DeFi 2.0 there's a few things you may not know about it let's get into it so you just wet your
toes into the world of DeFi and discord and twitter is already full of DeFi 2.0 chatter
so what the hell is DeFi 2.0 anyways here are 5 things you don't know about DeFi 2.0 but first my
name is Trev and here at coin market cap we love making videos about all things crypto from market
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and anyways guys let's just get right into the video as you already know DeFi or decentralized
finance comprises all the decentralized alternatives to our existing financial world
the difference between DeFi protocols and traditional financial services is that DeFi
doesn't require intermediaries instead DeFi uses blockchain technology to cut out all of those
expensive middleman like banks brokers and stock exchanges and in the past year we've watched DeFi
go from a fringe idea to a colossal business right now the total value locked into DeFi
protocols is hovering around the 250 billion dollar mark and the global market cap for all
DeFi tokens is just under 150 billion dollars yes these figures are impressive but to put them into
context the global derivatives market contains an estimated 1 quadrillion dollars so DeFi still has
a way to go before we can even start making any meaningful comparisons to traditional finance
still the DeFi 1.0 protocols available to us now offer an impressive wide array of financial
services already we've got decentralized lending protocols like make your dow which enables you to
put your crypto up as collateral in exchange for less volatile assets like stable coins
there are derivatives platforms like synthetics that issue synthetic assets allowing for the
creation of crypto indexes like the DeFi index and of course we have decentralized exchanges or dexes
like uniswap and pancake swap dexes allow you to create your own liquidity pools or contribute
liquidity to a pool in exchange for a share of the transaction fees among other features however
given DeFi success it's pretty easy to overlook the problems our DeFi 1.0 protocols are up against
problems which DeFi 2.0 seek to address so without further ado let's take a look at 5 things you
don't know about DeFi 2.0 so that brings us to our first point which is DeFi 2.0 aims to provide
long-term liquidity once the sun's set on the summer of DeFi back in 2020 it became abundantly
clear that DeFi had a huge obstacle to overcome a persistent lack of long-term sustainable liquidity
to answer why we have to look at how most DeFi platforms get their liquidity in the first place
which is through incentivized liquidity mining liquidity mining involves third parties like
you and me lending our tokens to a protocol in exchange for an incentive if you've ever staked
or lent your crypto assets to a DeFi platform and received some of the platform's native tokens
you've received a liquidity mining incentive the assets we lend act as the platform's liquidity and
enable it to offer all of the usual default stuff like collateralized borrowing and token trading
and as DeFi has become more prosperous and competitive over time up and coming protocols
have started offering higher and higher rewards to learn more liquidity but this is
actually completely unsustainable but why because eventually and inevitably the platform runs out
of rewards to even give out or if it's rewards has an uncapped supply the protocol disburses
so many tokens that its value can never even rise the crux of the matter is that you and me
and all of the other liquidity providers aren't contracted to keep our liquidity in the pool
we can cash out whenever we feel like it which is usually around the time that the rewards dry up
and when that happens the whales are the first to cash out which drains all of the protocol's
liquidity then the protocol's native token inevitably crashes and then we can all move on to
the next shiny DeFi protocol there are countless examples of this exact situation to further
illustrate this problem but the one that stands out above the rest is a DeFi platform called titan
on june 16th 2021 titan's token was trading steadily at a respectable 65
but sometime during the evening titan whales began dumping their tokens on mass one after
another by midday the following day the price of a single titan token had crashed to a 0.0000024
and all but the first few whales that had cashed out were badly burned and the damage wasn't
limited to rookie investor even the veteran billionaire investor mark cuban took a hit
and this lack of sustainable liquidity has been a thorn in DeFi side for a while now but a couple
platforms have developed some innovative and interesting ways to solve this issue as such they
have been widely praised as the new wave of DeFi 2.0 protocols and one of these new potential DeFi
2.0 protocols is olympus so what does olympus do differently instead of using the liquidity mining
incentives relied upon by DeFi 1.0 protocols olympus owns 99.5 percent of its liquidity
a concept called protocol controlled liquidity or pcl by owning all of its liquidity olympus makes
it more and more difficult for a pod of crypto whales to dump their positions all at once and
crash the tokens value olympus achieves this by using what is called a decentralized reserve
currency called om right now om tokens are backed by a treasury which is owned and controlled by
olympus and has a balance of more than 750 million dollars each individual owned token is backed by
at least one die an ethereum based stablecoin which gives each token a price floor of at least
