In this article we explain what DeFi 2.0 term implies.
DeFi or decentralized finance comprises all the decentralized alternatives to our existing financial world. The difference between DeFi protocols and traditional financial services is that DeFi does not require intermediaries, instead DeFi uses blockchain technology to cut out all of those expensive middlemen like banks, brokers, and stock exchanges.
In the past year, we have watched DeFi go from a fringe idea to one of the most aspiring business models in crypto. Currently, the total value locked into DeFi protocols is hovering around the 75 billion dollar mark and the global market cap, for all DeFi tokens, is just under 140 billion dollars.
The DeFi 1.0 protocols available to us, still offer an impressively wide array of financial services. We have already got decentralized lending protocols like MakerDAO, which enables you to put your crypto up as collateral in exchange for less volatile assets like stablecoins. There are derivatives platforms like Synthetics that issue synthetic assets allowing the creation of crypto indexes, such as DeFi index.
We have decentralized exchanges or DEXes, Uniswap and Pancakeswap as for instance. DEXes allow you to create your own liquidity pools or contribute liquidity to a pool in exchange for a share of the transaction fees among other features. However, given DeFi success, it is considerably easy to overlook the problems our DeFi 1.0 protocols are up against; problems which DeFi 2.0 seeks to address. Without further ado let's take a look at 5 things you may not know about DeFi 2.0:
1. DeFi2.0 aims to provide long-term liquidity
2. It will not rely on fiat-back stablecoins
3. It will be more decentralized
4. It will lower user costs
5. DeFi2.0 offers a superior user experience
Once the sun set on the summer of DeFi, back in 2020 it became abundantly clear that DeFi had a huge obstacle to overcome a persistent lack of long-term sustainable liquidity. The reason is that most DeFi protocols get their liquidity through incentivized liquidity mining.
Liquidity mining involves third parties, you and I for instance, sending our tokens to a protocol in exchange for an incentive. If you have ever staked or lent your crypto assets to a DeFi platform and received some of the platform's native tokens, you have received a liquidity mining incentive. The assets we lend act as the platform's liquidity and enable it to offer all of the usual DeFi products such as collateralized borrowing and token trading.
As DeFi has become more prosperous and competitive over time, new protocols have started offering higher and higher rewards to gain more liquidity. It is completely unsustainable, because eventually and inevitably the platform runs out of rewards to even give out. Even if its rewards have an uncapped supply, the protocol disburses so many tokens that its value will not be able to rise again.
The crux of the matter is that you and I and all of the other liquidity providers are not contracted to keep our liquidity in the pool; we can cash out whenever we wish for it, which is usually around the time that the rewards dry up; as that happens, the whales are the first to cash out, which drains all of the protocol's liquidity, then the protocol's native token inevitably crashes.
But a couple of platforms have developed some innovative and interesting ways to solve this issue as such. They have been widely praised as the new wave of DeFi 2.0 protocols and one of these new potential DeFi 2.0 protocols is GTON Capital. Then, what does GTON do differently instead of using the liquidity mining incentives relied upon by DeFi 1.0 protocols? GTON owns 99.5 percent of its liquidity as a concept called “protocol owned liquidity” or POL by owning all of its liquidity GTON makes it more and more difficult for the crypto whales to drop their positions all at once and crash the tokens value. GTON achieves this by using what is called a decentralized reserve currency called $GTON.
GTON tokens are backed by a treasury, which is owned and controlled by GTON Capital DAO and has a balance of more than 4 million dollars. Treasury allows for implementation of another innovative approach for liquidity management first introduced by GTON Capital called Pathway. Pathway is an algorithm enabling market making activities using treasury funds. The algorithm assesses the project’s fundamental metrics and determines the optimal MM scope.
DeFi platforms rely heavily on stablecoins, most of which are backed by US dollars. Yet, this is against of what DeFi is all about; DeFi is supposed to move us away from inflationary centralized currencies like the US dollar. DeFi is not supposed to be a digital duplicate of our existing financial services and for now fiat-back stablecoins are integral to DeFi 1.0 protocols.
So how can DeFi 2.0 get around this problem? This is an area where a number of possible DeFi 2.0 protocols have been innovating to use decentralized reserve currency although they work just like a stablecoin, they’re not a stablecoin for they are not pegged to a stable asset, instead it is a free-floating reserve currency backed by a basket of assets.
One of the most common gripes to hear about DeFi is the lack of true decentralization, which is a fair point as the word decentralized is right there in the name. Since DeFi has grown in popularity we have seen increasing numbers of protocols move over to a DAO operating structure, which has gone some way to addressing this concern.
As you are already aware, DAO's or decentralized autonomous organizations are managed and owned by their community of token holders, not by a decentralized company or a boardroom of directors, anyone holding the required quantity of a DAO's governance token can propose changes to the DAO and vote on changes proposed by other DAO members. By adopting a DAO structure DeFi protocols can offer a more democratic way to organize and operate. While simultaneously addressing the centralization concerns of DeFi users, as you have no doubt noticed a number of popular DeFi platforms now, function as decentralized autonomous organizations, or DAOs including MakerDAO, Uniswap and a few DeFi 2.0 contenders like GTON already use a DAO structure as well.
And yet, there is a large number of DeFi protocols that have to adopt a decentralized structure, but as we start to move into a DeFi 2.0 era DAOs will likely become a more common structure for DeFi protocols or maybe even the norm and that brings us to our last point, which is that DeFi 2.0 will lower user costs and offer a superior user experience.
If you have used any DeFi protocol, you know that it can be both expensive and difficult to navigate clearly. Reducing the cost for using DeFi services and improving the user experience would be an important step on the road to mainstream adoption.
Then, why have we grouped them together well before we see any lower costs and a better user experience across the DeFi space? Two changes need to happen first: DeFi protocols must adopt a more sustainable way to source their liquidity, the reasons for which we covered in the first part of this article. If you have read the first part of this article, you already know why this is so important.
And the second change that we need to see is Ethereum 2.0 going live. Why? Because currently, the vast majority of DeFi protocols run on Ethereum suffer from low transactions in high gas fees and also low scalability, but all that is set to change with Ethereum 2.0 which we are expecting to go live sometime this year. Ethereum 2.0 should reduce gas fees, speed up transaction times and make DeFi protocols built on Ethereum much more easier to scale and once transactions on DeFi protocols become faster and cheaper, they become more accessible to more people.
Among the crowd of new DeFi users you can expect to see a lot of first-time crypto users, many of whom are currently priced out of DeFi, but if they are not priced out they might be avoiding DeFi for another reason, which is that they are not able to understand how to use DeFi and while web 3.0 wallets like MetaMask have gone a long way making DeFi more accessible, even crypto natives still make mistakes such as sending a token to the wrong network. These products and services are still improving all of the time and making defines incrementally easier to navigate every single day. For instance, MetaMask is trialing a new wallet purpose built for institutional investors called MetaMask institutional, which might go some way to bring more institutional investment to DeFi.
That is to say that, the combination of a sustainable liquidity sourcing across DeFi and the improvements expected from Ethereum 2.0 will provide a better and cheaper user experience during the DeFi 2.0 era.