The Defi ecosystem has passed several stages since its development. A lot of projects are trying to overcome the challenges of the first generation of Defi. From lending platforms to Automated Market Makers (AMMs) and Decentralized Exchanges (DEXes), all and all are trying to shape a successful transfer from Defi 1.0 to Defi 2.0.

In this article, we are going to explain what Defi 2.0 is, what differences it has from Defi 1.0, and what advantages it has. Stay with us.

What is Defi 2.0?

The first generation of Defi started its work since the creation of lending platforms like Aave and Compound, and decentralized exchanges like Uniswap and SushiSwap. It had great achievements regarding decentralization and mass adoption of the blockchain technology. By the way, it had its own limitations and challenges. The most important limitations included shortage of liquidity, and some security problems. The new Defi protocols, using features like arbitrage, liquidity mining, and yield farming, help users trade with lower levels of slippage, have more profit opportunities, and benefit from more secure platforms.

Defi’s final goal was to democratize the whole financial system, and to remove intermediaries like banks. However, no one can deny that all new technologies have their limitations. These limitations become appear in the passage of time. Exactly like the world-wide web that passed from Web 1.0 to Web 2.0 (and is now passing from Web 2.0 to Web 3.0), Defi is having the same experience.

Defi 2.0 has important applications, but to narrow down the topic, we can say that its two main applications are “providing stable liquidity”, and “reinforcement of Decentralized Autonomous Organizations (DAOs)”. Let’s elaborate more on these two applications.

Providing stable liquidity

In Defi 1.0, markets and liquidity pools are distributed among different blockchains and platforms. This also distributes the available liquidity. As a result, users’ access to liquidity is limited. Besides, the incentive for providing different protocols’ liquidity is not strong enough. Users provide the liquidity of a specific protocol to earn rewards. So, when they find a protocol with a higher reward, they shift to that.

In Defi 2.0, protocols try to provide stable liquidity and earn the loyalty of their users through innovative methods like yield farming. One of the Defi 2.0 projects that has been successful in offering stable liquidity is “OlympusDAO”. OlymousDAO combines different strategies like bonds with special discounts, and the ability to stake the native token (OHM), to keep its users loyal.

Reinforcement of DAOs

In Defi 2.0, DAOs are serious rivals to the traditional organizations. Defi 2.0 is using different strategies to reinforce the decentralized autonomous organizations to the most possible extent. While preserving the independence of DAOs, Defi 2.0 is trying to build an effective connection between decentralized organizations and the global financial system, and this is its success key.

Differences between Defi 1.0 and Defi 2.0

We have to mention that Defi 1.0 and Defi 2.0 have a similar final goal. They both want to create a decentralized financial system based on blockchain, and they both use smart contracts and decentralized applications. The only difference is that Defi 2.0 is trying to improve Defi 1.0 and remove some limitations.

Defi 2.0 has a higher level of interoperability with users. It connects users in a peer-to-peer manner, guarantees the profit of both (or all) parties, and minimizes the intervention of the developers.

Defi 2.0’s algorithms are also much more efficient. They have fewer security leaks and broaden the activities users can have. In brief, Defi 2.0 has a more stable ecosystem and is more reliable.

Risks of Defi 2.0

Despite all advantages we mentioned up to here, we again repeat that Defi is a new technology and it is still evolving. What we said does NOT mean that all limitations and risks have been removed, and now we are facing a risk-free ecosystem. Defi 2.0 still may have security problems, and smart contracts still may encounter bugs and security breaches. No one can claim that smart contracts are completely safe, and they won’t face problems by any means.

Besides, we shouldn’t forget the ever-existing risk of new regulations. We previously mentioned that Defi 2.0 is trying to have a more efficient cooperation with the global financial system, but we have to wait and see whether this traditional system has the same will or not. Defi, and cryptocurrencies in general, are not regulated in many countries, and they may have different reactions to this evolving world.

Conclusion

If we want to summarize the aim of Defi 2.0 in one phrase, that is: “improving Defi’s mass adoption”. We have to wait and see if it succeeds in achieving this aim or not. Besides, we shouldn’t think that Defi 2.0 is the last generation of Defi. Exactly like the web that is having its third generation, it is not unlikely that Defi has newer, more advanced generations like Defi 3.0, and so on.