{"id":84644,"date":"2023-07-13T08:03:59","date_gmt":"2023-07-13T08:03:59","guid":{"rendered":"https:\/\/www.techopedia.com"},"modified":"2024-01-15T10:32:43","modified_gmt":"2024-01-15T10:32:43","slug":"decentralized-finance-2-0-evolution-and-new-opportunities-in-the-defi-2-0-space","status":"publish","type":"post","link":"https:\/\/www.techopedia.com\/decentralized-finance-defi-2-0-evolution-and-new-opportunities","title":{"rendered":"Decentralized Finance 2.0: Evolution and New Opportunities in the DeFi 2.0 Space"},"content":{"rendered":"<p><span style=\"font-weight: 400;\"><a href=\"https:\/\/www.techopedia.com\/definition\/34630\/decentralized-finance-defi\">Decentralized finance<\/a> (DeFi) is a disruptive technology that is changing the way we interact with the finance industry. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">DeFi has opened up new possibilities like instant loans, decentralized trading, and peer-to-peer lending. The industry that emerged in 2018 is fast-growing and has now entered its next phase, called DeFi 2.0. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">In this article, we talk about the industry, the concept of DeFi 2.0, its key features, and the new opportunities it presents.<\/span><\/p>\n<h2><span id=\"what_is_defi\">What Is DeFi?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Decentralized finance is an emerging financial industry that is powered by public <a href=\"https:\/\/www.techopedia.com\/definition\/30246\/blockchain\">blockchains<\/a> like <a href=\"https:\/\/www.techopedia.com\/definition\/32571\/ethereum-cryptocurrency\">Ethereum<\/a>, Solana, and Tron. DeFi aims to create a new financial industry that is fair, free, and open to anyone with internet access.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">DeFi differentiates itself from the traditional finance industry as its users do not have to depend on or interact with intermediary financial institutions.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Users trade crypto assets, buy derivatives, lend and borrow funds and earn interest using <a href=\"https:\/\/www.techopedia.com\/definition\/33409\/decentralized-application-dapp\">decentralized applications<\/a> (dApps). These functions on these applications are automated and powered by <a href=\"https:\/\/www.techopedia.com\/definition\/32499\/smart-contract\">smart contracts<\/a>.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The main features of the early DeFi 1.0 were:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\"><strong><a href=\"https:\/\/www.techopedia.com\/definition\/stablecoin\">Stablecoins<\/a>:<\/strong> Fiat-pegged cryptos like USDT and DAI provided crypto users with dollar exposure and stable prices.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\"><strong><a href=\"https:\/\/www.techopedia.com\/5-emerging-trends-in-crypto-lending-and-borrowing\">Crypto lending and borrowing<\/a>:<\/strong> Decentralized applications like Aave and MakerDAO pioneered crypto lending markets.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\"><strong><a href=\"https:\/\/www.techopedia.com\/definition\/decentralized-exchange-dex\">Decentralized exchanges <\/a>(DEX):<\/strong> Smart contract technology allowed users to trade on DEXs.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\"><strong><a href=\"https:\/\/www.techopedia.com\/definition\/defi-yield-farming#:~:text=Yield%20farming%20is%20a%20way,be%20financial%20or%20non%2Dfinancial.\">Yield farming<\/a>:<\/strong> The need for liquidity in DEXs and lending platforms created liquidity pool markets for users to contribute their cryptos and earn interest on them.<\/span><\/li>\n<\/ul>\n<h2><span id=\"what_is_defi_20\">What Is DeFi 2.0?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">DeFi 2.0 is the evolution of the early decentralized finance industry. It looks to address limitations and solve problems of the initial stage of the DeFi movement.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The key features of DeFi 2.0 include:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Improved scalability<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Cross-chain interoperability<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Optimized yield farming opportunities<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Enhanced on-chain on governance<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Competitive oracle market<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Better user experience<\/span><\/li>\n<\/ul>\n<h2><span id=\"opportunities_in_the_defi_20_space\">Opportunities in the DeFi 2.0 Space<\/span><\/h2>\n<h3>L2 scaling<\/h3>\n<p><span style=\"font-weight: 400;\">Achieving mass scale is the dream of the entire crypto industry. The limited scale of underlying blockchains like Ethereum has hindered the growth of the DeFi industry.