DeFi 2.0 is giving users a new source of passive income and greater autonomy!
Decentralized financing (DeFi) is a way of taking banking outside the control of traditional financial institutions. It has emerged as a new and revolutionary way of investing funds with quicker transaction speeds. As of January 2022, US$92.3 billion of value is locked in on DeFi platforms.
With DeFi platforms gaining more relevance, there have been many attempts to improve upon their functioning. DeFi 2.0, the second generation of DeFi protocols, is one of the attempts that aims to improve the plus points of a typical DeFi platform to make it more user-friendly. Let’s take a look at how DeFi 2.0 works and some DeFi 2.0 projects that you can look out for in 2022.
DeFi 2.0 explained
DeFi 2.0 intends to address the risks present in DeFi transactions. These risks include the volatility of crypto, security concerns within smart contracts and a lack of accountability to pay back loans.
DeFi 2.0 introduces insurance for the losses that might be incurred by liquidity providers (LPs), who fund a liquidity pool with crypto assets, due to fluctuating crypto prices. Similarly, it helps mitigate risks posed by faulty smart contracts by ensuring smart contracts. DeFi 2.0 also ensures that there are no critical errors in smart contracts by holding open-source communities or insurance providers responsible for performing security audits on the contracts.
As far as the lack of accountability is concerned, DeFi 2.0 ensures repayment of loans by making them self-repaying. Self-repaying loans use the collateral from yield farming (crypto staked within liquidity pools) to pay off loans.
DeFi 2.0 projects
Now that we know what DeFi 2.0 hopes to accomplish, here are some projects that are shaping the future of DeFi.
Olympus DAO
One of the leaders in the DeFi 2.0 movement is Olympus DAO. The platform is a decentralized autonomous organization (DAO) with OHM as its native token. The OHM token is supported by a wide variety of crypto assets, including DAI and FRAX, and thus is able to maintain relative price stability.
Much like any other DAO, Olympus gives token holders the ability to vote on important decisions. Users can earn money through the platform by staking their OHM tokens. Through staking, users also earn sOHM (staked OHM), which can be leveraged on various DeFi platforms. You can convert sOHM token into OHM by burning it. Another way in which Olympus DAO users can earn money is via bond sales. Users can create LP tokens and use them to issue bonds and purchase OHMs for a discounted price.
Abracadabra.money
Another major project in the DeFi 2.0 movement is the lending platform Abracadabra.money. Those who possess interest-bearing tokens, such as yvWETH and yvUSDC, can use the assets as collateral to borrow or mint the dollar-pegged stablecoin Magic Internet Money (MIM) on the platform.
Through this system, users can convert their interest-bearing tokens, which were previously left idle, into a liquid asset and earn more. The platform has low borrowing costs and stable interest rates. The platform also has a governance token called SPELL. Holders of the SPELL token can vote on proposals and receive platform fees by staking it.
Convex Finance
Convex Finance (CVX) is a DeFi platform built on top of the stablecoin exchange Curve Finance (CRV). It provides CRV token holders and Curve LPs with an additional source of interest and trading fees on their tokens. The key reason why holders and LPs would stake CRV tokens on Convex rather than Curve is that it provides boosted rewards.
Basically, users of Convex Finance are just pooling their holdings of CRV to create Convex-supported Curve liquidity pools. These pools give you additional rewards as opposed to the average liquidity pool. This allows the users to not only get the benefits of holding CRV tokens (which is a share of the platform’s trading fee) but an opportunity to use their CRV holdings to earn trading fees from Convex Finance as well. LPs who invest their LP tokens on Convex Finance receive a base interest rate, some of Curve’s platform trading fees, boosted rewards as well as CVX tokens.
Should you invest in DeFi 2.0?
Everything we previously mentioned gives you insight into how DeFi 2.0 platforms work. They are essentially providing users with more voting rights and greater liquidity, which seem beneficial to users, adding to the “decentralized” nature of DeFi platforms.
However, all is not sunshine and daisies with DeFi 2.0. Some projects have had their fair share of scandal and skepticism associated with it. For instance, in January this year, news broke out that Sifu, one of the people working with Abracadabra.money, had previously founded a crypto exchange that lost US$169 million worth of user funds. This led to the price of MIM and SPELL crashing.
Another example comes from Olympus DAO. Skeptics of the platform say that the platform’s annual percentage yield from staking is so high (7000% via new OHM token mints) that it almost seems fraudulent.
So should you invest in any of these projects? Well, much like other types of crypto investments, there is a lot of research that needs to go into deciding which DeFi 2.0 project to invest in. Selecting a good project can make the difference between getting a profit and getting scammed. So invest some time into reading about the project, the people behind it and how it works.
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