Compared to the walled gardens of traditional finance the benefits of DeFi offer a more ubiquitous range of financial tools for consumers. But with that said, the very nascency of its ecosystem has led to a plethora of flaws, like impermanent loss and shortcomings with liquidity mining that require many users to compromise on risk.
This is where DeFi 2.0 comes in.
What Is It:
In essence, and as with any iteration of technology (not just blockchain), DeFi 2.0 is a movement focused on improving on the shortcomings of its forebears. While a more detailed insight will be covered in the following DeFi 101 article, key differences between DeFi 1.0 and DeFi 2.0 have centered on liquidity, scalability, security, and centralization.
Why Does It Matter:
At the risk of generalising, one shared aspect of any successful business or service (regardless of industry) is that it helps create (or reinforce) a path of least resistance for end-users.
For example, Amazon helps its customers save time by automating the delivery of its products. Uber and Airbnb help streamline and save time on the cost and effort of transportation, accommodation, etc.
One could argue from both a macro and micro perspective that the purpose of DeFi is similar in its intent to lower the barrier of entry to competitive financial solutions. For example, people who would ordinarily struggle with accessing loans can find non-prejudicial alternatives with MakerDAO or Compound.
However, the current methods needed to benefit from core DeFi-centric activities like lending, staking, or yield farming are still relatively daunting for the average user. But through simplifying the user experience, providing stronger incentives, aligning with updated regulations, and mitigating against the levels of uncertainty in web3 markets, DeFi 2.0 can help move its rich tapestry of platforms and resources further along the more expansive journey to democratise finance safely and securely.
The Shortcomings of DeFi 1.0:
To better understand the relevance of DeFi 2.0, we can explore some of the more common problems it’s trying to solve.
Liquidity: Providing liquidity to a pool requires a lock-up of funds and their total value. While separated across disparate blockchains and markets, this financial rigidity often results in capital inefficiency.
Liquidity Mining: Many DeFi protocols suffer from a lack of long-term, practical incentives for liquidity providers outside of distributing LP tokens. As it stands, one common problem with liquidity providers is that they routinely withdraw both their allocated resources and rewards once eligible or when a more competitive protocol with a higher APY comes around. This periodic and capitulated sale of a protocol’s native tokens on the market often causes a diluted supply.
Scalability: DeFi platforms that experience high periods of network activity can often suffer from data congestion. These bottlenecks slow the speed of transactions and make network…
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