DeFi 2.0 is a new system built on the existing DeFi which primarily focuses on liquidity and incentivization.
As DeFi was a revolutionary idea in providing decentralized financial services to anyone with a crypto wallet, DeFi 2.0 will add a feature that improves the current DeFi system.
DeFi 2.0 adds new features like meeting new compliance regulations like knowing your customer (KYC) and anti-money laundering (AML) that governments globally plan to introduce.
It solves DeFi limitations like scalability, third-party information, centralization, liquidity, and security issues that have plagued the decentralized finance system till today.
Liquidity providers face a high degree of risk in adopting new technology and prices can change very quickly, resulting in an impermanent loss. DeFi 2.0 addresses this risk by providing loss insurance. Smart contracts are also protected by smart contract insurance.
As we have seen layers built on blockchain platforms like Bitcoin and Ethereum, DeFi 2.0 is also built the same way to solve various anomalies in the current DeFi ecosystem.
The newly added features solve the lending system, as DeFi 2.0 payoff loans themselves with a self-repaying option. In this, loans use collateral from yield farming to pay off the loan balance, when the due date comes and the balance collateral is returned to the owner.
Whereas earlier, DeFi uses the traditional lending features where users borrow funds from other users with interest after supplying a hefty amount as collateral.
Benefits of Defi 2.0
Consistent liquidity supply
DeFi 2.0 always provides much more consistency in providing liquidity, just like banks provide liquidity to their clients. Just because there is a higher yield, users don’t move from one DeFi to another, which can cause a liquidity crisis. Defi 2.0 can more efficiently allocate liquidity to the protocols that need them.
Default risk to end-users
It insulates the liquidity provider from impermanent losses and defaults. When users withdraw the money from their account they get the original amount they deposited plus interest. In some DeFi 2.0 platforms, users are getting a higher market value when they sell native tokens to parent platforms. In this way, the DeFi platform is now responsible for any risk in providing liquidity. Therefore, the brunt of the impermanent loss problem is now transferred to the DeFi 2.0 platform.
Instead of asking users to lend their personal tokens for liquidity, DeFi 2.0 acts as a decentralized bank and takes over the role of liquidity provider. This bank accumulates the tokens in what is referred to as treasuries and stakes these tokens directly at exchanges or lends out the tokens. The users are then rewarded in bank tokens instead of the native token they stake.
With this, users can buy or sell tokens that distribute governance authority for DAOs among token holders. The benefits of DAO participation depend on the purpose of the organization. DeFi 2.0 is also building protocol-controlled value mechanisms that are poised to benefit DAOs.
DeFi 2.0 is changing the way DeFi has been under implementation for the past two years. DeFi has been a big hit in crypto and new ways to mitigate the issues will further help DeFi to stand and offer an alternative to users that have been looking towards DeFi for meeting their financial needs and that too by attaining financial independence.