"DeFi 2.0": A Deep Dive into Decentralized Finance Dark Horses Spell, OHM, and Toke

This article is authorized to be reprinted from Josh Lu Zijian. Note: This article is for research reference only, carries extremely high risks, and is not investment advice.

The era of cross-chain is coming, decentralized finance enters a new era of DeFi 2.0. Many dark horses have emerged in this new field, all of which have risen against the trend in a low atmosphere in September. From several times to more than ten times growth, what are the outstanding features of these new DeFi projects like Toke, OHM, Spell?

Get to Know the Three Outstanding DeFi 2.0 Projects

Just like that, DeFi suddenly upgraded to 2.0. The topic of DeFi 2.0 has slowly started to spread on Twitter. So, what exactly is DeFi 2.0? Some say it's about pursuing a more decentralized DeFi to make it more resistant to censorship. However, Josh personally believes that the problem of decentralized resources due to cross-chain integration has propelled us into DeFi 2.0. Cross-chain integration wasn't necessary six months ago, but now it has become as essential as a household staple. With numerous public chains in full bloom, users have more choices, so they are always moving assets to different chains.

Assets in DeFi are considered liquidity. Liquidity has shifted from being concentrated on a single chain to being dispersed across multiple chains. In the era of DeFi with multiple chains coexisting, it is crucial to address the fragmented liquidity issue. Insufficient liquidity can lead to poor cryptocurrency purchase prices, resulting in a negative user experience. DeFi projects with poor user experiences naturally become unpopular and gradually lose users.

"DeFi 2.0 has seen many new projects, and the three projects introduced in this article, Toke, OHM, and Spell, are currently performing exceptionally well."

OHM Olympus Algorithmic Stablecoin

Protocol Owned Liquidity (POL) is a new concept proposed by Olympus. Since liquidity coming and going affects user experience, Olympus aims to own it. OHM is an algorithmic stablecoin that is not pegged to the US dollar but has real assets as collateral behind it. Unlike most stablecoins that are pegged to the dollar, which is heavily influenced by the Federal Reserve's interest rate policies and not very decentralized, Olympus aims to be a truly decentralized asset. By selling discounted liquidity bonds and asset bonds to achieve a stable balance, increasing the currency supply can trigger selling pressure, while offering discounted rewards encourages users to buy OHM tokens.

Liquidity bonds, also known as LP bonds, can be exchanged for discounted OHM tokens. As more users purchase LP bonds over time, Olympus' liquidity increases. As users purchase LP bonds, they transfer liquidity to Olympus. Therefore, there is no risk of users withdrawing liquidity as OHM tokens decline. Since users continuously purchase LP bonds, over 85% of the overall market liquidity is owned by Olympus.

Assets usually consist of two tokens, such as OHM-DAI, with a ratio of 50%/50%, allowing users to sell OHM for DAI or use DAI to buy OHM. If the OHM token declines and the liquidity belongs to users, they typically withdraw the liquidity and quickly sell the declining OHM tokens to avoid further losses. If everyone does this, the OHM tokens in the pool will decrease, resulting in increasingly poor buying and selling prices.

Locking OHM tokens in the Olympus protocol earns rewards every eight hours, equivalent to an Annual Percentage Yield (APY) of 7000%. With a lock-up effectiveness of over 90%, only 10% of OHM tokens are in the market. This limited supply of OHM tokens in the market significantly reduces selling pressure. Moreover, since rewards are in OHM tokens, the number of OHM tokens in the market continues to increase. Therefore, the overall market value of OHM keeps rising, currently ranking 61. Despite the high reward system, it is crucial to note that algorithmic stablecoins are high-risk projects.

SPELL Cross-Chain Stablecoin

Asset transfers across chains have become commonplace, and Spell actively deploys major public chains to allow users to use the MIM token on each chain. Spell cooperates with cross-chain transfer tools to facilitate transferring MIM tokens to other chains without transaction fees. Note: Cross-chain bridges are tools that facilitate asset transfers between chains, usually requiring a fee for transferring assets to another chain.

MIM is a collateralized USD stablecoin, where 1 MIM equals 1 USD, aiming to become a leading cryptocurrency collateralized stablecoin. Spell is the governance token, issuing the stablecoin MIM by minting it with collateralized multiple currencies, supporting leverage, and innovatively allowing borrowing against interest-bearing token receipts. Note: Currently, MakerDAO, with the governance token MKR and the stablecoin DAI, is the leading cryptocurrency collateralized stablecoin project.

