Footprint: Understanding DeFi 2.0 from Four Perspectives

Looking back at the development of DeFi as a whole, DeFi made its debut in 2019, which was defined as the first year of DeFi with a total value locked (TVL) of $270 million at that time. The momentum continued in 2020 when Compound launched its governance token COMP for liquidity mining, igniting the trend and sounding the first horn for liquidity mining.

As of November 3, 2021, the overall TVL has reached $269 billion, an increase of over 990 times, giving rise to many representative DeFi projects such as Curve, Aave, Compound, MakerDAO, Sushiswap, and Yearn Finance. With the rapid growth of DeFi projects, the concept of DeFi 2.0 emerged.

Data source for total value locked in DeFi (since January 2019): Footprint Analytics

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Is DeFi 2.0 a new track? Different people have different views. From the rapid development of DeFi projects, it can be divided into two tracks: DeFi 1.0 and DeFi 2.0. DeFi 1.0 is the cornerstone of the entire DeFi, providing users with functions such as liquidity mining, token exchange, lending, AMM, etc., leading the mission of continuous innovation. However, with the arrival of the DeFi 2.0 track, it means that it has achieved "micro-innovation" on the basis of DeFi 1.0, changing the relationship between protocols and liquidity providers, and many new and representative DeFi 2.0 projects have emerged, such as Olympus, Abracadabra, and Convex Finance, laying a more solid foundation for the ecosystem.

This article will guide you to understand the era from DeFi 1.0 to DeFi 2.0 from the following 4 perspectives:

1. Concept of DeFi 2.0
2. Issues solved by DeFi 2.0 and representative projects
3. Performance of DeFi 2.0 projects
4. Opportunities and challenges

1. Concept of DeFi 2.0

Before diving into DeFi 2.0, let's first understand what DeFi 1.0 is all about.

DeFi 1.0 constituted the early decentralized financial infrastructure that forms the current DeFi landscape, including decentralized exchange applications like DEX (Uniswap, SushiSwap, etc.), lending applications (Aave, Compound, etc.), stablecoin applications (MakerDao, etc.), yield farming applications (Yearn, etc.), and more. It also includes derivative assets such as Synthetix, UMA, insurance projects like Cover, Nexus Mutual, and others derived from them.

DeFi 2.0, on the other hand, builds on the first-generation protocols to create DeFi applications. Through innovative advancements from 0 to 1, it can be considered as the second generation of protocols, known as DeFi 2.0. Its core lies in transforming liquidity into the foundational layer of DeFi, making DeFi more sustainable. From this perspective, DeFi 2.0 signifies an evolutionary trend in the DeFi ecosystem.

2. Issues Addressed by DeFi 2.0 and Representative Projects

Every enterprise or project undergoes its own development process. After achieving stability in one field, innovation and iterative operations in another field are necessary for continuous growth. Similarly, in the DeFi 1.0 stage, many representative projects demonstrated the disruptive power of decentralized finance. For instance, Curve dominated a third of the total TVL in the DEX track, with over 100 pools and attractive APY mechanisms. Maker Protocol is one of the largest decentralized applications (DApps) on the Ethereum blockchain, and many other leading projects introduced features such as liquidity mining, lending, etc., showcasing the most vibrant development of the DeFi ecosystem.

TVL Ranking of Top 20 Protocols Source: Footprint Analytics

Market Share of TVL of Top 20 Protocols Source: Footprint Analytics

The innovation of DeFi 1.0 lies in providing pools for users to provide liquidity themselves, solving the problem of project bootstrapping. Over time, as more people and projects participate in practice and exploration, new challenges slowly emerge:

• Continuous release of liquidity supply compensation leading to selling pressure
• Merciless "mining and selling" behavior of liquidity providers
• Assets for lending requiring over-collateralization, resulting in inefficient capital utilization
• Issues with reasonable community organization forms and governance structures

With the emergence of DeFi 2.0, projects are proposing new concepts and solutions to address the issues of DeFi 1.0 through new mechanisms. The following are explained through three representative projects with breakthrough developments.

Olympus DAO: Alternative to "Liquidity Mining" Model

Olympus DAO is an algorithmic currency protocol that aims to become a stable cryptocurrency. It is the first project to create an alternative to the "liquidity mining" model using a bond mechanism. By issuing its native token OHM at a discount, Olympus can purchase LP positions from the market, creating "protocol-owned liquidity."

Bond Discount Situation (Since November 3, 2021) Source: Olympus DAO

Each OHM is backed by 1 DAI. As the price of OHM increases, more DAI enters the staking contract, leading to higher rewards for staking OHM. This keeps the market price of OHM consistently higher than 1 DAI. By creating super high staking APY through super issuance, OHM's price is continuously driven closer to the total asset value in the treasury through continuous gaming.

