What is DeFi 2.0? This is the explanation!

One of the most influential and successful waves of blockchain-based innovation is decentralized finance or DeFi. DeFi refers to a broad spectrum of decentralized applications that bypass traditional financial services intermediaries and open up new economic primitives and are powered by blockchains with built-in smart contract capabilities and secure oracle networks like Chainlink.

The DeFi protocol continues to evolve and iterate over proven financial-based agreement models, driven by its intrinsic advantages in terms of permissionless composability and open source development culture. The DeFi ecosystem is moving at a rapid pace—in recent months, a surge in liquidity-focused DeFi projects has brought in a new generation of DeFi innovation known as DeFi 2.0. So, does DeFi 2.0 already exist?

Early Development of DeFi

DeFi predecessors such as Uniswap, Aave, Bancor, MakerDAO, Compound, and others have built a solid foundation for the rapidly growing DeFi economy, adding a lot of critical "LEGO money" and can be incorporated into the ecosystem. These projects have created an open and transparent marketplace for various financial services, such as exchanges, loans, deposits, insurance, and more, which can be accessed by anyone anywhere with low fees and minimal risk.

DeFi 1.0 limitations

Although DeFi has shown great potential in changing the global financial landscape, there are still some challenges and issues that need to be addressed. Some limitations of DeFi 1.0 include:

• Scalability: DeFi is largely built on Ethereum, a blockchain that suffers from congestion and high gas fees due to its capacity limitations. This reduces the user experience and hinders mass adoption of DeFi.
• Liquidity: DeFi depends on liquidity, i.e. the availability of assets that can be exchanged easily and quickly. However, liquidity is often fragmented between different protocols and platforms, which reduces efficiency and results in slippage and arbitrage.
• Decentralization: DeFi claims to be a completely decentralized system and does not require a central authority. However, in reality, there are still some central points of failure, such as development teams, oracle providers, and token governance, that can affect the security and performance of the protocol.

DeFi 2.0 Goals

DeFi 2.0 is an updated version of the current DeFi model, aiming to fix existing weaknesses while leveraging strengths to provide consumers with new and exciting options on the road to financial freedom. Some of the goals of DeFi 2.0 include:

Improve scalability

DeFi 2.0 seeks solutions to address Ethereum's scalability issues, either by migrating to other, faster and cheaper blockchains, such as Solana, Binance Smart Chain, or Polygon, or by using layer two, such as Optimism, Arbitrum, or zkSync, which can increase throughput and reduce transaction costs.

Increase liquidity 

DeFi 2.0 seeks ways to increase liquidity and reduce fragmentation, either by creating protocols that can interact with multiple platforms and assets, such as cross-chain or multichain, or by creating more sustainable and equitable incentive mechanisms, such as own liquidity protocols or liquidity bootstrapping pools.

Meningkatkan desentralisasi 

DeFi 2.0 mencari cara untuk meningkatkan desentralisasi dan mengurangi ketergantungan pada pihak ketiga, baik dengan menggunakan oracle yang lebih terdesentralisasi dan andal, seperti Chainlink, atau dengan menciptakan organisasi otonom terdesentralisasi (DAO) yang lebih demokratis dan partisipatif, seperti OlympusDAO, Wonderland, atau KlimaDAO.

Inovasi DeFi 2.0 dan Protokol Generasi Kedua DeFi

Apakah Anda masih bertanya-tanya mengapa DeFi 2.0 begitu populer? Teruslah membaca untuk mengetahuinya.

Skalabilitas: Layer Satu, Layer Dua

Interacting with the Ethereum network has been a major stumbling block for DeFi users, especially beginners. Nevertheless, DeFi offers a wide array of exciting opportunities, making it very attractive. As a result, the question arises: How can users experience DeFi without having to face Ethereum's scalability issues?

One answer is to use layer one, which is a blockchain that stands alone and has its own consensus and security, such as Solana, Binance Smart Chain, or Polygon. The blockchain offers lower transaction speeds and fees than Ethereum, as well as compatibility with smart contracts and DeFi applications.

DeFi Protocol 1.0

Some DeFi protocols that run at layer one include:

Serum 

Serum is a decentralized exchange protocol (DEX) that runs on Solana, which offers speed, liquidity, and low fees. Serum also supports cross-chain trading, which allows users to trade assets from various blockchains, such as Bitcoin, Ethereum, or Terra.

PancakeSwap 

PancakeSwap is an AMM protocol running on Binance Smart Chain, which offers exchanges, yield farming, and lotteries at low fees. PancakeSwap also supports NFTs, allowing users to collect, buy, and sell rare and unique digital items.

QuickSwap 

QuickSwap is an AMM protocol running on Polygon, which offers exchange, yield farming, and staking at low fees. QuickSwap also supports layer two, which allows users to transact quickly and cheaply on top of Ethereum.

DeFi 2.0 Protocol

Another solution is to use layer two, a solution that builds on Ethereum and inherits its security and interoperability, but by increasing scalability and reducing costs. Some popular layer two solutions include:

Optimism 

Optimism is a layer two solution that uses optimistic rollup, a technique that combines many transactions into one batch and sends them to Ethereum, while assuming that the transactions are valid unless there is evidence to the contrary. Optimism can increase throughput by up to 100 times and reduce gas costs by up to 90%. Some DeFi protocols that use Optimism include Uniswap, Synthetix, and Chainlink.

Arbitrum 

Arbitrum is a layer two solution that also uses optimistic rollups, but with some differences in terms of design and features. Arbitrum can increase throughput by up to 270 times and reduce gas costs by up to 55%. Some DeFi protocols that use Arbitrum include Aave, Balancer, and Curve.

zkSync 

zkSync is a layer two solution that uses zero-knowledge rollup, a technique that uses cryptographic proofs to verify the validity of transactions without revealing the details. zkSync can increase throughput by up to 2000 times and reduce gas costs by up to 100 times. Some DeFi protocols that use zkSync include Gitcoin, 1inch, and Loopring.

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Also Read:

What is the Annual Percentage Rate (APR) in DeFi?

What is Aave? DeFi Platform Pioneer

Understanding about Uniswap (UNI), a Revolutionary DeFi Platform

DISCLAIMER: This article is informational in nature and does not constitute an offer or solicitation to sell and buy any crypto asset. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices may change significantly from time to time and Bittime is not responsible for fluctuations in crypto asset exchange rates.