DeFi 2.0 is a movement of projects improving on the problems of DeFi 1.0. DeFi aims to bring finance to the masses but has struggled with scalability, security, centralization, liquidity, and accessibility to information. DeFi 2.0 wants to combat these and make the experience more user-friendly. If successful, DeFi 2.0 can help reduce the risk and complications that discourage crypto users from using it.
You can also take out self-repaying loans where your collateral generates interest for the lender. This interest pays off the loan without the borrower making interest payments. Other use cases include insurance against compromised smart contracts and impermanent loss.
A growing trend in DeFi 2.0 is DAO governance and decentralization. However, governments and regulators may eventually affect how many projects are run. Keep this in mind when investing, as offered services might have to change.
Many investors adopted the term ‘Defi 2.0’ as these early players developed. 2.0 promises to improve capital utilization, launch new finance tech, and improve the user experience. The five most important projects to take off in 2022 are Abracadabra, Olympus, and Convex Finance
Problems solved by DeFi 2.0
DeFi 1.0 was innovative in that it created pools, whose liquidity was provided by users. More and more people started taking resources from the pool to finance their own crypto projects and problems began to emerge with that. Among those are:
- Selling LP tokens without an attractive staking mechanism
- Releasing more tokens as LP rewards, increasing pressure to sell
- Capital inefficiency
- Lending requires over-collateralized assets
3 Best DeFi 2.0 Coin 2021
Olympus DAO: A stable crypto and liquidity mining alternative
If you haven’t heard about it, Olympus DAO is a Decentralized Finance (DeFi) protocol whose primary use case seems to be “making people extremely angry.” Skeptics argue that its core functionality – a staking scheme with an annual percentage yield (APY) of 7,000% via new OHM token mints – is unsustainable to the point of being fraudulent.
OlympusDAO has achieved that feat by borrowing engineering principles from hundreds of failed experiments before it. Algorithmic stablecoins are a class of cryptocurrencies that leverage a series of bonds, coupons, staking mechanisms and “rebases” – tools that programmatically and automatically expand or contract the circulating supply of a currency – to create a digital asset, usually one intended to track the U.S. dollar.
How does Olympus and OHM work?
To ensure that each OHM is backed by a basket of assets and Olympus has the capability to maintain a floor price for OHM (currently 1 DAI), Olympus needs to amass a treasury. This is done through the initial sale and distribution of OHM, as well as subsequent issuance of “bondings”.
“Bondings” are the key innovation underpinning Olympus and how it seeks to manage its currency, OHM. Very simply, Olympus buys treasury assets from investors at their risk-free value and pays them back with OHM at a discount after a certain vesting period (currently 5 days). The discount rate of the OHMs is also known as the premium of the bondings – the higher the premium, the more OHMs investors will receive for their assets after the vesting period. Premiums rise with the debt ratio; the more OHM the protocol wants to sell through bondings, the higher the discount, and vice versa.
The initial version of “bondings” launched with OHM-DAI LP, where investors were encouraged to exchange their LP tokens (essentially their liquidity in the Sushiswap pools) in return for discounted OHM. Soon after Olympus also introduced bondings for other LP tokens, as well as other treasury assets such as DAI, FRAX, etc.
It is important to note that while they have a similar name, the “bondings” introduced by Olympus are not the same as bonds commonly understood in the traditional finance world. Bonds are debt obligations that have fixed tenor and coupon (think of it as a loan), where issuers have to repay their investors their principal and coupon at the end of the tenor. Olympus’ “bonding” however, is more akin to a discounted token sale. Investors sell their assets for OHM at a discount, but OHM itself generates no returns unless staked or through price appreciation.
Over time with more bondings sold, the Olympus protocol effectively owns most of the liquidity in the OHM Sushiswap pools. Olympus coined this lock-in as “Protocol-owned-Liquidity” (more on this later).
All these features working in tandem arguably leads to a virtuous cycle:
Abracadabra: adding value and improving use of capital
According to its website, Abracadabra Money is a lending platform. The interesting thing about this platform is that it utilizes interest-bearing tokens (ibTKNs). The interest-bearing tokens are those that accumulate interest and constantly go up in price as users hold them. They describe a portion in a lending pool that increases in volume as borrowers repay interest.
If you are a holder of one of the following interest-bearing tokens (ibTKN), Abracadabra is the project for you.
yvWETH — WETH v2 Yearn Vault
yvUSDC — USDC v2 Yearn Vault
yvYFI — YFI v2 Yearn Vault
yvUSDT — USDT v2 Yearn Vault
xSUSHI — Staked SUSHI
You can use these assets as collateral to mint Magic Internet Money (MIM).
Due to the fact that MIM is backed by ibTKNs, your collateral value is always increasing.
So what is MIM you may ask? MIM is a USD pegged stable coin. As with most stablecoins, it will be traded on markets with other stablecoins such as USDT, DAI, and USDC.
Abracadabra Money: How does it work?
Users follow the steps:
Step 1 — Collaterals are deposited on Abracadabra.
Step 2 — A debt allocation, with interest, is assigned to the borrower.
Step 3 — MIM tokens are deposited into the borrower’s wallet.
Step 4 — Users take their MIM wherever they like.
The next important thing to know is about tokens. In fact, Abracadabra has 3 principal tokens. These are :
- SPELL: This is Abracadabra’s money token that works as the governance token.
- MIM (Magic Internet Money). This MIM token is the main element to maintain the Abracadabra Money’s lending model. It is a USD pegged stablecoin.
- sSPELL: This token is received by staking SPELL tokens and utilized for fee-sharing and governance.
Abracadabra Money: About SPELL and MIM token
The maximum supply of SPELL is 210,000,000,000 SPELL coins. The distribution of the SPELL token is given below:
- 63% tokens for Global Farming Incentives
- 30% tokens for the Team allocation
- 7% tokens for Initial DEX Offering
According to the website, the MIM is a USD pegged stable coin and it is supported by ibTKNs. MIM tokens are issued by the multisig owners on Ethereum and they are included in circulation.
Convex: A new and improved user experience
What is Convex Finance (CVX)?
Convex Finance is a yield optimization and automation protocol built on top of Curve Finance. It allows users to receive boosted CRV and liquidity mining rewards with minimal effort. CVX is the native token of Convex Finance for staking, claiming performance fees, and governance voting.
What is ConstitutionDAO (PEOPLE)?
ConstitutionDAO was a crowd-funding movement to buy a first-edition copy of the U.S. constitution. PEOPLE is the token representing a share of the ConstitutionDAO. Since the bid for the document has failed, the PEOPLE token is now also representing a DAO movement with historical significance.
The DeFi evolution continues
Whether you think of DeFi 2.0 news as a generational change in decentralized finance or just a fancy name, one thing is sure: It’s another sign of the DeFi space’s continuing progress.
More importantly, the types of initiatives that make up the DeFi 2.0 movement show that we’ve already passed through what is perhaps the most critical stage of that evolution: the bootstrapping phase. With that out of the way, DeFi 2.0 projects now have the tools they need to keep pushing decentralized finance forward.
Developers are getting inventive when it comes to designing protocols (the concept of money lego) that maximize profit, capital efficiency, decentralization and everything else. Some tradeoffs have yet to be seen, but they do exist. For the time being, it appears like everyone is merely excited.
In a more philosophical sense, DeFi phase one taught us a lot. There have been numerous accomplishments as well as blunders. Lessons learned from a not-so-distant past. This field is maturing in terms of adoptions and technology and the decentralized ethos that people are forgetting as they combine with “the old world” — regulation, the government and traditional finance.