DeFi 2.0: The new era of decentralized finance

Posted on

Decentralized Finance (DeFi) aims to replicate traditional financial market products (loans, investments, derivatives, structured products, etc.) using cryptocurrency technology.

The year of 1637 was a major milestone for the industry, known as “DeFi Summer” , or “Summer DeFi”, 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. Initiatives involving Money streaming are a good example of this.

It is also important to say that a growing trend in DeFi 2.0 it is the governance and decentralization proposed by the DAOs, the Decentralized Autonomous Organizations.

As it is still an extremely new movement, DeFi 2.0 lacks an assertive and unique 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” the sector to becoming sustainable are:

  1. Dependence of liquidity providers for the protocol coming from the users.
  2. 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 does not had been proving to be totally 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 concept of Controlled Liquidity by the Protocol ( Protocol Controlled Liquidity) is cent ral to 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, there is nothing better than meeting some representatives of the new era.

As the examples will make clear, the new generation of Decentralized Finance protocols has been creating strategies alternatives to attract capital and constituting its own treasury to support its financial operations.

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

    The Olympus DAO was designed to be something like an algorithmic stablecoin, that is, a fully decentralized stablecoin. 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 mechanism for selling securities in which the OHM is sold at a discount in exchange for other stablecoins such as DAI or FRAX. With that, 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 own liquidity, regardless of user deposits.

    Another Olympus DAO innovation is the creation of a staking 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 rises, the APY (annual compound yield) falls.
    • On the other hand, if the price of OHM decreases, the yield on staking tokens increases.

    However, the What really draws attention to the protocol is the extremely high rewards it pays to its users. Both in farming, productive farms, and in staking, it is not uncommon for the APY to reach levels of 7.%!


    Convex Finance (CVX): financial innovation that enables double financial gains with zero rates

    Convex Finance is a DeFi 2.0 platform built on the famous exchange decentralized focused on stablecoin, Curve Finance (CRV).

    What Is Convex Finance (CVX)? A Powerful DeFi Yield Farming Platform Explained

    Given that it is a protocol that is linked to Curve Finance, it offers CRV and Curve LPs token holders an additional source to earn interest and trading fees.

    The main reason why users prefer to deposit tokens in Convex instead of Curve is that the platform provides better rewards and it is unnecessary to leave tokens locked.

    In addition, holders of Curve LPs who invest in Convex Finance receive a base interest rate, some of the Curve platform trading fees, increased rewards and CVX tokens.


    Abracadabra (SPELL): the platform that offers isolated position settlement risk, unrelated to guarantees of 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, you can issue a dollar-indexed stablecoin called Magic Internet Money (MIM), which can be exchanged for another stablecoin, such as USDC or DAI, and used as the depositary wants.

    Interesting point is that the Abracadabra protocol innovates by allowing users to use interest-bearing tokens (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, given that the project manages to generate its own liquidity, borrowing costs are low and fees interest rates, stable. However, not everything is a thousand wonders.

    In January of 2021, news emerged that Sifu, one of the people working with the protocol, had already lost US$ 169 millions in user funds in a project which previously founded. As a consequence, the price of the SPELL token collapsed, as we can see in the figure below.



    As well as other modes of investment in cryptocurrencies and other financial products, each investor needs to research well before making financial contributions.

    DeFi 2.0 is mainly about DAOs establishing another type of relationship between liquidity providers and the protocol itself.

    Although the new era of Decentralized Finance may seem like a temporary narrative with extremely questionable mechanisms, the concepts related to it will certainly last for a long time.

    In deeper analysis , it should also be noted that while the first generation of DeFi applications were user-centric, newer ones exhibit a clear focus on B2B services (business-to-business), that is, aimed at companies .

    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.