DeFi 1.0 to 3.0 ：What is next？

[TL;DR]

DeFi has its history backdated to the creation of the first peer-to-peer financial solution, bitcoin. But it was too limited to capture the Robustness to accommodate the unique elements that have hosted the fast-growing $100 billion industry. These features as we know today range from liquidity mining, lending, DEx, DAO, token exchanges, AMMs, and many more.

The creation of Ethereum, by Vitalik Buterin, became a doorway for decentralized finance due to its smart contract building capabilities. Ethereum projects, therefore, account for a major part of DeFi projects.

Nonetheless, the industry has therefore struggled with issues around scalability, security, and centralization. It has also placed a demand for more enhanced protocols which has led to the birth of DeFi 2.0, and 3.0 respectively.

In this article, you will understand:
-The different stages of DeFi evolution and their impact.
- Examine DeFi 3.0 projects and their peculiarities.

MakerDAO became one of the first Ethereum-based Autonomous organizations and can be regarded as the foundation for DeFi. It issued a stable coin called Dia, backed by digital assets which are managed via MakerDAO’s smart contracts, unlike USDC and USDT which are backed by dollars in a bank. MakerDAO created the pathway for an open and permissionless financial system. Borrowers deposit about 150% value of Ether to qualify for a loan in DIA on MakerDAO.

In September 2018, Compound Finance launched a platform that allowed borrowers to take loans, and lenders receive interest on the money they set out for loans. To qualify for a loan, borrowers will have to deposit digital assets to cover the loan, as in collateral. This is done without any third-party involvement.

In November 2018, Uniswap luched. It pioneered the use of the automated market maker to ensure enough liquidity between any pair of tokens. The platform allowed users to seamlessly swap any token on Ethereum with any central control or permission. In DeFi, Uniswap performed the role of a Decentralized Exchange (DEx).

Similar to Uniswap, Curve Finance DEx focuses on exchanging stable coins.it also utilizes AMM, like Uniswap, to lend out tokens in its liquidity pool to DeFi markets like Yearn and compound Finance.

Others include Balancer, Bancor, Yam, Synthetix, Sushi Swap, AAVE, and many more. The underlying trait here is that DeFi 1.0 provided a base layer used for farming, lending to provide liquidity, and borrowing with collateral.

DeFi 2.0

DeFi 2.0 came into the scene to address the limitations associated with the early stage of DeFi these include:

1. Because Most DeFi projects are built on the Ethereum blockchain, it has high traffic, DeFi projects are often too slow and cost-inefficient. Hence, scalable solutions were anticipated.

2. Risk of Zero insurance is another trend in DeFi 1.0. In the case of system compromise, or hacks that could lead to loss of assets, many Liquidity providers are often exposed to many risks when there is no insurance scheme in place.

3. Risk of impermanent loss is was a major problem in the DeFi 1.0 era. This happens when the value of the asset you provided, in the liquidity pool, changes.

4. Newbies find it difficult to navigate the UX and UI interphase of many of these DeFi projects. This made the projects inclusive for only Crypto experts.

5. To a great degree, many DeFi projects are still centralized in that they do not operate with DAO principles in their ecosystem. Either a group of developers or investors still direct the projects by themselves, making them less trustworthy. A decentralized Autonomous organization allows anybody to participate in the project decision.

Apart from addressing the above-listed problems for users, other DeFi projects are now disposed to solving these problems for older generation projects to make the industry more sustainable for more users.

DeFi 2.0 has therefore improved on capital efficiency. They have been able to secure smart contract insurance and impermanent loss insurance. To solve the issue of liquidation risk, DeFi 2.0 has also adopted self-repaying loans. Another outstanding feature of DeFi 2.0 is the existence of a protocol-owned liquidity pool or protocol-controlled liquidity(PCV). They use the liquidity to invest in other projects and distribute the profits to holders. Projects like Solana, Avalanche, and polygon have also created room for more scalability in the DeFi space.

Examples include Olympus DAO, Wonderland.

DeFi 3.0 Projects Explained

Although DeFi 2.0 was able to mitigate some of the issues outlined above, it still faced some more challenges. As many people switch from CeFi to DeFi, there was a lot of pull of liquidity into the industry hence it also became attractive to bad actors, who often take advantage of the loops in the smart contract.

Another reason for the new DeFi generation is for the inclusion and anticipation of all forms of finance, including Decentralized hedge funds, Options, and Derivatives.

In simple terms, DeFi 3.0 is like another layer on top of DeFi 2.0. It also has its treasury, but all you need to do in this case is to hold the token in your wallet. In this era, the price of the token will either increase or new tokens will be distributed to holders’ wallets. This is simply reflective of the protocol activities. Examples include Multi-Chain Capital, Multi-Farm Capital, Cross Chain Capital, and Cross Chain Capital.

Multi-Chain Capital (MCC)


MCC allows users to buy on Ethereum, farms for others, and share profits among holders. MCC specifically farms for token holders on Polygon, Fantom, and Avalance. Whenever anyone buys MCC tokens, a 5% value of the token bought is being distributed among token holders. While 5% of every sale goes to the MCC treasury, and buyback of $MCC

Multi-Farm Capital

Allows you to buy on Ethereum, farms for you on Multiple chains, and return the profits to holders. Just like MCC, the MFC token represents a share in the profit from farm investments. MFCunique feature is that they strive to establish community involvement in every sense of it.

Source: Multi-Farm Capital proposal. Snapshot.org

Tokenomic

10% of buys for existing holders
5% of sales go into multi-chain farming to increase the treasury buybacks of tokens.
5% of every sell goes into payment for marketing, Dev.

Cross Chain Capital (CCC)

Cross Chain Capital operates on Avalanche blockchain to provide holders with incentives. First through passive reflection drive of 10% for every CCC buys and secondly through long-term sustainable buyback protocols and liquidity for token value. The project token is currently trading at 0.000004771, and a total of 4,250 holders own the coin as of the time of this writing.

Source: Cross-Chain Capital. Meduim.com

Conclusion

DeFi 3.0 has an outstanding long-term trajectory because the mechanism used for the buybacks and profit share is an insane way to reduce the common challenges of DeFi 2.0. In the past, DeFi protocols experienced whale dumps which return the value of tokens to zero. Although this is still considered experimental or very young, if successful, it could result in a more efficient way of making DeFi highly deflationary and secure.


Author: Gate.io Observer: Olatunji. M
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