one dollar but each ohm token is actually backed by much much more than just one dollar currently
owned tokens are backed by around 150 dollars worth of assets which is mostly made up of die
frax lusd and eth and right now it's in its early stages but if protocol controlled liquidity keeps
on working it could become the DeFi 2.0 standard and we also have an upcoming video on DeFi 2.0
which includes a more detailed look at exactly how the olympus protocol actually works and that
brings us to the second point which is defined 2.0 won't rely on fiat back stable coins as you're no
doubt aware DeFi platforms rely heavily on stable coins most of which are backed by the us dollar
but this flies in the face of what DeFi is really all about DeFi is supposed to move us away from
inflationary centralized currencies like the dollar DeFi is not supposed to be a digital
duplicate of our existing financial services and for now fiat back stablecoins are integral to DeFi
1.0 protocols so how can DeFi 2.0 get around this problem this is an area where a number of possible
DeFi 2.0 protocols like alchemics fey protocol and olympus dow have been innovating to use
olympus decentralized reserve currency ohm as an example again ohm works just like a stablecoin but
it isn't a stablecoin because it's not pegged to a stable asset instead it's a free-floating reserve
currency backed by a basket of assets and the basket of assets in olympus case is its treasury
moving away from fiat back stablecoins will take a long time but olympus seems to be leading the way
so far but other DeFi protocols are creating new and even more efficient sustainable replacements
for stablecoins all the time and the next point is that DeFi 2.0 will be more decentralized one
of the most common gripes to hear about DeFi is the lack of true decentralization which is a fair
point as the word decentralized is right there in the name since DeFi has grown in popularity we've
seen increasing numbers of protocols move over to a dow operating structure which has gone some way
to addressing this concern as i'm sure you're already aware dao's or decentralized autonomous
organizations are managed and owned by their community of token holders not by a decentralized
company or a boardroom of directors anyone holding the required quantity of a dao's governance token
can propose changes to the dow and vote on changes proposed by other dow members by adopting a dow
structure DeFi protocols can offer a more and more democratic way to organize and operate
while simultaneously addressing the centralization concerns of DeFi users as you've no doubt noticed
a number of popular DeFi platforms now function as decentralized autonomous organizations
or dows including maker dao uniswap and a few DeFi 2.0 contenders like olympus already use
a dow structure as well and still there's a large number of DeFi protocols which have yet to adopt a
decentralized structure but as we start to move into a DeFi 2.0 era dows will likely become a
more common structure for DeFi protocols or maybe even the norm and that brings us to our last point
which is DeFi 2.0 will lower user costs and offer a superior user experience if you've used any DeFi
protocol you know that it can be both expensive and difficult to navigate clearly reducing the
cost for using DeFi services and improving the user experience would be important step
on the road to mainstream adoption so why have we grouped them together well before we see any lower
costs and a better user experience across the DeFi space two changes need to happen first
DeFi protocols must adopt a more sustainable way to source their liquidity the reasons for which
we covered in part 1 of this video if you've watched part one of this video you already know
why this is so important and the second change that we need to see is ethereum 2.0 going live
why well because right now the vast majority of DeFi protocols run on ethereum in ethereum as
we know suffers from low transactions in high gas fees and also low scalability but all that is set
to change with ethereum 2.0 which we are expecting to go live sometime next year ethereum 2.0 should
reduce gas fees speed up transaction times and make DeFi protocols built on ethereum much more
easier to scale and once transactions on DeFi protocols become faster and cheaper they become
more accessible to many many more people among the crowd of new DeFi users you can expect to see a
lot of first-time crypto users many of whom are currently priced out of DeFi but if they're not
priced out they might be avoiding DeFi for another reason which is they don't understand how to use
DeFi and while web 3.0 wallets like metamask have gone a long way making DeFi more accessible
even crypto natives still make mistakes like sending a token to the wrong network still these
products and services are improving all of the time and are making define incrementally easier
to navigate every single day for example metamask is trialling a new wallet purpose
built for institutional investors called metamask institutional which might go some way to bringing
more institutional investment to DeFi so the combination of a sustainable liquidity sourcing
across DeFi and the improvements expected from ethereum 2.0 will provide a better and cheaper
user experience during the DeFi 2.0 era anyways guys that's been 5 things you don't know about
DeFi 2.0 i've been your host trev and if you have any questions just ask alex in the description
below and also if you learned anything make sure to comment that down below in the comment section
as we're always eager to hear your feedback we'll catch you in the next one see you later