocols only to the point where it was possible to redeem the rewards. Thus, the Protocol Controlled Liquidity concept is central to the DeFi 2.0 protocols. By solving the liquidity problem, the new era of Decentralized Finance can be able to greatly increase the scalability of the technology.

Main projects and financial proposals aimed at DeFi 2.0:

To get out of the abstract, nothing better than meeting some representatives of the new era. As will be clear from the examples, the new generation of Decentralized Finance protocols have been creating alternative strategies to attract capital and constituting their own treasure to sustain their financial operations.

Olympus DAO (OHM): the highlight of the new decentralized era


Olympus DAO was conceived with the aim of being something like an algorithmic stablecoin, that is, a fully decentralized stable coin. The platform’s native cryptocurrency is the OHM token, the first “decentralized reserve currency”, as characterized on the protocol’s official website. The project introduced a bond selling mechanism where OHM is sold at a discount in exchange for other stablecoins such as DAI or FRAX. With this, its main objective is to achieve price stability while maintaining a fluctuating market price. Therefore, we can say that the Olympus DAO is something like a Central Bank, as it uses reserve assets to “self-manage”. With this feature, the protocol itself creates its liquidity, regardless of user deposits. Another Olympus DAO innovation is the creation of a staking system that rewards users with additional OHMs in proportion to the tokens locked in the protocol. It sounds confusing, but in practice it’s quite simple: When the price of OHM goes up, the APY (compound annual income) goes down. In contrast, if the price of OHM decreases, the yield on staking tokens increases. However, what really stands out about the protocol are the extremely high rewards it pays to its users. In both farming, productive farms, and staking, APY often reaches levels of 7,000%! two. Convex Finance (CVX): financial innovation that enables double financial gains with zero fees Convex Finance is a DeFi 2.0 platform built on the famous decentralized stablecoin exchange, Curve Finance (CRV).
What Is Convex Finance (CVX)?  The Powerful DeFi Yield Farming Platform Explained
Given that it is a protocol that is linked to Curve Finance, it offers holders of CRV and Curve LPs tokens an additional source to earn interest and trading fees. The main reason why users prefer to deposit tokens with Convex over Curve is that the platform provides better rewards and it is unnecessary to leave tokens locked. Additionally, holders of Curve LPs who invest in Convex Finance receive a base interest rate, some of Curve’s platform trading fees, increased rewards and CVX tokens. 3. Abracadabra (SPELL): the platform that offers the risk of liquidating positions in isolation, not linked to guarantees from other operations The Abracadabra platform is similar to the MakerDAO protocol: it uses collateralized assets to issue stablecoins. However, despite not being a Decentralized Autonomous Organization (DAO) like Maker, it is governed through a shared page in Snapshot. The project proposal ends up following the same logic as the Olympus DAO (OHM): with it, it is possible to issue a dollar-indexed stablecoin called Magic Internet Money (MIM), which can be exchanged for another stable currency, such as USDC or DAI, and be used as the depositary wishes. Interesting point is that the Abracadabra protocol innovates by allowing users to use interest bearing tokens as collateral to inject liquidity into the protocol, at the same time they can borrow up to 90% of the amount deposited on the platform. It is also worth noting that, as the project manages to generate its own liquidity, borrowing costs are low and interest rates are stable. However, not everything is a thousand wonders. In January 2022, news broke that Sifu, one of the people working on the protocol, had already lost $169 million in user funds on a project he founded earlier. As a consequence, the price of SPELL token collapsed, as we can see in the figure below.

Conclusion:

As with other modes of investing in cryptocurrencies and other financial products, each investor needs to research well before making financial contributions. DeFi 2.0 is primarily about DAOs establishing another type of relationship between liquidity providers and the protocol itself. While the new era of Decentralized Finance may seem like a temporary narrative with extremely questionable mechanisms, the concepts related to it are sure to last for a long time. On closer examination, it should also be noted that while the first generation of DeFi applications were user-oriented, the new ones exhibit a clear focus on B2B (business-to-business) services. The fact is that it has become increasingly clear that digital currencies are a path of no return and that the concept of DeFi is the future — and present, in many cases — of financial transactions.