What is DeFi 2.0?
DeFi 2.0 is a term you may have come across more often lately, should you already be active within the crypto
world. Many new crypto projects are grouping themselves under this umbrella term, and that might make you curious about what DeFi 2.0 means. In this article, we'll explain to you exactly what DeFi 2.0 is and which projects belong to it.
What is DeFi?
DeFi stands for Decentralized Finance and is a common problem within the world of cryptocurrency and blockchain. This is because it represents a large group of niches.
By DeFi we mean all crypto and blockchain projects that want to make a change in the current centralized financial system. The goal is to decentralize centralized financial products and services by moving them to the blockchain.
The blockchain consists of a network of thousands of computers connected to each other. They have a copy of the history of the blockchain. This relates to everything that has happened. For example, this history states by whom and to where a transaction was made.
All the computers in the network also make sure that new transactions are processed. They do this by adding a new block to the blockchain. This block stores the necessary information, which counts as history for the entire network.
Developers can program a traditional financial product on the blockchain. The computers in the blockchain network then take care of everything. This happens completely decentrally, because there is no one party that has more say than the others. So the blockchain can be seen as something that is collectively made for and by each other.
What do we mean with DeFi 2.0?
DeFi 2.0 is a collective term for all the protocols and projects created for the blockchain, solving problems or mistakes of previous DeFi projects. For example, another project may have problems with the speed of transaction processing. Or the costs turn out to be very high.
A group of developers may then decide to develop a protocol that ensures that transactions can be processed faster, or that users have to pay less high costs. These are solutions for projects created under 'DeFi 1.0', which is considered the first generation of DeFi.
What is the difference between DeFi 1.0 and DeFi 2.0?
The main difference is that DeFi 1.0 is seen as the first generation of DeFi products. After all, blockchain technology is still very new, and these products were seen as "tests" in some cases. Nobody knew for sure what the result would look like.
As a result, some technologies were not yet aligned enough. This led to the possibility of certain errors getting in the way of the efficient operation of the product.
DeFi 2.0 includes all the protocols that have been developed to solve the errors. Thus, it is not so much about the development of new DeFi ideas. These are granted up to DeFi 1.0. DeFi 2.0 is about improving ideas that belong to DeFi 1.0.
What problems are solved by DeFi 2.0 protocols?
A protocol does not necessarily have to address a particular problem to belong to DeFi 2.0. It can be any kind of problem that occurs with a DeFi product. Still, there are a few problems that we see most common, and thus most DeFi 2.0 protocols focus on.
Using some DeFi applications can be risky. For example, there is a financial risk in using them, or there is simply a vulnerability found in the technology. A DeFi 2.0 protocol could solve this.
It is important that an application is easy to use. This can sometimes be difficult to achieve, as blockchain technology is not yet as accessible as the Internet as we know it today.
The largest blockchain that DeFi applications run on is Ethereum. However, this blockchain suffers from the scalability problem. It can no longer handle the large number of applications and users, which means it can take an incredibly long time for a transaction to complete. Meanwhile, users do pay sky-high transaction fees for using the blockchain.
What are the most important DeFi 2.0 projects?
By now, there are many DeFi 2.0 projects that aim to make the DeFi
space better and more accessible. The projects below are the best known and the most important. The tokens of these projects are all for sale on the crypto exchange of Coinmerce.
Algorand (ALGO) - Algorand's blockchain provides support for DeFi applications and focuses on scalability and interoperability. The latter means collaboration between different blockchains.
- Avalanche's blockchain is fast and requires little cost to be used for the development of DeFi applications.
Maker (MKR) - Maker is a protocol that ensures the stability of the DAI-stable coin. The MKR token is available for purchase from Coinmerce, but the DAI token is not. Coinmerce actually has its own stable coin.
- Solana's blockchain allows development of DeFi applications, making it a competitor to Avalanche and Ethereum.
- The Yearn.Finance protocol allows yielding and lending on Ethereum's blockchain. These are capabilities that allow users to earn a passive income from their crypto coins.
DeFi 2.0 is a collective term for all the projects, applications and protocols that solve the problems of other DeFi projects. These DeFi projects belong to DeFi 1.0, which is also called the first generation of DeFi.
There are several problems that such applications may face. Consider scalability, usability, and security. Well-known DeFi 2.0 projects that try to solve these kinds of problems are Avalanche, Solana and Yearn.Finance.