Ines AissaniWe have barely understood DeFi before we are already talking about DeFi 2.0? Yes, things are moving very quickly in the world of blockchain. This is nothing new and it even seems that things are accelerating more and more.
The moment you feel comfortable with a new protocol, bam, we talk to you about another one and then two hours later, another one, etc. And if you wander around YouTube looking for information, you come away with your head ready to explode, not knowing where to put your money. The rates of return are more interesting here, and then there too, oh and you have to try that! Come see here, the promises are great. You will be a farmer who will become rich tomorrow….
In fact, we're luring you like that, isn't it beautiful after all, all this money falling from the sky? A Ponzi? A scam?
Difficult to follow the route but we are here to summarize for you the exceptional situation that we are currently experiencing.
Because yes, there we can speak of real upheaval. In fact, we've been hearing about DeFi 2.0 for about a few months now, but today it's getting even louder.
Let's see what this is all about.
The difference between DeFi 1 and 2 and the problems of the first generation
If we talk about DeFi 2.0, it is to mark the break with the first generation of DeFi which is the one you know and use at this very moment. In fact, don't forget that this is a very new domain, having emerged in summer 2020 only. It has been barely 2 years in fact that we have known the challenge in what it produced at its most confusing and spectacular, namely Liquidity Mining (or Yield Farming by extension).
It was really with the Challenge that we started talking about farming, rates of return and the possibility of almost limitless enrichment. We have seen deposits in protocols (all combined) reach a billion dollars, in just a few months. The Challenge has attracted a horde of mercenary investors who are affectionately called degens (degenerates).
Any padaone could win money, even better than at the casino. This was the distorted promise of DeFi and many thieves took great advantage of it.
However, there is a catch. A big problem indeed.
Anyone who asks the naive question of the origin and consistency of tokens from farming can ultimately see the elephant in the room.
And, at this point, I'm not talking about network congestion problems. You know, it's the fact that when there are too many users, the network is congested, which causes transaction fees to skyrocket. Fees on Ethereum have become such that a person who does not have thousands of dollars can ruin themselves by making the slightest transaction. However, that is not the problem with DeFi. It goes much deeper than that.
I'm not talking to you about impermanent loss problems either. No, this is due to an algorithm thought behind the AMM and this is not such a thorny problem as that.
No, I'm not talking to you about this type of problem linked to the infrastructure of a network or a protocol.
I'm talking to you about a problem inherent to Yield farming itself...
Yes, and to fully understand, I must remind you of the origin of Yield Farming.
It all started with Coumpound Finance (historically we date the beginning here even if there were small antecedents before). Compound Finance is one of the oldest lending and lending protocols (at the time, that is to say a year ago, there was almost only this as a possible service on the challenge). You could then deposit or borrow tokens. To reward users, co-founders Robert Leshner and Geoffrey Hayes decided to send COMP governance tokens to users.
This is where the machine got carried away. And, not just a little. Furiously.
The Comp token experienced a meteoric and violent rise. Judge for yourself, please.
This rise in the Comp token gave ideas to other protocols, you might think. That's where this whole race started. Dozens of new protocols and DEXs have appeared with an additional reward of a token returned to users. The mercenaries were running from one protocol to another. They began to deny the activity of trader in favor of that of farmer. They went from one protocol to another to collect new tokens.
For those who followed, it was a time of excitement for food tokens, because with the launch of Yam.finance (sweet potato in English), there followed a host of protocols for farmers. At that time you could grow anything.
We began to see the problem in a more relevant way at that time. We could see that the farmers were whistling the protocols and moving from one protocol to another. The only criterion they had in mind was the rate of return.
So, a greedy drug addict's journey gradually took shape. We have become accustomed to these murky behaviors of decentralized finance junkies. We go to one protocol and withdraw our funds to deposit them in another which offers a better return.
Still don't see the problem?
Let me explain it to you with better formulas.
Users are always looking for the best yield opportunities. They will then always go towards the most attractive, without even looking at the foundations of the project. This therefore leads to whistling pools which have the effect of destroying cash flows.
This becomes unhealthy because a protocol must constantly attract users with attractive APYs and/or APRs. Except that it's not viable, you think. Not in the long term.
However, what we are all looking for is stable, long-term projects. Hype and fashion are irrelevant when depositing money, hmm.
The real problem is that many tokens have been created without foundation, for the most part. They are there simply to virtually satisfy the appetite of the mercenary farmers. What matters is that we give them tokens, after all. As much as possible, what does it matter if they don't have longevity.
You know the of people, cough cough, I'm not going to come back to it here.
Developers are then forced to manipulate the price of these tokens manually. We will burn tokens every week or every month to maintain an acceptable price and not cause the price to fall. This is all artificial and not based on viable mathematical support.
Or, we will create other tricks, such as imposing penalties if people withdraw their tokens (too early). For example, we recently saw Elrond which implemented a vesting system to push liquidity providers to leave their tokens without withdrawing them.
All of this is certainly effective, but once again not in the long term. It's DIY. We want foundations.
