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Since the rise of DeFi (Decentralized Finance) in 2020, it has been almost two years. Since then, trade and finance have become more decentralized, there are new methods to make money in the crypto space, and we’ve seen tremendously successful DeFi projects like UniSwap. But in such a new industry, issues are still to be resolved, just as we saw with Bitcoin (BTC). In response, a new generation of DeFi Decentralized Applications (DApps) has gained popularity under the moniker “DeFi 2.0.”
In this article, let’s have an overview of what Defi 2.0 is and other related concepts.
Before diving into the world of DeFi 2.0, let’s look at Decentralized Finance (DeFi).
What is DeFi?
Understanding the first generation of decentralized finance and what it offers is crucial before digging into DeFi 2.0. DeFi is a catch-all word for many peer-to-peer financial services hosted on open blockchains, most notably Ethereum.
The underlying idea is to make it possible for anyone with an internet connection to lend, borrow, trade assets, purchase derivatives, and do much more directly without an intermediary. DeFi protocols streamline everything through smart contracts, eliminating the need for intermediaries like banks and other third parties.
Limitations of DeFi
Before delving further, let’s examine the issues DeFi 2.0 attempts to fix. Many of the difficulties raised here are common to problems with cryptocurrencies and blockchain technology in general:
- Scalability: DeFi protocols sometimes offer expensive and slow services on blockchains with significant traffic and gas prices. Easy tasks can take too long and become inefficient.
- Oracles and third-party information: Because financial products depend on outside data, they require higher quality oracles (third-party sources of data).
- Centralization: DeFi should aim to decentralize to a greater extent. However, DAO concepts are still lacking in many applications.
- Security: The risks present in DeFi are not managed or understood by the majority of users. Millions of dollars are being invested in smart contracts that they are unsure are secure. Although security audits are in place, their worth tends to decrease when changes occur.
What is DeFi 2.0?
The DeFi 2.0 movement aims to improve upon and address the issues of the first DeFi wave. Although DeFi was ground-breaking in how it offered decentralized financial services to everyone with a crypto wallet, it still had flaws. Second-generation blockchains like Ethereum (ETH), which outperform Bitcoin, have already demonstrated this process in the cryptocurrency space.
Why does DeFi 2.0 matter?
DeFi can be intimidating and hard to comprehend, even for HODLers and seasoned crypto users. However, it intends to remove entry barriers and produce new revenue streams for cryptocurrency owners. With DeFi, customers who might not qualify for credit from a regular bank might.
DeFi 2.0 is significant because it can democratize finance while maintaining risk.
Risks of DeFi 2.0, and how to prevent them?
- Your interactions with smart contracts run the risk of having vulnerabilities, backdoors, or hacking. A project’s safety is never guaranteed by an audit, either. Do maximum research as possible on the venture, and remember that risk is a part of an investment.
- Regulation could affect your investments. Globally, governments and authorities are interested in the DeFi ecosystem. While laws and regulations can increase the security and stability of the cryptocurrency market, some projects may need to modify their services as new laws are implemented.
- Impermanent loss. Anyone who wishes to engage in liquidity mining is taking a significant risk, even with IL insurance. There is no way to eradicate the risk altogether.
- It could be challenging for you to get to your funds. Finding the smart contract on a blockchain explorer might be a good idea if you are staking using a DeFi project’s website UI. If the website is down, you wouldn’t be able to withdraw otherwise. You’ll need some technical know-how to deal with the smart contract directly.
How to invest in DeFi 2.0?
- Yield Farming
DeFi 2.0 protocols rely on yield farming to obtain user liquidity. They go one step further, though, by allowing investors to put tokens up as collateral for loans. The procedures are now a more appealing choice for investors because of this variation in yield farming.
- Staking
As it enables users to become validators for blockchains that function on a proof-of-stake basis, staking is a method of generating passive income. By choosing this path, you can collect block rewards while locking your currency on the blockchain.
- Lending
Self-repaying loans offer the fantastic potential to both lenders and borrowers. In a DeFi 2.0 protocol, yield farming is an excellent way to practice loans in exchange for interest payments.
Conclusion
DeFi made several innovations while also making a number of mistakes. DeFi 2.0 aspires to improve on the innovations and correct the mistakes to give more straightforward and democratic funding options.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
