Decentralized Financial

What is DeFi 2.0? How is it different from the original DeFi and how is it changing the financial world?

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What is DeFi 2.0? How is it different from the original DeFi and how is it changing the financial world?

In the fast-changing world of today, technology continues to develop at an incredible rate, and new products and services are constantly being created and improved upon. More and more are engaging with Blockchain as a means for financial transactions and storing information with companies from all sorts of industries integrating their businesses with Blockchain technology.

In this article, we are discussing DeFi (Decentralized Finance), a growing trend in the financial world. Decentralized Finance initially grew in popularity through its ability to manage huge volumes of transactions in digital assets, from cryptocurrency to NFTs, which today can be done with the use of Blockchain, without the need for an intermediary.

Now the system is undergoing another evolution, DeFi 2.0, a more developed version for decentralized financing. In this article, we will discuss in more detail what DeFi and DeFi 2.0 are, as well as other related systems so you can keep up with the latest developments and incorporate this knowledge into your investment decisions.

What is DeFi?

DeFi (Decentralized Finance) is a financial system that functions without an intermediary and is able to function in every way that a bank can, including creating assets, overseeing borrowings, guarantees, transferring assets, as well as managing many other types of transactions that a financial institution would be able to do today.

Through a decentralized system on the blockchain, DeFi can implement various execution mechanisms to satisfy certain conditions through smart contracts.

Image from BAP-Software

 

It is important to mention that the DeFi system is considered to be trustworthy, uses safe technology, and has a sound way of working. Already, this could be seen as an improvement on the traditional financial system which is operated by financial institutions.

Other than this, DeFi can also manage the savings and accounts of its clients. The client would connect their e-wallet with the DeFi system through a website that provides this service when they need to buy, sell, or trade their digital assets or undergo any other kind of activities such as asset management. All of this can be done through the blockchain with DeFi.

We can’t get into DeFi without also discussing Digital Assets which are assets on the system that can be literally anything. This includes gold, oil, stocks, land, and anything else you can imagine. These are not simply just things that can be traded, but in fact, they have more uses than that. 

Many might see digital assets as something that will happen in the future, but actually, this is all already happening, and will continue thanks to the abilities of DeFi.

What is DeFi 2.0, and how is it different from the original DeFi? 

DeFi 2.0 is the upgraded version of DeFi that was created in order to remedy the weak spots and further utilize the stronger points in the DeFi system in order to increase opportunities for its clients and what the system can be used for.

As mentioned at the beginning of this article, DeFi has its advantages and is a system that has grown quickly and substantially. However, it is not without its issues and therefore has necessitated the need for an updated version– DeFi 2.0. 

The limitations of DeFi (Decentralized Finance) 

Image from Coin98insight

Scalability : expensive gas fees and longer transaction times

Security : issues with risk related to hacking and rugpulls 

Lending Platform : there are more lenders than borrowers

Governance Token : the governance token that we stake cannot be used elsewhere outside of the system

The above reasons are why we needed to amend DeFi and come up with DeFi 2.0, an extension of the original system. Other than rectifying the issues stated, DeFi 2.0 will also improve upon other processes in the system.

How is DeFi 2.0 changing the financial world?

Platforms that run on DeFi 2.0 tend to be younger projects that are testing the risks of running on the system. Therefore, the returns tend to be very high compared to platforms that have been on for longer on the original DeFi system. 

The trend for DeFi 2.0, and what is most evident right now, is that capital efficiency is setting a new standard by using TVL (Total Value Locked). The previous DeFi utilized locked which gave rise to the orginal DeFi limitations that we discussed earlier in this article.


An Example of DeFi 2.0 platforms: 

RariCapital is the most popular platform among projects on DeFi 2.0 because their coins are listed on Coinbase (the largest trading platform, functioning as a stock market for digital assets). Seen as the next lending protocol, RariCapital is a platform that allows anyone to create a liquidity pool of coins that others can borrow. Everything can be customized, including the coins to be borrowed, with a self-supporting Oracle system from other AMMs.

As DeFi 2.0 comes together, we will be seeing many new innovations, much like the original DeFi. DeFi 2.0 is still in its early stages today, and we will have to wait and see if this version is able to do all that it claims and if it really will mend the issues in DeFi.


Conclusion

There are many projects on DeFi 2.0 today, and we anticipate a lot of changes in the system as it continues to develop. The information in this article is based on the current working model of DeFi 2.0 as well as the forecasts of investors. DeFi 2.0 is still very new, and so we recommend that you study market data thoroughly and prepare for the waves in the market that will continue to influence the system.