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In 2022, Ethereum completed its long-awaited transition to a <a href=\"https:\/\/www.techopedia.com\/definition\/33595\/proof-of-stake-pos\">proof-of-stake<\/a> (PoS) <a href=\"https:\/\/www.techopedia.com\/definition\/consensus-algorithm-consensus-mechanism\">consensus mechanism<\/a>, which paved the way for Ethereum to facilitate faster and cheaper transactions using <a href=\"https:\/\/www.techopedia.com\/definition\/layer-two-l2\">layer two<\/a> (L2) rollups. As the underlying infrastructure improves, the DeFi applications built on top of it are expected to become more scalable and efficient.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The EVM-compatible nature of L2 rollups is a big boost for the DeFi ecosystem. <a href=\"https:\/\/www.techopedia.com\/definition\/ethereum-virtual-machine-evm\">EVM<\/a> compatibility allows developers to easily duplicate their existing Ethereum-based applications to L2 rollups without having to rewrite the code.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The growth of DeFi on L2 chains has enormous potential. Leading DeFi platforms like Uniswap and Aave have already extended their presence to L2 chains like Optimism and Arbitirum. Other projects are expected to follow, while newer applications may even choose to directly launch on L2 chains.<\/span><\/p>\n<h3>Cross-Chain Interoperability<\/h3>\n<p><span style=\"font-weight: 400;\">When the DeFi movement started in 2018, cryptocurrencies existed in isolated environments. Cryptos native to a particular blockchain could not interact with other blockchains.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, the emergence of cross-chain bridges has enabled the transfer of cryptos from one blockchain to another. This cross-chain movement of crypto has allowed the DeFi movement to flourish beyond bigger chains like Ethereum.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Capital is now flowing into upcoming projects, thereby enabling innovation in the DeFi sector. This is a key characteristic of DeFi 2.0.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Where does the opportunity lie? Cross-chain bridges are an emerging technology. Bridges are not perfect and come with security vulnerabilities. Blockchain networks like <a href=\"https:\/\/www.techopedia.com\/definition\/34445\/polkadot-blockchain\">Polkadot<\/a> and Cosmos that have built-in interoperability features have fledging DeFi ecosystems that could see accelerated growth in the future.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">EVM-compatible layer one blockchain like Avalanche and <a href=\"https:\/\/www.techopedia.com\/definition\/binance-smart-chain-bsc\">BNB Chain<\/a> also have the chance to eat into Ethereum\u2019s DeFi market share.<\/span><\/p>\n<h3>Customisability<\/h3>\n<p><span style=\"font-weight: 400;\">Higher levels of customizability for developers and end users will be a key feature in the DeFi ecosystem.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Cosmos \u2013 which was featured in <a href=\"https:\/\/www.techopedia.com\/cryptocurrency\/best-defi-2-0-coins\">Techopedia\u2019s 8 best DeFi 2.0 projects<\/a> list \u2013 allows developers to create application chains. 2022 saw an emerging trend where DeFi applications chose to move away from <a href=\"https:\/\/www.techopedia.com\/definition\/layer-1-in-blockchain\">L1<\/a> blockchains and start their own native chains.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Crypto derivative DEX dYdX made headlines when it announced that it will move to Cosmos and will exist on its custom blockchain. The main motive behind this movement is to allow higher levels of customizability and greater scalability.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In June 2023, leading DEX Uniswap announced its vision for a highly-customizable Uniswap v4. The DEX will introduce smart contracts called \u201chooks\u201d that will allow developers to create customized liquidity pools.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The new features will include on-chain limit orders, customized on-chain oracles, dynamic fees based on volatility, and more.<\/span><\/p>\n<h3>Yield Farming<\/h3>\n<p><span style=\"font-weight: 400;\">There are numerous ways to yield farm in DeFi 2.0. Liquid staking token (LST) yield farming gained prominence after Ethereum completed its move to PoS consensus.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The emergence of crypto staking platforms like Lido and Rocketpool that issue staking tokens to users has given birth to a new yield farming strategy called leveraged staking.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Here is an example of leveraged staking. Max owns 100 ETH tokens and chooses to stake all of his ETH for yield on Lido. Lido issues him 100 stETH tokens which he can use to redeem his locked (<a href=\"https:\/\/www.techopedia.com\/definition\/staking-blockchain-staking\">staked<\/a>) ETH.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In search for more yield, Max deposits 100 stETH as collateral on the crypto lending platform Aave to borrow new ETH tokens. He then stakes the borrowed ETH and receives new stETH in return for it. Max can choose to repeat the process depending on his risk appetite. This is called leveraged ETH staking.