The degradation of DeFi and the problems to be solved.
Normally at this point you understand the Defi problem better, right?
We create empty tokens which we redistribute to give the appearance of gain... This may ultimately make us think (and what nerve to make fun of classic finance) of the FED or the European Central Bank with the cutting board. ticket.
Worse still, and more fundamental, DeFi also relies on stablecoins likeUSDT which are linked to US Dollars (mainly). It is still a strange paradox of its link with the current fiduciary system. Even if we try to get rid of it, we are no less extremely linked. Tether is in 3rd place in terms of market capitalization, which shows its place in the cryptographic ecosystem…
For the moment, the Defi is still very closely linked to FIAT but it can no longer lie to itself. The problems of inflation, centralization or irresponsible monetary policy are then also linked to decentralized finance, ultimately.
And this is how brilliant minds have developed coherent protocols with a real internal logic.
The new actor of this change is undoubtedly olympusDAO. (We will make a detailed article on this blog)
The revival of DeFi 2.0
Remember that at the time of writing this article, this is still a very recent phenomenon (a few months); We do not yet have the necessary perspective nor the adequate terms to better understand its magnitude.
The only thing we can touch, however, is the stakes.
The real challenge of second generation protocols is to put the value back where it should be. The obsession of Defi 1 investors was to go where there is the most return without taking into account the value of the protocol or even the project roadmap. So, second generation protocols want to attract investors, of course, but above all, keep them.
Basically, the diagram is as follows:
- DeFi 1: For investors to deposit capital, they are given rewards. Tokens in addition to transaction fees, for example.
- DeFi 2.: The protocol already has its own liquidity.
Likewise, the other big difference with the first generation is the real desire to be decentralized. Many DeFi protocols belong (in number of tokens) to the developers. Users only have a tiny part of it and cannot clearly be part of the organization.
Similarly, for DeFi 2.0 protocols, DAOs are put forward and truly decentralized. Unlike defi 1 protocols, where organizations are very often “centralized” in the hands of developers.
To better understand the particularity of second generation protocols, let's see how OlympusDAO ($OHM) works.
What is special about OlympusDAO and the $OHM token
OlympusDAO actually aims to compete with the fiat dependence that we currently know (with Tether). USDT is in 3rd place in terms of market cap as we use it. This is problematic because we cannot criticize a system that we happily use.
Hypocrisy of the Challenge…? It's not bad, it's normal, it's still a field of experimentation...
However, some want to make things happen. And the anonymous founders of OlympusDAO are clearly with this in mind.
They have set up an OHM token which aims to be a floating currency (not pegged therefore) which is backed by a basket of assets that the protocol really holds in its treasury. We can then consider it as a private bank which issues its own notes, like a reserve bank.
For this alone, there is a technological breakthrough that deserves our attention.
The OHM algorithm then uses the treasury assets to keep the price as close to 1S as possible. It is also an algorithm based on game theory (with scenario 3,3 (i.e. staking) which is the most optimal action for the well-being of the entire community). Cooperation is then required.
Bonding is the biggest innovation that OlympusDAO has launched. In simple terms, if you put crypto as collateral (e.g. DAI tokens, OHM-FRAX LP), you can get OHM at a discount. The value of OHM relative to this asset will determine whether the protocol will increase the supply or burn them to maintain a market-determined price.
In fact, bonding plays a key role as it also helps to secure the liquidity of the OHM indefinitely. The protocol radically reverses the liquidity mining model and incentivizes users to permanently sell their LP tokens to the protocol in exchange for OHM at a reduced rate. In this way, Olympus now owns this user liquidity, meaning they can stay in the protocol.
Better yet, this means that it is the protocol that owns the vast majority of its protocols' liquidity!
The other element that catches our attention. It's its "crypto" spirit. A fair distribution, there is no venture capital, sustainable growth and a system of cooperation. This is exactly what a DeFi protocol should be.
The project has received criticism where some have talked about Ponzi, or even criticized the incredible APY rates (at 4 digits).
Beyond the criticisms (we will release an article/video on the issue), there are also proven supporters. The protocol then launched OlympusPro to help other projects have their own liquidity. And, ultimately, no longer be dependent on CEX or classic Liquidity Mining.
There have also been many forks of OlympusDAO including Wonderland which is getting a lot of attention!
We'll talk about it again in another dedicated article, don't worry. That said, don't run into the protocol until you DEEPLY understand the issues and internal mechanics. Seriously, this is a very innovative protocol and one that is very difficult to understand. We think it's a Ponzi which we will explain in a detailed article.
However, if you know what you're doing, you can test. Take responsibility.
The DeFi space is a huge financial laboratory. Things change quickly as you know. We're going to dig deeper into these new models that are shaking up the cryptosphere.
It’s fascinating in any case, don’t you think?
- Discover olympusDAO
- Watch the video of Finematics on the new DeFi 2.0 models
- Watch the video of Zonebitcoin on DeFi 2.0
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Hell Disclaimer: This is not financial advice, just information sharing. Always do your research as this is an experimental area that is sometimes beyond us.
