Currently, major blockchain platforms are launching large-scale updates, and the DeFi sector is not lagging behind. Not so long ago, plans appeared about transitioning to the next level – DeFi 2.0. This step aims to resolve the key issues of DeFi 1.0 and create more comfortable working conditions. What are the plans of DeFi 2.0 projects, and what are the risks of such an update? Let’s find out!
What is DeFi 2.0?
According to open sources, DeFi 2.0 is a set of projects aimed at analyzing the operation of the old DeFi sector, identifying imperfections, and eliminating them.
DeFi 2.0 projects are focused on:
- Popularizing the digital finance sphere;
- Resolving scalability, centralization, and liquidity issues;
- Strengthening security;
- Increasing the level of information accessibility within the sector and beyond.
Why did DeFi 1.0 become a problem?
The first wave of DeFi made a splash in the world of cryptocurrencies, comparable to the advent of the first cryptocurrency. Essentially, these concepts complemented each other perfectly at the dawn of decentralized finance. Bitcoin (BTC) was a new means of payment, and DeFi was a new banking system. Users simply had to register their crypto wallets on the network, and access to a new breakthrough currency, uncontrolled by government institutions, was granted.
Over time, it became clear that both Bitcoin and DeFi were full of technical inconsistencies, problems, and bags. Hence, the second wave of cryptocurrencies emerged, and DeFi 1.0 began its transition to DeFi 2.0.
The issues with DeFi were mainly related to the increase in the number of users (scalability, network load, transaction speed reduction, etc.). Among the key "weak points" we can highlight the following:
- Scalability
The increase in the number of users leads to slower information processing. Systems fail to cope with the load, so high fees are charged, and simple operations take too much time and resources.
- Centralization
Initially, the DeFi sector implied a complete rejection of centralization. Unfortunately, implementing this idea in practice proved much more challenging. Currently, not all DeFi projects use DAO principles.
- Dependency on oracles
Financial products on which the DeFi market relies entirely depend on information from third parties – oracles. This significantly limits the sector's activities and hinders its potential development.
- Security
A large percentage of DeFi platform users today are not confident in the security of their transactions. Take a look at our article about DeFi vulnerabilities.
Advantages of DeFi 2.0: a new era of decentralized finance
Let's outline the key benefits of the DeFi 2.0 update:
- Reduced entry barriers to the DeFi sphere
The issues of popularizing cryptocurrencies in the modern world are still relevant, and attracting new clients will benefit everyone involved. For a long time, the DeFi sector repelled potential clients due to the complexity of understanding its principles. DeFi 2.0 promises to provide its users with new opportunities for convenient and comprehensible earnings.
- Risk reduction
Strengthening democratic principles within DeFi projects will help users understand the decision-making processes. They will be able to participate in voting and make the platform comfortable for everyone, not just those in power.
Limitations of DeFi 2.0
Unfortunately, DeFi 2.0 has "inherited" some problems from DeFi 1.0. For example:
- Smart contract vulnerability
The DeFi sector is controlled by smart contracts. Their hacking or technical failure can halt the sector's operations and jeopardize client funds. Therefore, when dealing with DeFi projects, whether old or new, one should always prioritize personal security.
- Impact of government regulators
Despite the declared decentralization, the DeFi sphere is still subject to state control. In recent years, this sector has attracted increased interest. On one hand, regulators' involvement in the activities of DeFi projects provides additional protection, but on the other, nothing prevents the government from introducing new rules affecting the project and its participants.
- Liquidity mining risks
Currently, there is no technology or system capable of fully securing this area of activity. DeFi 2.0 will require much larger liquidity resources than its previous version.
Conclusion
In any case, the update to DeFi 2.0 was necessary for the Crypto World. Since this is a saturated and complex segment of the industry, resolving all its issues in a matter of weeks is simply impossible. The transformation of DeFi will spur the development of other sectors, such as ReFi and RAW.
The potential of DeFi 2.0 is enormous; the update has already gained support from crypto enthusiasts, analysts, and technical experts. We only need to observe the changes that will become noticeable in the near future.
The easiest way to buy, sell or exchange coins is to use SimpleSwap services.
If you want to learn more interesting facts about crypto then check out our blog! You might like our articles “6 Things to Do Before Crypto Bull Run” and “Extended Reality Explained”.