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Note that these strategies are risky and can result in devastating losses.<\/span><\/p>\n<h3>On-Chain Governance<\/h3>\n<p><span style=\"font-weight: 400;\">Developing effective ways to implement on-chain governance is one of the biggest challenges in the crypto sector.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Blockchains like Polkadot and <a href=\"https:\/\/www.techopedia.com\/definition\/cardano-ada\">Cardano<\/a> are pushing for upgrades to improve their on-chain governance system. Cardano aims to governance to all users with the introduction of a voting and treasury system. Meanwhile, Polkadot announced an open governance platform that will empower DOT holders to vote on budget allocation, software updates, and more.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Offchain tools like Snapshot are also being used by projects to simplify voting processes and to facilitate gas-less voting.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The road to better blockchain governance is a tricky one. The world has seen several instances of on-chain governance failures. If the crypto industry gets this right, the impact will be noteworthy.<\/span><\/p>\n<h3>Competitive Oracle Market<\/h3>\n<p><span style=\"font-weight: 400;\">DeFi applications are highly dependent on data <a href=\"https:\/\/www.techopedia.com\/definition\/oracle-blockchain-oracle\">oracles<\/a> for off-chain information based on which smart contracts execute commands. The heavy reliance on oracles is one of DeFi\u2019s biggest vulnerabilities.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">At the moment, the blockchain oracle sector is dominated by Chainlink. Most decentralized applications use Chainlink oracles for price feeds, automation, and random number generation.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Now, alternative oracle services are appearing, which could result in a healthy and competitive blockchain oracle market. In October 2022, Binance launched its oracle service, which is expected to be used across 1,400 applications on the BNB Chain. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">Alternative first-party oracles services like API3 promise accuracy and trustworthy data directly from the source.<\/span><\/p>\n<h3>User Experience<\/h3>\n<p><span style=\"font-weight: 400;\">User experience on DeFi applications has significantly improved since the early days. The improvements in <a href=\"https:\/\/www.techopedia.com\/cryptocurrency\/best-crypto-wallets\">crypto wallets<\/a> have been and will remain key to better user experience.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Simple solutions like Wallet Connect, which allows users to log in to dApps without the need to install browser applications, have helped. More complex solutions, like the introduction of smart contract wallets, are expected to simplify user onboarding, cross-chain experience, and <a href=\"https:\/\/www.techopedia.com\/definition\/gas-fee-ethereum\">gas fee<\/a> payments.<\/span><\/p>\n<h2><span id=\"the_bottom_line\">The Bottom Line<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">DeFi 2.0 is by no means the final form of blockchain finance. The growth of the DeFi sector is completely dependent on innovation in the underlying public blockchain space. Ethereum is considered the hotbed of DeFi, and Ethereum\u2019s scalability roadmap signals a long and tricky road ahead. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">W<\/span><span style=\"font-weight: 400;\">e are yet to see the full potential of DeFi. And a<\/span><span style=\"font-weight: 400;\">s things stand, the current developments promise a fairer and open financial system for all.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Decentralized finance (DeFi) is a disruptive technology that is changing the way we interact with the finance industry. DeFi has opened up new possibilities like instant loans, decentralized trading, and peer-to-peer lending. The industry that emerged in 2018 is fast-growing and has now entered its next phase, called DeFi 2.0. In this article, we talk [&hellip;]<\/p>\n","protected":false},"author":286557,"featured_media":84909,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_lmt_disableupdate":"no","_lmt_disable":"","om_disable_all_campaigns":false,"footnotes":""},"categories":[601,602],"tags":[1023,1106],"category_partsoff":[],"class_list":["post-84644","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blockchain","category-cryptocurrency","tag-blockchain","tag-cryptocurrency"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.2 (Yoast SEO v24.5) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Decentralized Finance (DeFi) 2.0: Evolution and New Opportunities<\/title>\n<meta name=\"description\" content=\"L2s, alternative blockchains, and interoperability-focused networks will see DeFi growth as the sector looks to scale. 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