DeFi 2.0: The Next Meta Trend

So what is DeFi 2.0 all about? Is this a new term which will be widely adopted or is it just a temporary narrative which will pass by before users move on to the next trend? What are the most interesting DeFi 2.0 protocols currently in fluctuation and how do they affect the existing DeFi projects? This article will help you gain more insight and hopefully answer these questions.

However, before we proceed, if you want to learn more about decentralized finance, Layer 2 solutions or more about web3, then please visit our Blog where we have previously tackled these topics. Also, if you wish to start your own NFT Marketplace, then definitely contact our team of elite developers.

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What is DeFi 2.0?

The crypto community endorses and popularizes new terms such as DeFi, Layer 1, Layer 2 and web3, so DeFi 2.0 appears to be next one out there. Although, the ideas between DeFi 2.0 are still not entirely clear as this is a developing topic, the concept refers to a new type of DeFi protocols which are attempting to solve some of the main drawbacks of the already existing projects. The method used it to enhanced DeFi projects is by experimenting with protocol design and tokenomics.

Such experimentation evolves around innovation from liquidity mining and is very often associated with protocols owning their own liquidity instead of temporarily renting via liquidity mining incentives.  

One of the biggest problems that DeFi protocols are facing is related to the attraction of long-lasting liquidity in a sustainable way. Most protocols allocate a large amount of their native tokens into liquidity mining incentives. As a result, a lot of capital is attracted and it can quickly increase the growth rate of a protocol. However, the problem here is that the majority of liquidity is not loyal and can transfer on to the next project if there are better incentives. It also selling pressure to the native token and the token’s price is often associated with the overall quality of a project.

A lot of protocols attract millions of funds into liquidity only to lose out to new projects which emerge with improved promises and better return on investment. At present, most if not all projects are facing a dilemma. The dilemma translates into how can users and liquidity can be brought in a sustainable way as opposed to attracting mercenary capital. To make things even worse, the liquidity mining programs are limited to a certain amount of tokens.

As such, in order to help solve this dilemma, a new type of DeFi protocols are emerging with the aim to change the typical mining programs to be more sustainable. To better understand the new protocols, the following paragraphs will review them starting with Olympus Dao.

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Olympus DAO

Olympus is a decentralized reserve currency protocol that is running on the OHM token. OHMs token are backed by a multiple digital assets stored in the Olympus treasury This in turn creates a ground price for OHM that the actual price shouldn’t fall below.

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In order to participate in Olympus, users can either stake their existing OHM tokens and get new OHM from the rebase rewards, trade different assets in exchange for discounted OHM or earn OHM from airdrops for completing OHM transactions. Trading assets in exchange for discounted OHM is one of the main concepts that allows the protocol to own its own liquidity. The bonding process operates in the following manner:

The protocol sells its own tokens (OHM) at a discount to their market value in exchange for other assets. The discounted OHM is invested over a period of a few days - typically 5.

Currently, the protocol supports bonding of 2 main asset types: LP tokens which represent liquidity added to DEXs such as Uniswap or SushiSwap and single assets such as DAI and FRAX. At the moment, Olympus owned is over 90% of its own liquidity across all markets and exchanges.

The bonding mechanism used by Olympus has opened a lot of new possibilities not only for Olympus itself but also for other protocols via Olympus Pro. Olympus Pro, has been recently launched by the Olympus team. It allows other protocols to leverage the same bonding mechanism that made Olympus successful and offer it as a service.  Additionally, Olympus Pro has started attracting more and more protocols looking for a more sustainable way to bring long term liquidity. Some of the protocols participating in Olympus Pro include:  Alchemix, Frax, StakeDAO and Pendle.

Looking towards the future, Olympus Pro also launched a dedicated marketplace for selling bonds. Investors will be able to use this marketplace to buy tokens from different protocols at a discount in exchange for other assets that can then become a part of the protocols’ treasuries.

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Tokemak

Another protocol applying the concept of liquidity mining is Tokemak. What is Tokemak? The Tokemak project focuses on creating sustainable liquidity in DeFi through a decentralized market making protocol. In Tokemak, each asset has its own pool called a reactor, where the protocol token, TOKE, is used for directing liquidity. Liquidity providers supply only 1token to a dedicated reactor and TOKE holders become Liquidity Directors. As such, they can decide where the liquidity should flow.

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After successfully bootstrapping the liquidity in its ETH and USDC Genesis pools, now the Tokemak community has now begun to vote on different projects on the platform. In the near future, reactor assets will be paired with the assets from the Genesis pools and deployed across DeFi in general.

Tokemak, OlympusDAO and the protocols leveraging Olympus Pro are only some of the new protocols innovating in the area of liquidity mining. Surely, there will be other protocols and platforms which will enable DeFi 2.0 to be more reachable to the wider audience.

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Summarizing DeFi 2.0

Consequently, a question which arises, is do we actually need a new term such as DeFi 2.0? Regardless of terms or names, there will be always new projects emerging, there will be more experimentation with existing protocols and tools which will inevitably improve design, functionality and will achieve better sustainable results. Moreover, DeFi 2.0 will spark new excitement to the crypto community which can intentionally or by chance spark generate new ideas.

DeFi 2.0 is a rather upgraded version of DeFi attempting to fix the existing weaknesses and leverage the strengths of the current DeFi, which can open even more promising possibilities for users in the future. Thanks to the development of blockchain technology, Decentralized Finance allows people to access and use Decentralized Applications anywhere, anytime, without being under the control of any entity or organization.

DeFi 2.0 could look like a temporary narrative, however the core concepts behind it will most likely stay with us and make liquidity mining more sustainable. As such, the concept will arrive sooner, rather than later. New DeFi protocols will have a way of attracting long-lasting liquidity without being stuck in the cycle of subsidized users with liquidity mining rewards. Such competition with networks and projects which can launch with a new token in a matter of days will cease to exist in the long run.

This does not translate to liquidity mining going away anytime soon. In fact, projects will have a way of enabling it for a quick bootstrapping phase or to attract initial capital to a new chain or Layer 2 project. As a result, users and developers alike will have a choice. Hopefully, we will be seeing more of Olympus DAO and Tokemak in the future as well other projects following their model.

So if you would like to learn more about DeFi and build your own DeFi exchange, please feel free to contact our team of developers who can help you achieve great results and become the pioneer of our future.