<h2>How Defi 2.0 enters the picture</h2>A subset of Defi protocols based on earlier Defi accomplishments like <a href="https://www.builder.news/crypto-insights/staking-yield-farming-and-liquidity-mining-pros-and-cons-comparison-y45Cd" alt="Staking, yield farming, and liquidity mining: Pros and cons comparison" title="Staking, yield farming, and liquidity mining: Pros and cons comparison" target="_blank" rel="" class="">yield farming, lending, and other things</a> are referred to as "Defi 2.0" in the blockchain industry. Liquidity issues plague many on-chain systems using native tokens, and significant Defi 2.0 implementations have made this a key point of emphasis.<img src="https://cdn.builder.news/news/11ed4f9ae5ed0e67a8e6023f659fee92.jpg" alt="defi 2.0" title="defi 2.0" width="600" height="338" class="lykafe0"><h3>From the limitations of Defi 1.0…</h3>In order to present customers with fresh and exciting options on the path to financial freedom, Defi 2.0 is an upgraded version of the current Defi model that aims to address shortcomings while capitalizing on strengths. The sections below detail the various restrictions placed on Defi 1.0.The use of Defi platforms is the first difficulty. Decentralized goods are challenging for novices to use due to the UX and UI complexity, hence the vast majority of active users have experienced crypto enthusiasts. People do desire digital inclusion, and the next Defi run will depend on how well Defi 2.0 projects mainstream crypto.Second, scalability does not result in an easier situation. The user experience is still hampered by high costs and lengthy approval wait times. As most Defi solutions are built on the Ethereum blockchain, which has a huge user base, there are, as we are all aware, significant delays and rising transaction prices. Because of this, it is unprofitable to utilize Defi devices for consumers with incomes under a few thousand dollars.People have short attention spans, particularly in the crypto sphere, and it is obvious that people are leaving DApps in search of more lucrative opportunities. Especially for Defi's blue chips, yields are less alluring than they formerly were. Due to this, there has been a recurring "farm and dump" scenario, which has led to unfavorable cash flow for practices and a host of other problems that lead to the wasteful use of assets.All cryptocurrencies also need liquidity to trade in <a href="https://www.builder.news/crypto-insights/best-decentralized-exchanges-to-follow" alt="7 best decentralized exchanges to follow" title="7 best decentralized exchanges to follow" target="_blank" rel="" class="">decentralized exchanges (DEXs)</a> and <a href="https://www.builder.news/crypto-insights/an-ultimate-guide-on-automated-market-makers-PvtRU" alt="An ultimate guide on Automated Market Makers" title="An ultimate guide on Automated Market Makers" target="_blank" rel="" class="">Automated Market Makers (AMM)</a>&nbsp;without changing the token's price. Although incentive programs may offer a little reprieve, they are not ideal and present a greater underlying risk to small investors.Although Defi commonly use oracles, some projects are still oblivious to their importance and will not connect with a reputable oracle. Many protocols have been attacked as a result, and they have suffered losses.<h3>…there comes Defi 2.0</h3><img src="https://cdn.builder.news/news/11ed4f9ae5ed1448a8e6023f659fee92.jpg" alt="defi 2.0" title="defi 2.0" width="600" height="400" class="lykafe1">When users and projects became aware of Defi's limitations and sought out appropriate alternatives, Defi 2.0 research got underway. Every solution to a problem has led to slight increases in the market, which are exactly what the market wants. Let's now have a look at the approaches that have aided Defi 2.0 project growth.<h4>Scalability</h4>The Ethereum network has proven to be a significant barrier for Defi users, especially newcomers. Unfortunately, because of expensive gas and lengthy wait periods, the majority of users have not been able to use Defi. On the other hand, Defi offers a variety of opportunities, which makes it highly tempting. So, how can people experience Defi without having to cope with Ethereum's scaling problems? BSC, Polygon, and Solana, three blockchains that can provide the most of what people want, received the money. The scalability issue's remedies can be what starts the next market wave.<h4>Liquidity: Yields</h4>The most straightforward way to address the liquidity issue, or to draw more users and capital into the Defi market, is to help them generate yields. The liquidity issue was partially solved by third-party liquidity providers on AMM protocols, which allowed any independent individual with enough money to provide liquidity for a token pair.Teams might possibly receive enough liquidity from others rather than providing it themselves. However, because doing so would require exposing themselves to the risk of temporary loss in exchange for small fee revenue through swaps, end-users have few incentives to bootstrap liquidity for a new coin. To accept such risk, they required a convincing financial justification. There was a chicken-and-egg issue as a result.If there isn't enough liquidity, the slippage brought on by swaps deters users from participating in a Defi protocol's environment. Without consumer involvement in token transactions, insufficient fee volume is generated to encourage third-party actors to pool their tokens and provide liquidity. Another significant Defi innovation, as a result, was born. Yield