DeFi 2.0: A Megatrend for the 2022 Summer

• Projects that adjust capital efficiency in their protocol are at an advantage.
• Interactions with real-world applications will be catalyzed by complete protocol decentralization.
• DeFi 2.0 is still an ideal marketed on Twitter (NYSE:TWTR) by a handful of projects.

DeFi has been overshadowed by NFTs in 2021, as investors sought new ways of generating profit. DeFi protocols that altered financial perceptions have become “undesirable” due to their lack of high economic yields, pushing “yield farmers” to inquire about new ways of generating capital. With demand for DeFi increasing, decentralized frameworks are rewiring protocols into a new epoch of DeFi 2.0.

The New DeFi Summer

DeFi brought more financial usability to smart contracts, creating new financial instruments outside the realms of centralized institutions. In fact, it brought blockchain to its intended scope of promoting a decentralized market.

DeFi protocols spun off from flagship protocols like Compound, which stamped their place in the DeFi market through “liquidity mining.” The industry-recognized its shortcomings due to their capital inefficiency. DeFi 1.0 attracted users by rewarding them with high yield, yet the financial return mentality of investors did not account for a project’s worth. Rather, users concentrated on flipping capital between protocols to obtain higher APY’s.

Scuppytrooples highlighted in a Twitter thread that DeFi 2.0 would kickstart a new market obsession as new projects developed more efficient protocols on top of DeFi 1.0. In essence, DeFi 2.0 will amend network shortcomings, including scalability, liquidity protocol, and governance, which all fall under the umbrella of capital efficiency.

What DeFi 2.0 Wants to Be.

Trends heavily guide blockchain’s culture mentality. DeFi 2.0 is obsessively used by new protocols to increase demand and draw investor attention. Hackernoon noted in a 2020 article that DeFi 2.0 is the condition to increase “support for real-world economic activities,” but requires an underlying remodeling of functions, including liquidity and scalability.

A Messari Research article highlighted that DeFi 2.0 aims to resolve liquidity mining incentives and prevent capital nomads from affecting the sustainability of projects. Sam Kazemian, the founder of Frax Finance, argued that DeFi 2.0 is, in fact, “experimenting with algorithmic & social rules that formalize their capital deployment,” in order to streamline and create a better performing protocol-oriented towards comprehensive decentralization.

DeFi 2.0. needs to go beyond the previous bootstrapping mechanisms implemented by early protocols. Admittedly, high liquidity mining APYs are an intelligent customer acquisition process, but ultimately failed in the long-term success of products. Jason Ye argued that native token prices would decrease as token inflation rose.

Scupytrooples emphasized that Olympus DAO is taking a different rewards route and showcasing firsthand why DeFi 2.0 can improve the overall perception of decentralized finance. Olympus DAO has implemented a protocol-controlled value that uses a bonding mechanism, which effectively works to prevent “toxic liquidity” from entering the ecosystem.

On The Flipside

• TVL is becoming an irrelevant metric for helping users to assess the importance of a protocol.

What’s the Novelty?

In truth, new protocols that follow the main DeFi scheme failed because of the lack of demand in the network. Quang Phan noted that Capital Efficiency is DeFi’s ultimate goal if it aims to reach mass adoption status. The lack of usability of platform functions, aside from the passive income generated by users, is close to none. Sure, this does not apply to established protocols such as Uniswap, however, it does show how DeFi is used for speculative purposes.

DeFi 2.0 thus programs new expectations for protocols to be addressing several issues, including scalability, governance centralization, and liquidity mining. To that end, trusting a protocol that’s governed by a set of network rules increases the decentralization factor, and the balance sheet liquidity attained and stored by protocols decreases the risk factor. In short, DeFi 2.0 holds the prerequisites necessary for abiding by regulatory norms, while still maintaining autonomy.

Why You Should Care?

High yields generated by farmers through liquidity mining could be a thing of the past. New rules being added to DeFi 2.0 protocols could be the catalyzing agents for improving the perception of DeFi as a safe financial tool.

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