DeFi 2.0: Rehab for DeFi 1.0 Liquidity Addicts?
DeFi 2.0 protocols bring more efficiency in holding assets on their balance sheet and deploy stablecoins, liquidity, incentives, and assets through the hivemind of their token holders.
Excerpt from our Momentum 6 Alpha Leaks call with Scoopy Trooples about DeFi 2.0:
In the words of Scoopy Trooples, DeFi 2.0 provides three things:
- Increased capital efficiency in DeFi protocols: $TOKE will give a loan to a market maker then the market maker will provide the other side of the liquidity then create markets/add depth and profit off of the spreads
- Protocol controlled value/liquidity: $OHM pioneered this. Instead of just having a farming program to bootstrap, they also sold OHM bonds to back the currency and buy up all of the LP shares for $OHMDAI and $OHMLUSD
- Advanced treasury management for DeFi protocols: Projects will take their treasuries and deploy them into DeFi in order to increase their income and yields
Listen to the full episode here. Tune in to our semi-weekly Alpha Leaks Call on the Momentum 6 Twitter Space.
What is DeFi 2.0?
In the simplest terms, DeFi is an ecosystem by which various financial products become available on public decentralized blockchain networks. DeFi makes these products open to anyone and users do not have to go through financial intermediaries such as brokerages and banks.
As best described by Sam Kazemian: DeFi 2.0 protocols bring more efficiency in holding assets on their balance sheet and deploy stablecoins, liquidity, incentives, and assets through the hivemind of their token holders. DeFi 2.0 does not expect token holders to be just voters but also creates platforms with socially coordinated processes, mechanisms, and incentives to produce and deploy within the protocol.
Messari coined two major trends pushing DeFi out of its comfort zone: LaaS and Second-Order Protocols.
Liquidity as a Service (LaaS) providers are there to help protocols solve their addiction to liquidity mining. Liquidity mining is no longer attractive in DeFi because it is a perpetual expense on the balance sheet of a protocol. LaaS providers are beneficial as they help various protocols buy liquidity from the market or even rent it in a cheap and quality manner.
“Second Order” Protocols
These are protocols that seek to automate, extend or enhance existing DeFi models. Second-order protocols leverage DeFi’s composable nature. These protocols are also built on existing DeFi infrastructure to enhance, automate or extend existing processes or models.
DeFi 2.0 Protocols
Most of the DeFi 2.0 protocols we have in the current ecosystem are experimenting with social and algorithmic rules that formalize their capital deployment. Some of the things that differentiate such protocols are collateral, liquidity, incentives, governance tokens, and stablecoins.
This protocol uses the Olympus DAO’s bond mechanism to grant projects a chance to get their own protocol-owned liquidity. A project can exchange its tokens for an underlying asset or any kind of LP token it wishes at discounted prices. Such an approach is a great improvement to the traditional liquidity mining programs where projects must keep mercenary liquidity.
Olympus Pro allows protocols to permanently purchase liquidity while at the same time guaranteeing a new demand channel for these tokens. The underlying token in Olympus Pro bonds does not have any relation to the $OHM token. However, projects can pair with sOHM or OHM and gain exposure to OlympusDAO’s ecosystem.
Projects are offered a chance to spend native tokens and acquire liquidity in perpetuity without loss fear. This is unlike the current setup, where liquidity mining has a similar high upfront cost but with no benefit in return.
Token Reactor (Tokemak)
Tokemak is one of the first protocols to introduce Liquidity as a Service. Within Tokemak, projects can provide a single token to a reactor, which will then be paired with a base asset such as USDC or ETH.
Projects that acquire $TOKE can direct their liquidity to venues of their choice. It is an upfront investment that is far much better than traditional liquidity mining.
Tokemak is designed to be primarily used by:
- Liquidity providers and yield farmers: any user can deposit single assets into the network to be utilized as liquidity
- DAOs: DAOs can harness Tokemak’s liquidity flow in order to strengthen and direct liquidity for their project, offering an alternative to traditional liquidity mining
- New DeFi projects: New projects will be able to inexpensively stand up their own token reactors and use the Tokemak’s protocol controlled assets to generate healthy liquidity for their project from its inception
- Market makers: MMs can take advantage of the network’s store of assets in order to direct liquidity across various exchanges
- Exchanges: exchanges can also leverage TOKE’s utility in order to gain access to deep liquidity to bolster their market depth
Fei is a protocol with a decentralized and scalable stablecoin known as $FEI that is backed by on-chain reserves. Fei protocol is a giant MakerDAO CDP that has formalized ways of deploying liquidity. The mechanism has proved to be more efficient than that of market-based individual CDPs.
Fei Protocol announced a partnership with OndoFinance that will enable it to deliver an expensive and short-term LaaS option for DeFi. As such, protocols do not need upfront capital cost but will be exposed to impermanent loss. Fei Protocol will take a small fixed fee at the maturity of the liquidity period.
2022 and Beyond DeFi Predictions from Justin Choi
Jason Choi summarized some of the expectations in DeFi space through a Twitter thread:
The following are some of the takeaways:
- Low hanging fruits for decentralized Finance have already been built. CeDeFi presents the next billion to trillion-dollar opportunities.
- Most of the Decentralized Finance protocols will end looking the same. They will eventually verticalize to crypto banks.
- Total VEX volumes will be overtaken by total DEX volume within three years.
- Within 5 years, self-hosted front ends for Decentralized Finance will shoot by 30–50% of all Decentralized Finance usage.
- Within the next 3 years, 50% of Decentralized Finance users will have on-chain identity plus credit score equivalents.
- Anonymous teams will create about 50% of the largest DeFi protocols by market cap within the next 3 years.
- Within 3 years, <20% of total L2 usage will be from optimistic roll-ups.
- NFT are likely to transcend individual metaverses and their individual blockchains.
- In the next five years, a value increase in top-performing nonfungible tokens might outweigh the total revenues generated on the nonfungible token market.
- Most of the DeFi users will not care if they are using a fast L1 or L2
- One out of the five largest and most active VCs in the next five years will be a DAO.
- In the next five years, we are likely to see a DAO purchase a well-known web 2 company and tokenize it.