farming, or the practice of employing liquidity provider (LP) tokens to bootstrap liquidity for new Defi protocols, has become standard. Therefore, how will yield farming transform Defi?Blockchain experts called the summer of 2020, when yield farming (also known as liquidity mining), a boom in Defi activity, as "Defi Summer." The idea behind yield farming is simple. Users that use the AMM protocol to offer liquidity for an exchange pair earn an LP token in return, stake the LP token for rewards in the project's native token.By offering a solid economic justification for third-party liquidity providers to deliver a token's greater return, this strategy resolves the chicken-and-egg problem. <a href="https://www.builder.news/crypto-insights/best-crypto-staking-platforms" alt="7 best crypto staking platforms in 2022" title="7 best crypto staking platforms in 2022" target="_blank" rel="" class="">By staking more of the project's native token</a> and increasing their yield, they may also be able to generate larger AMM swap fees overall due to deeper liquidity.With the introduction of yield farming, new Defi protocols were able to bootstrap substantial sums of liquidity to begin and maintain operations while minimizing slippage for users entering their ecosystem. In turn, yield farming has reduced the barrier to entry for both users and Defi project developers, as evidenced by the exponential growth of Defi protocols overall.Although yield farming has shown to be a successful method of bootstrapping money for Defi initiatives, there are long-term hazards involved. Furthermore, despite its efficiency, it does not entirely resolve the liquidity issue on its own because of the unique limitations of long-term yield farming enterprises.Since it is required and beneficial, the majority of Defi projects must engage in yield farming activities and boost liquidity. To avoid unfavorable, long-term effects, project teams must exercise caution when it comes to their token supply and long-term yield farming strategies.&gt;&gt;&gt; Read more:&nbsp;<a href="https://www.builder.news/crypto-insights/real-yield-X8ZIF" alt="Real Yield: A New Trend For DeFi" title="Real Yield: A New Trend For DeFi" target="_blank" rel="" class="">Real Yield: A New Trend For DeFi</a><h4>DAOs</h4>In addition to coming to Defi to make money, people also come there to strive for independence and self-sufficiency. However, a group still maintains control over several Defi protocols, which causes users to lose faith in the system.Defi projects tend to prioritize the decentralized aspect as a solution to this problem. The popularity of the DAO, which lets anybody vote on a project's development, has skyrocketed recently.<h4>Capital efficiency</h4>Defi is expanding at a dizzying rate. Total Value Locked, or TVL, for the sector has risen steadily over time. The majority of Defi's assets remain immobile and underutilized, which is one of its largest problems. Consider the following example to grasp this:<ul><li>Lending: The current low utilization ratio of Defi procedures indicates that there are far more lenders than borrowers.</li><li>AMM: Although AMM is Defi's "Liquidity Pool" and draws a lot of TVL, most of it is not utilized. This is because the design of AMM precludes the concentration of liquidity.</li><li>Aggregator: Users that enter assets into aggregator protocols and receive Agtokens are unable to use those tokens elsewhere.</li></ul>When working on capital-efficiency-focused initiatives, Defi 2.0 will be able to:<ul><li>Improve TVL: Permit deposit assets to be utilized completely.</li><li>Stable cash flow: The approach for trading LP tokens for bonds minimizes the frequency of farm and dump scenarios while simultaneously providing long-term liquidity, as shown by Olympus DAO. This helps to create a sustainable cash flow. Therefore, keeping a healthy financial flow enables initiatives to grow more sustainably and draw in new backers.</li></ul><h2>Defi 2.0 vs 1.0</h2><table><tbody><tr><td data-colwidth="138" style="background-color: #f9cf2e;"></td><td style="background-color: #f9cf2e;">DeFi 2.0</td><td style="background-color: #f9cf2e;">DeFi 1.0</td></tr><tr><td data-colwidth="138" style="background-color: [object Object];">Connection between users</td><td style="background-color: [object Object];">Strong connection between users</td><td style="background-color: [object Object];">No connection between users</td></tr><tr><td data-colwidth="138" style="background-color: [object Object];">Ecosystem</td><td style="background-color: [object Object];">DAOs, liquidity incentives to create a warm, sustainable and interconnected decentralized financial architecture and capital efficiency</td><td style="background-color: [object Object];">It includes decentralized central trading applications, DEXs, lending and stablecoin applications, synthetic assets, and insurance-type projects</td></tr><tr><td data-colwidth="138" style="background-color: [object Object];">Incentive schemes</td><td style="background-color: [object Object];">Users are 100% rewarded; attractive incentive scheme for users</td><td style="background-color: [object Object];">Unattractive limited incentive scheme for users</td></tr><tr><td data-colwidth="138" style="background-color: [object Object];">Governance pattern</td><td style="background-color: [object Object];">Governance $ policy rights are delegated to the members</td><td style="background-color: [object Object];">Disorganized community and inappropriate governance pattern</td></tr><tr><td