17 February 2022
What is DeFi 2.0 and how does it differ from classical DeFi
What is DeFi 2.0 and how does it differ from classical DeFi

The decentralized market was first applied to the financial industry, proving that blockchain is a successful use case for processing transactions. The development of the decentralized sector resulted in the advent of many instruments. Among the most successful in recent years is the development of an entire industry of revenue-generating tools branded as DeFi – decentralized finance.

DeFi is a combination of protocols and platforms that perform the functions of liquidity pools, decentralized exchanges, DAOs, financial instruments, and others. At its core, DeFi needs to provide the market with liquidity and support exchange operations while solving the problems of traditional finance – centralization, custodial issues, and autonomy.

The DeFi market has gained substantial popularity and developed largely thanks to the benefits it provides in financial terms. Participants of DeFi can generate passive income by allocating or lending their liquidity for other participants and protocols to use. The process of liquidity mining and yield farming became the staple of DeFi. By lending their available tokens and digital currencies to liquidity pools, market participants received rewards in the form of commissions from every transaction performed with the assets they lent. The ability to generate considerable amounts of passive income augments by the fact that many DeFi protocols and liquidity pools offered double-digital annual returns.

Though profitable, liquidity mining has its disadvantages. The most obvious reside in the inherent flaws of DeFi itself – a lack of accountability and the high risks involved with scams, which result in massive losses for investors. Liquidity mining is also flawed since it involves the risk of impermanent losses, high subjectivity to volatility, smart contract flaw risks, and automated market maker (AMM) value impact. These risks result in considerable losses for investors during liquidity mining through commissions and volatility or in a total loss of funds due to security breaches.

DeFi 2.0 was introduced to counter the problems of classical DeFi. The new iteration of DeFi seeks to be more accessible for a broader range of investors and is designed to reduce the risks of impermanent losses through the introduction of impermanent loss insurance. The inclusion of cross-chain bridges also considerably expands the capabilities of liquidity migration in DeFi 2.0. Protocols operating under DeFi 2.0 also simplify educational approaches, giving users access to more streamlined interfaces and a smoother learning curve.

Most importantly, DeFi 2.0 is all about expanding the capabilities of decentralized finance beyond liquidity mining. The new concept introduces the narrative of decentralized lending, making digital asset loans more accessible to both businesses and average users. Yield farming is also expanded in DeFi 2.0 with asset management, making the entire sector more open and secure for beginners.

The high income generated by farmers through liquidity mining may be a thing of the past. The new rules applied to DeFi 2.0 protocols could become the catalyst to improving the perception of DeFi as a safe financial tool.

Getting started in decentralized finance is the exciting part of the crypto journey; however, at some point, all participants want to get their cryptocurrency out into the real world.

There are many options for withdrawing cryptocurrency and exchanging it for fiat money, each of them has its pros and cons. Crypto-friendly debit cards, like Embily, allow you to manage crypto and use it in  day-to-day payments. And OTC service helps to trade in large blocks, facilitate crypto-investment and VC using crypto.