Since its inception in 2018, Decentralized Finance (DeFi) has opened up new avenues in financial markets; it is now upgrading to DeFi 2.0. Public blockchains like Ethereum, Tron, and Solana power the emerging financial industry. It aims to create a fair, free, and open-to-all financial sector. Experts argue that the industry is slowly evolving to become the next generation; Decentralized Finance 2.0.
DeFi 2.0 – Everything You Need to Know
The primary features of the first generation are Stablecoins, primarily fiat-backed non-volatile cryptocurrencies like USDT and DAI. Then comes Crypto lending and borrowing, with applications like Aave and Maker Dao. They are followed by Decentralized Exchanges (DEX) using smart contracts technology by users to trade on Dexs. Finally, it allowed Yield Farming, leveraging liquidity platforms, and a liquidity pool market where users keep digital assets to earn interest.
The developers are working extensively on developing the next version of Decentralized Finance 2.0 to address the limitation of the first generation, along with the possibility to solve the issues persistent from the inception of the first generation.
The key feature of the next generation would include;
- Improved Scalability.
- Cross-chain Interoperability.
- Enhanced on-chain on governance.
- Optimized yield farming opportunities.
- Competitive Oracle market.
- Enhanced user experience.
The upcoming version of Decentralized Finance would present various opportunities. The first would be layer-two scaling, as the industry is expanding with thousands of new users entering the realm daily. The limited scalability of the blockchains like Ethereum has been a concerning point for developers.
In 2022, during a hard-fork event, Ethereum transitioned from Proof-of-Work (PoW) consensus to Proof-of-Stake (PoS) mechanism. This transition facilitated faster transactions on the Ethereum blockchain using layer-2 rollups. Along with developing the underlying blockchain infrastructure, dApps are expected to evolve, becoming scalable and efficient.
In 2018, most of the cryptocurrency ecosystem existed in isolated environments. Cryptocurrencies native to a particular blockchain were unable to interact with others. With the advent of cross-chain bridges, the transference of crypto from one blockchain to another was possible. This pushed the decentralized finance movement beyond the limitations of blockchains like Ethereum.
Cross-chain bridges are an emerging technology. However, these bridges are known to be a favorite point to attack for hackers and come with an underlying vulnerability. If correctly addressed DeFi 2.0 can solve the problem.
The next exciting feature in the next generation will be an extended level of customization. Cosmos was featured in Technopedia’s 8 best DeFi 2.0 projects, allowing developers to create applications on-chain. The added feature should include on-chain limit orders, customized on-chain oracles, dynamic fees based on market volatility, etc.
Subsequent versions would facilitate multiple ways for yield farming. For instance, the Liquid Staking Tokens (LSTs) yield farming garnered much attention after the hard fork event and Ethereum Shapella Upgrade, which allowed unstaking. Being a relatively new concept, liquid staking has many more possibilities.
One of the biggest challenges the crypto industry faces is the implementation and working of on-chain governance. Cardano and Polkadot are already pushing for upgrades facilitating on-chain governance. However, the road to its success is treacherous, but if the developers manage to strike the correct note, the symphony can be achieved.
dApps depend highly on data oracles for off-chain information to execute smart-contract commands. This heavy reliance has proved to be among the most significant vulnerabilities of decentralized finance. Alternative first-party oracle services, like AP13, facilitate accuracy and trustworthy data directly from the source.
Lastly, the developers are trying to enhance the user experience. The advancement in crypto wallets has been beneficial for increasing crypto adoption. Developers are working on more straightforward solutions like Wallet Connect, allowing users to log in to dApps without installing browser applications.
Evolution is eminent and decentralized finance will also go under some development with time. Developers are trying to address specific issues and develop the next version of decentralized finance 2.0.
Steve Anderson is an Australian crypto enthusiast. He is a specialist in management and trading for over 5 years. Steve has worked as a crypto trader, he loves learning about decentralisation, understanding the true potential of the blockchain.
Source: https://www.thecoinrepublic.com/2023/07/14/everything-to-know-about-decentralized-finance-defi-2-0/