data-colwidth="138" style="background-color: [object Object];">Scope for innovation</td><td style="background-color: [object Object];">Unlimited scope for technological and financial innovation</td><td style="background-color: [object Object];">One-way technology development and innovation</td></tr></tbody></table><h2>Top Defi 2.0 projects to follow</h2><img src="https://cdn.builder.news/news/11ed4f9ae5ed185fa8e6023f659fee92.jpg" alt="defi 2.0" title="defi 2.9" width="600" height="338" class="lykafe2">Defi 2.0 protocols take advantage of the fact that the first generation of Defi devices effectively launched the sector by building a foundational user base and creating the essential Defi primitives that present and future manufacturers may now use to create the subsequent wave of Defi apps. Additionally, this new generation of Defi protocols is intended to protect the industry's long-term sustainability.The main issues that are now preventing the sector from becoming sustainable are its reliance on third-party providers and token incentives to secure liquidity, as well as its virtually nonexistent correlation with traditional finance and the global economy. Addressing these difficulties is the sole goal of Defi 2.0 and later. Olympus DAO, Abracadabra and Convex Finance can be considered as 3 of the typical projects of Defi 2.0. All three have a rapidly increasing TVL as a testament to the interest of investors.<h3>Olympus DAO</h3>Olympus DAO is renowned for its ground-breaking protocol-owned liquidity (POL) approach and is one of the pioneers of the Defi 2.0 movement. With OHM serving as its native coin, the platform is a self-managing decentralized autonomous organization (DAO). The reserve money for decentralized finance may be this cryptocurrency, according to Olympus. OHM tokens are supported by stablecoins like DAI and FRAX, which enables them to retain price stability.In a manner similar to other DAOs, Olympus lets token holders vote on significant issues. Users can also generate money on the network by staking their OHM tokens. Users can obtain sOHM tokens by staking, and these tokens can then be used on various Defi platforms. Your sOHM tokens can be burned in order to change them into OHMs.By creating LP tokens, users can then use them to issue bonds and purchase OHMs at a reduced price. Olympus DAO members can also generate income by selling bonds.<img src="https://cdn.builder.news/news/11ed4f9ae5ed1c55a8e6023f659fee92.jpg" alt="defi 2.0 project" title="defi 2.0 project" width="600" height="259" class="lykafe3">(Source: DeFiLlama)Olympus DAO has a rapid TVL growth and is among the top Defi projects in the Assets category. The current TVL of the Olympus DAO reaches about $233.16M.<h3>Abracadabra.money</h3>Abracadabra.money, another significant Defi 2.0 initiative on the list, is essentially a <a href="https://www.builder.news/crypto-insights/7-best-defi-lending-platforms-in-2022" alt="8 best DeFi lending platforms in 2022" title="8 best DeFi lending platforms in 2022" target="_blank" rel="" class="">lending platform</a>. Owning interest-bearing tokens like yvUSDC and yvWETH enables you to borrow money or create Magic Internet Money (MIM), a stablecoin pegged to the dollar, by serving as collateral.Users can convert their interest-bearing tokens into tradable assets by doing this. The borrowing rates are cheap and the interest rates on the platform are stable. The governance tokens for the platform are called SPELL, and they can be staked to receive platform fees in addition to being used to vote on proposals.<img src="https://cdn.builder.news/news/11ed4f9ae5ed203ea8e6023f659fee92.jpg" alt="defi 2.0 project" title="defi 2.0 project" width="600" height="260" class="lykafe4">(Source: DeFiLlama)The lending platform Abracadabra now owes the TVL about $373.5M.<h3>Convex Finance</h3>Convex Finance is a Defi platform based on Curve Finance's reliable exchange (CRV). Both stakers and liquidity suppliers profit from this platform. Convex provides a chance for Curve Finance's liquidity providers to receive more rewards without having to lock in their CRV tokens. Additionally, the platform costs negligible performance fees and has no withdrawal fees. Similar to that, individuals who are interested in staking can utilize Convex to stake their CRV tokens and profit from increased rewards.<img src="https://cdn.builder.news/news/11ed4f9ae5ed23eaa8e6023f659fee92.jpg" alt="defi 2.0 project" title="defi 2.0 project" width="600" height="258" class="lykafe5">(Source: DeFiLlama)Convex Finance's TVL is now $3.86B, which has joined with Yearn Finance (TVL: $414.24M) and Arrakis Finance (TVL: $726.13M) to become the top yield farming projects. Such rapid growth by providing superior user experience, simplifying Curve and CRV locking and commitment, and improving profitability for both token holders and liquidity providers.<h2>Bottom lines</h2>Defi has long been recognized as a prominent figure in the democratization of finance and the spread of blockchain technology. In order to provide customers with exciting new options to advance on their path to financial freedom, Defi 2.0 is an enhanced version of the sizable Defi ecosystem that resolves to repair its defects and expand on its strengths.<div class="pr-block-special">Disclaimer: This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.</div>

What is Defi 2.0 and what problems will it help solve? Will projects from Defi 1.0 continue to explode in the Defi 2.0 phase? Let's learn more below!

May the trend Defi 2.0 push the Defi protocol to a next level?