DeFi 2.0 Movement Ushers in a New Wave of Innovative Projects
VYSYN Ventures Weekly Insights #86: The new generation of DeFi is poised to push the current landscape to new heights
The decentralized finance (DeFi) space is one sector of the digital asset industry that has managed to keep investors on their feet at all times. Contemporary conditions unsurprisingly bear the same trait. We are on the precipice of a new era of DeFi innovation. Dubbed DeFi 2.0, this new wave of DeFi projects is fixing the flaws of the current DeFi ecosystem and is set to change the face of the ecosystem.
This week’s edition of the VYSYN Release will analyze what the DeFi 2.0 movement is all about and what prompted the move from what is now referred to as DeFi 1.0. We will also highlight some of the most promising projects in this space offering potentially exponential returns.
Overview of the current DeFi 1.0 landscape
DeFi 1.0 is the early infrastructure that makes up the current DeFi ecosystem. It is on this solid framework built by DeFi pioneers that innovations within the space are launched. Protocols like Uniswap, Bancor, Aave, Compound, MakerDAO, and more have provided users access to reliable exchanges, frictionless lending/borrowing, and stable pegged currencies. These DeFi pioneers raised the industry’s first “money LEGOs”, including liquidity provider (LP) tokens and decentralized stablecoins, which have set the stage for further DeFi evolution.
In 2020, the DeFi market experienced its first major boom, hitting $1 billion in total value locked (TVL) in February 2020. The market rallied to over $21 billion by the end of the year. Investors were rushing into the space, attracted by the promise of unique project aims — eliminating the need for middlemen in financial transactions — and mouth-watering returns. The market’s value skyrocketed, shooting to highs of over $250 billion.
(Source: DeFi Llama)
The rapid growth of the DeFi market revealed some of the inadequacies of the ecosystem. Low and inconsistent liquidity, high risks of impermanent loss for liquidity providers, scalability, smart contract failures, and much more. It was in the light of these risks that the ideas powering DeFi 2.0 were born. Here are three promising DeFi 2.0 protocols that offer potentially exponential returns while solving the defects of DeFi 1.0.
Protocol-owned liquidity platforms
A massive DeFi 1.0 problem is the loss of platform liquidity once investors exit the project, typically, the project gains liquidity after an initial rush that pumps token values high. At this point, speculators sell their token and exit, leaving the platform with low liquidity. To counter this, several new-generation DeFi protocols have adopted the protocol-owned liquidity mechanism. Unlike existing systems where investors can remove liquidity by exiting in droves at any time, the protocol owns the LP tokens.
A typical example of this mechanism is the Protocol Owned DEX Liquidity (PODL) smart contract used by the Fantom-based non-custodial liquidity market protocol, Geist. This smart contract enables liquidity providers to sell their tokens to the protocol for a premium, preserving the protocol’s liquidity and making its token, GEIST, deflationary.
Geist is a fork of Aave, one of the biggest DeFi 1.0 platforms in the industry. However, Geist seeks to improve the incentives available to liquidity providers, ensuring sustainable liquidity on the platform. The protocol was launched to attract lenders, borrowers, and liquidity providers to various platforms on the Fantom network.
Geist’s PODL contract receives 50% of the protocol’s FTM treasury rewards. To ensure healthy ongoing liquidity on the platform, the PODL contract allows users to sell their GEIST/FTM liquidity provider (LP) tokens back to the protocol. In exchange, they receive FTM at discounted prices and the protocol locks the purchased LP tokens forever.
Geist saw a massive surge in interest during the first few days of its launch earlier in October 2021. In the first three days, it accumulated a whopping $11.1 billion in TVL. According to data from the DeFi tracking platform, DeFi Llama, Geist currently has a TVL of $766.9 million. Utilizing the protocol owned liquidity solution, Geist and other DeFi 2.0 protocols, including OlympusDAO and Wonderland, safeguard project developers from investor migration and adequately incentivize liquidity providers.
(Source: DeFi Llama)
Self-repaying loans on Alchemix
Another innovation that DeFi 2.0 protocols are introducing is self-paying loans. Self-paying loans are a new class of loans that allow users to borrow digital assets on the back of the future yields of their collateral. DeFi traders deposit crypto collateral and borrow a synthetic version of the underlying asset while the locked collateral generates yields that are used to pay off the debt.
The revolutionary self-paying loans solution was pioneered by the Ethereum-based lending platform, Alchemix. The protocol lends out representative tokens pegged equally to the collateralized assets with a liquidation-free feature, allowing users to spend and save simultaneously.
To draw a loan from Alchemix, users must deposit collateral in either the DAI stablecoin or ETH. When a user deposits DAI, they receive Alchemix’s USD-backed stablecoin, alUSD. On the other hand, when ETH is deposited as collateral, users receive the platform’s tokenized Ether, alETH. The underlying collateral is then deposited into yield-generating protocols so that it increases through the duration of the loan.
The loan (alUSD or alETH) is programmed to be equal to the collateral at all times and is kept that way by a transmuter. Users can mint the synthetic tokens with their profit, convert it to the underlying asset via the transmuter, and trade it on other DEXes like Curve or SushiSwap. They can also use the loan to farm ALCX, the governance coin of Alchemix. There are currently over $850 million assets locked in the protocol.
Collateralized stablecoin lending on Abracadabra.money
DeFi lending platform, Abracadabra, seeks to add value to digital assets while improving capital utilization. Abracadabra is intended to be an improvement over existing DeFi 1.0 lending platforms like MakerDAO. Abracadabra’s collateralized stablecoin loans help investors leverage their capital by converting their interest-bearing assets into liquidity.
The platform allows users to deposit interest-bearing tokens from several protocols, including Curve, Yearn Finance, and SushiSwap, as collateral. Users can deposit tokens like yvUSDT and xSUSHI, and choose a leverage level to borrow the platform’s dollar-pegged stablecoin, Magic Internet Money (MIM). Abracadabra gives a maximum initial loan amount of 70% of the collateral. The MIM tokens can subsequently be exchanged for other stablecoins or crypto on the multi-chain protocol, Curve.
With this innovative solution, Abracadabra.money allows investors to have liquid assets and also retain their interest-bearing tokens. Unlike several DeFi 1.0 protocols that leave these interest-bearing tokens idle, Abracadabra.money helps users leverage their funds and maximize profits. Users can decide to repeat the borrowing processes multiple times at healthy leverage levels to significantly increase their APYs.
Additionally, users can stake Abracadabra’s incentive token, SPELL, to earn more and participate in the protocol’s governance. SPELL currently has a market cap of $369 million and is trading at $0.004 per token. The Abracadabra.money platform currently has a TVL of over $2.9 billion.
The evolution continues
With the rise of these new solutions, the DeFi economy is rapidly becoming more user-friendly and accessible to mainstream users. Developers are becoming more creative in building protocols that will maximize capital efficiency, profit, decentralization, and everything in between.
The possibilities associated with DeFi 2.0 can only be left to the imagination, however, the little we are seeing gives us a glimpse into the future. These protocols are making the DeFi space one that can no longer be overlooked. The future is exciting for DeFi and the 2.0 revolution is leading the charge.
About VYSYN Ventures
VYSYN Ventures is a longstanding venture capital company that specializes in funding and supporting disruptive startups in the blockchain and cryptocurrency industry. We have provided early-stage support to several projects that have grown USD market capitalizations of hundreds of millions and even billions. Our incubation program focuses on providing capital allocation, versatile marketing support, and tech assistance.