Decentralized Finance, popularly known as DeFi, is a disruptive technology actively changing our interaction with money. Long touted as groundbreaking in finance, DeFi allows users to exchange value without third-party participation. It enables data preservation between trading entities only, where users have more control over their data and finances. We are now on the verge of realizing DeFi’s true potential with the imminent establishment of DeFi 2.0 — the second generation of DeFi protocols.
DeFi 1.0 problems
With its promising applications, DeFi is still limited by its inherent flaws. These drawbacks evident in DeFi 1.0 create a barrier to adopting ready solutions to global financial limitations. They include,
- Scalability — Users expect seamless services regardless of active participants in a platform; unfortunately, DeFi 1.0 suffers from inadequate scalability. Most platforms are unable to keep up with the growing number, leading to poor services. High gas fees and long waiting times dampen user experience, hurting DeFi adoption.
- Liquidity — It serves as the driving force for every market. Without liquidity, markets would naturally die out. For DeFi 1.0, liquidity remains low due to adoption constraints and participant apathy. Most DeFi participants are partially invested due to drawbacks such as scalability issues and inadequate liquidity. This creates a vicious cycle that stifles DeFi growth.
- Centralization – Most DeFi 1.0 applications are still centralized despite their ‘decentralized’ claim.
Why you should be excited about DeFi 2.0
DeFi 2.0 picks up from DeFi 1.0 by dropping the limiting attributes listed above. It tackles scalability, liquidity, centralization, and capital efficiency to improve DeFi. As such, users should expect a better or different experience from DeFi 1.0.
At its core, DeFi 2.0 addresses each challenge as follows:
Blockchain technology has improved over the years. DeFi 2.0 uses improvements in blockchain, such as layer one and layer two modifications, to meet growing scalability demands. Users will experience lower wait times and lower gas fees per transaction in DeFi 2.0 platforms. Improvements in layer one are expected to improve the overall user experience and catalyze a new wave of DeFi adoption globally.
DeFi 2.0 improves market liquidity by helping users earn more yields. Essentially, inadequate liquidity is a problem of numbers and participation in a market. DeFi 2.0 creates a market environment primed for liquidity flow by availing ways for earning more and rewarding more for participation in platform activities. Through airdrops and enticing ROIs, more users are attracted to DeFi, translating to more market liquidity and currency flow.
DeFi 1.0 drew attention through its unique proposal of user involvement in the decision-making of platforms. This was never achieved as it was envisioned in DeFi’s first generation. DeFi 2.0 makes decentralized autonomous organizations (DAO) a priority. Many platforms are already using DAO in its different forms to make decisions and steer development.
DAO gives users a sense of belonging and ownership of a project they take part in. Users are more likely to participate in various platform activities due to the feeling of ownership created by DAOs. This will improve factors such as liquidity — a significant problem in DeFi’s first generation.
DeFi, in its current form, poorly utilizes capital at its disposal. Total value locked compared to liquidity in circulation is evident of low capital utilization. Further, platforms are registering more lenders than borrowers — another sign of poor capital utilization.
In its second generation, DeFi will have innovative ways of proper capital utilization to spur market growth and participation.
Users should expect an overall better DeFi experience with increased liquidity, low gas fees, decentralized governance, and proper utilization of resources at hand.
DeFi 2.0 is coming to POP!
PoP! — a platform dedicated to improving business by establishing mutual trust and commitment — is implementing elements essential to DeFi’s second generation. We are currently developing multichain interoperability to strengthen our platform function on accessibility. Users will access our services from multiple chains once our services are up.
POP! is a platform that allows 2 projects to objectively display mutual trust and commitment to each other, by locking their respective tokens together and creating a trustless Mutual Liquidity Pool (MLP). In addition, it grants POP! users the opportunity to provide single-sided liquidity, in the form of their favorite token, by matching them with another POP! user and adding their joint liquidity into the MLP.
Powered by Faculty Group, POP! aims to set a new golden standard with regards to partnerships, and how they are perceived in the digital asset ecosystem.