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Home » DeFi 2.0.: The Solution To Yield Farming Risk?

DeFi 2.0.: The Solution To Yield Farming Risk?

It changed everything, and it will do it again. If you missed out on the 2020 DeFi boom, what’s coming could be that second chance so many were hoping for. The DeFi space is far from saturated, so what can we expect from a new improved version?

You can get an idea by looking at other iterations already happening. For example, the rise of Web 3.0. has brought us the metaverse, from multi-chain NFTs to play-to-earn. Just like DeFi, Web3 is an umbrella term for many technologies in development.

So what is DeFi 2.0., and when will it happen?

The New DeFi Iteration

If you’ve never heard of DeFi 2.0., you’re not alone. And as a DeFi follower, probably neither. It’s such a recent movement there are barely any projects about it. A bit like MakerDao in its early days.

Which on DeFi 2.0. would be Olympus Dao, Wonderland, and Convex. More on that later.

To explain DeFi 2.0., you have to start with DeFi 101. By that, we refer to all the platforms that offer financial services with no third-party intervention.

  • Lending Platforms
  • Decentralized Exchanges (DEXs)
  • Yield Farms and Optimizers

DeFi 101 has seen a lot of experimentation. There have been platforms with four-digit APYs and tokens that fell close to zero. Not only can it be risky, but it’s not user-friendly either.

The DeFi we know is not what it was meant to be. True DeFi should be 100% decentralized, scalable, liquid, accessible, and secure. DeFi 2.0. is a new generation of platforms that will hopefully solve these problems.

What Wrong With The Current DeFi Space?

While there’s a lot “wrong” with DeFi (hence why it’s always changing), it doesn’t mean that DeFi 2.0. will replace it. Similarly, Web2 and Web3 platforms coexist despite both having pros and cons.

According to’s research report, the success of DeFi 2.0. is not taking away any market from existing DeFi solutions. Unless they’re direct competitors, you can invest in both types without getting in each other’s way. DeFi 2.0. addresses problems that DeFi 101 didn’t solve:

  • Centralization. While decentralization is possible, it can be inconveniently slow. If DAOs want to maximize TVLs and adoption, they may trade off decentralization. Protocols like these give more decision power to early, large contributors.
  • Liquidity. Whether you trade, invest, or farm yield, you need money to make money. And so do many amazing protocols that don’t have the funds to add token utility. And to provide more features, they partner with other providers for a fee (e.g., Uniswap with liquid staking solutions).
  • Scalability. DeFi protocols can lose efficiency when trying to scale. If it becomes too slow or expensive, people start looking for more rewarding platforms. Market behavior and regulations complicate it further.
  • Security. DeFi dApps use non-custodial wallets (e.g., Metamask), which is safer than large exchanges. However, your protocol can only be as secure as your infrastructure is. Building dApps with Ethereum’s proof-of-stake isn’t the same as, say, Solana’s proof-of-history.

Because of these problems, the DeFi 2.0. generation can follow two paths:

For the everyday investor, both DeFi 101 and 2.0. may look the same. So when it comes to features and results, how is DeFi 2.0. “better?”

What Does DeFi 2.0. Look Like?

When it comes to project adoption, liquidity is the biggest challenge. The way DeFi platforms have done it so far is via staking rewards, fee distribution, and LP tokens. Whether they use some or all of these incentives, 100% of the platform’s liquidity comes from the users.

More incentives may add token utility but decrease its value. And the smaller the fund pool, the easier it is to unbalance the pool and market prices. The riskier it becomes for yield farmers.

Olympus DAO (OHM) could be one DeFi 2.0. solution. This protocol owns 99% of the liquidity ($300M+) and automatically stabilizes the pool. Not only does it minimize impermanent loss but also offers interest rates as high as 7,000%.

While not as high, Olympus still maintains crazy APY rates a year later.

Olympus still maintains high APY rates a year later.

The DAO is always looking for protocol improvements. Some of them apply to Olympus, while others become forks. Most notably Wonderland ($TIME).

Protocol-owned liquidity introduces new tools to reduce yield farming risks:

  • Smart Contract Insurance: Smart contracts have limited use because they can’t access external data. Oracles like Chainlink solve that problem. Now investors can get a backup plan for cryptocurrencies’ volatility.
  • Impermanent Loss Insurance: The protocol earns fees just like liquidity providers. Which can go to build an insurance fund or mint more tokens.
  • Self-Repaying Loans: It’s possible to generate and compound interest with the collateral given to your lender. Once it matches your initial amount, you get back your collateral. Almost like getting paid to borrow.

DeFi 2.0. doesn’t necessarily introduce ground-breaking technologies. It instead offers solutions to overlooked problems such as risk management and usability.

Is There A New DeFi Summer Coming?

DeFi rocketed to the billions in 2020, peaking above $100B in 2021. And it could have gone higher if it wasn’t because of its inherent risks. The DeFi projects that tried to scale found overlooked problems, from security to liquidity.

Moreover, the recent chaos with Terra Luna’s stablecoin shows how necessary DeFi 2.0. is.

How do you find the perfect balance between scalability, decentralization, and security? Once we find the way, DeFi won’t only be more rewarding but safer than traditional finance.

Olympus DAO, Convex Finance, and Wonderland were the first movers. But the next Aaves and Uniswaps don’t even exist yet. Right now, it’s more of a DeFi 1.1 than a 2.0. We’re yet to see how this new iteration delivers on its promises.

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