This is an innovative approach that attracts users. For example, Josh can earn a 9% annual return by using 100,000 USDT in the Yearn protocol. In return, the Yearn protocol issues receipts in the form of the token yvUSDT. When Josh wants to withdraw USDT, he can submit yvUSDT to the Yearn protocol and receive the original 100,000 USDT plus interest due to the interest-bearing token receipt.

By using Spell, Josh can deposit the interest-bearing token receipt yvUSDT into Spell and borrow MIM tokens for use. Without Spell, Josh would need to withdraw 50,000 USDT to buy a car without continuing to earn a 9% annual interest rate. However, with Spell, Josh can directly use the borrowed MIM tokens without withdrawing 50,000 USDT. Although there is a 0.8% borrowing interest fee, it is cost-effective overall, effectively increasing Josh's capital utilization rate.

Spell is currently collaborating with OHM, accepting OHM as collateral tokens, actively seeking to participate in the OHM ecosystem. Additionally, Spell is in talks with the UST stablecoin for cooperation to actively connect with major stablecoins. MIM ranks 83 in market capitalization, ranking sixth among stablecoins, with UST as the fifth largest stablecoin project, showcasing rapid growth.

TOKE Tokemak Liquidity Management

Toke is a project designed with a focus on liquidity management. Recognizing the need for liquidity, Toke concentrates liquidity and allows users to vote on where to direct it, aiming to assist numerous DeFi projects in improving liquidity. For a new DeFi project to launch successfully, it must have sufficient liquidity to operate efficiently. However, it is challenging to gather liquidity in the initial stages. Therefore, in the early stages of the project, liquidity mining is used to incentivize liquidity inflow through the distribution of governance tokens, commonly known as liquidity mining.

The downside of liquidity mining is the inability to efficiently and sustainably build liquidity because DeFi farmers go wherever the APY is high, causing them to leave when profits are no longer lucrative, seeking the next farm. A mass exodus of farmers can lead to unpredictable price fluctuations, which is detrimental to the project.

Toke's approach involves setting up two roles within the system:

• Liquidity Provider (LP) - Can mine TOKE by providing single-asset liquidity
• Liquidity Director (LD) - Provides TOKE to control liquidity and direct it to projects or decentralized exchanges but bears impermanent loss. Currently, supported decentralized exchanges include Uniswap, Sushiswap, Balancer, and Deversifi. Liquidity directors can also earn TOKE rewards.

Users can use TOKE to vote on where to direct liquidity. Note: Impermanent loss refers to losses incurred due to significant price volatility while providing liquidity.

At first glance, it may seem like offering liquidity rewards with no significant changes, but in reality, rewards received in other non-TOKE tokens when mining on third-party platforms belong to the project. For example, the decentralized exchange's transaction fees and governance tokens will ultimately become assets in the TOKE project's treasury. Through decentralized governance, TOKE holders also have the opportunity to share rewards, ultimately creating a common liquidity tool.

Note: Third-party platforms refer to platforms where liquidity has been directed elsewhere.

Conclusion: The Liquidity Battle of DeFi 2.0

As we enter the era of DeFi 2.0, significant efforts have been made in the utilization of liquidity. These projects have gained popularity because they have truly addressed pain points. Spell's continuous expansion to other chains in response to the cross-chain era, enabling each chain to use the MIM stablecoin, and its innovative acceptance of collateral receipts for borrowing have made it highly popular, increasing MIM's stablecoin market share.

OHM's algorithmic stablecoin introduced the Protocol Owned Liquidity (POL), keeping liquidity in-house to prevent users from moving assets across chains, a concept that is highly innovative.

Toke, recognizing the importance of liquidity, proposed a solution for everyone to work together. Whether this solution is feasible remains to be seen, but the outlook in terms of token prices seems positive.

The arrival of DeFi 2.0 does not mean that older DeFi projects will fade away. As long as existing projects continue to develop and update, there is no need to worry about user attrition. Toke stands on the starting point of assistance to other DeFi projects. Not every project aims to directly replace its competitors, like Spell, which has set MakerDAO as its competitor.

As a side note, Avalanche's Time on the public chain has recently seen remarkable growth. It is a fork of OHM but maintains a good relationship with OHM, with a portion of the earnings distributed back to OHM.