Innovation in Decentralized Finance (DeFi) is advancing rapidly. Now we’re talking about DeFi 2.0 – but what exactly does that mean?
The crypto space and especially decentralized finance is known for its enormous pace of development. On the one hand, things that were relevant a year or two ago can become meaningless overnight. For example, initial coin offerings (ICOs) almost completely disappeared from the scene after the hype in 2017 and 2018. Now they only lead a niche existence. On the other hand, new technological innovations such as liquidity mining or non-fungible tokens (NFT) can create completely new industries at record speed.
To illustrate this enormous development dynamic, it is sufficient to take a look at the development of Total Value Locked (TVL) in DeFi – i.e. the money that is actually in DeFi space.
Since the beginning of 2021, the TVL has grown from just 22.27 billion US dollars at the time of going to press.
When you think you have understood a lot in the DeFi sector, the next innovation is usually already on the way. Currently, the term is the most popular DeFi 2.0 a lot of attention on yourself. What exactly is behind DeFi 2.0, we want to take a look below.
New projects want to turn the DeFi space inside out
DeFi 2.0 is currently still in an early phase. But it is already clear that a core component of DeFi 2.0 is to fundamentally change the way new users are accessed. So far, most of the projects in decentralized finance have relied on liquidity mining as a lure for new users. New DeFi projects, however (OlympusDAO, Fei Protocol or Alchemix) experiment with new ways to attract users to their platform.
The new generation of DeFi projects is based on the idea of protocol-controlled liquidity (PCV). This means that they don’t directly reward users for providing liquidity. On the contrary, the new DeFi protocols try to to raise funds for their own minutes.
In liquidity mining, on the other hand, protocols give their native tokens to users in exchange for the deposit of assets. In turn, they use the assets to offer token swaps, lending, borrowing or other DeFi services. The fundamental problem is that the projects dilute their token offer in exchange for capital. That means investors come to collect tokens as a reward and withdraw their capital as soon as there are other more profitable liquidity mining offers – not uncommon in decentralized finance. In the long run, this is not sustainable and there is also pressure to sell your own token.
What makes DeFi 2.0 different?
OlympusDAO (OHM) wants an alternative to liquidity mining create and create one Liquidity as a service platform. The DeFi project offers liquidity providers an incentive to sell their tokens (LP tokens) located in a liquidity pool. OlympusDAO offers you OHM tokens at a cheaper rate. The LP token sellers can have these OHM tokens paid out continuously over a predetermined period of time. This feature is to prevent sellers from selling the discounted tokens all at once for a quick profit.
Instead of using newly issued tokens for temporary liquidity, OlympusDAO is turning the liquidity mining model inside out. Users are induced to give up their liquidity permanently and DeFi projects therefore in theory do not have to offer any or fewer liquidity mining incentives, as they can acquire liquidity at OlympusDAO.
In addition, OlympusDAO can use the purchased LP tokens to generate additional income for its own protocol from trading fees or to lend this to other DeFi protocols – liquidity as a service.
So far, the service from OlympusDAO seems to be extremely successful. The DeFi 2.0 project now owns over 99.7 percent of its Liqudity Pools on SushiSwap itself (almost 90 million US dollars). In addition, the price of the OHM token has grown by over 94 percent within the last 30 days.