For example, users can create LP tokens such as OHM-DAI LP to issue "bonds" and purchase OHM at a discounted price within a certain period (approximately a 5% discount rate as of November 3, expiring in 5 days). Thus, when users purchase OHM at a discounted price, the LP tokens they create will be exchanged with the protocol. Unlike existing liquidity providers who can stop providing liquidity at any time and the protocol accepts liquidity, Olympus' staking and bond structure can maintain liquidity by binding LP tokens to the protocol in the form of bonds.

LP Token Situation (Since November 3, 2021) Source: Olympus DAO

Moreover, the protocol itself, rather than the user, owns LP tokens, generating transaction fees from the liquidity pool, while preventing immediate selling pressure from liquidity providers. Olympus DAO changes its relationship with liquidity providers, revolutionizing the traditional DeFi liquidity model.

Abracadabra: Enhancing Collateral Assets and Increasing Capital Utilization

Abracadabra is a lending platform, with the SPELL token as its incentivized token. Its model is similar to MakerDAO, where assets are over-collateralized to generate stablecoins. Unlike MakerDAO, Abracadabra collateralizes interest-bearing assets. Users can use yield-bearing assets such as yvUSDT and xSUSHI on Abracadabra to borrow or mint a stablecoin pegged to the dollar called MIM (Magic Internet Money), thereby releasing liquidity for these assets and increasing user earnings.

Advantages of its lending:

• Convert interest-bearing asset certificates into liquidity, increase capital leverage, and earn more profits
• Low borrowing costs and stable interest rates
• MIM stablecoin has good liquidity on the multi-chain Curve

Regarding liquidation:

• Only independent liquidation risks, not linked to other collateral

Overall, Abracadabra not only increases capital utilization but also reduces the likelihood of liquidation. Because these collateral assets appreciate in value, it represents an innovative solution based on user demand.

Convex Finance: Enhancing User Experience

Launched on May 17 this year, Convex surpassed Yearn Finance on June 3, 2021, in terms of the highest percentage of CRV locked. Convex aims to address the shortcomings in user experience of Curve by introducing a one-stop platform for CRV staking and liquidity mining. Through the CVX token, Convex simplifies the process of Curve and CRV locking and staking, enhancing the rewards for CRV holders and liquidity providers to promote the development of the CRV ecosystem.

Innovative product features and new economic models are essential characteristics of DeFi 2.0.

3. Performance of DeFi 2.0 Projects

Recent protocols like Olympus DAO, Abracadabra, and Convex Finance have garnered significant attention due to their innovative incentive mechanisms. According to Footprint data, their TVL has reached historical highs. TVL is an important indicator for measuring the scale of DeFi ecosystem development. Therefore, a project's development and the presence of new concepts can be assessed based on its data performance.

TVL Ranking Changes of Top 10 Protocols Source: Footprint Analytics

TVL Trend of DeFi 2.0 Platforms Source: Footprint Analytics

According to Footprint data, Convex Finance's TVL ($14.55 billion) has surpassed Yearn Finance ($6.05 billion) to become the leader in Yield, and in the past month, Convex Finance has seen the largest TVL change among the top 10 protocols, surpassing many mainstream DeFi projects. Its growth is attributed to addressing the user experience shortcomings of Curve, streamlining Curve and CRV locking and staking processes, and improving the returns for token holders and liquidity providers, leading to better development.

In addition, Abracadabra and Olympus have experienced rapid TVL growth in the past 30 days, with current TVLs of $4.2 billion and $0.65 billion, respectively. Compared to Convex Finance's growth rate in the last 30 days, Abracadabra (205.2%) and Olympus (178.9%) have shown even greater TVL changes. In this innovative DeFi 2.0 ecosystem, there is still room for their appreciation.

Token Price Trends of DeFi 2.0 Platforms Source: Footprint Analytics

Market Cap Trends of DeFi 2.0 Platforms Source: Footprint Analytics

Token Trading Volume Trends of DeFi 2.0 Platforms Source: Footprint Analytics

The tokens of Convex Finance, Abracadabra, and Olympus are currently priced at $0.031, $27.85, and $1045, respectively. Although there is a significant difference in the token prices of these three projects, it does not hinder their development in the DeFi 2.0 ecosystem.

Their market capitalization and trading volume have shown significant growth in the past two months. The increase in market capitalization reflects the project's market value in the DeFi industry, while the growth in trading volume indicates higher user activity.

4. Opportunities and Challenges

Blockchain technology itself is an innovation, and innovation is a crucial cornerstone of human social progress and technological development. The rise of project platforms that were not seen in the DeFi 1.0 stage, with their innovative mechanisms solving user challenges, brings tremendous opportunities for the development of DeFi 2.0. They also help users better understand the positive impact of decentralized finance, improving operational efficiency, preventing immediate selling pressure from liquidity providers, and creating more reasonable community organizational forms.

However, behind opportunities lie challenges and risks. In the new protocol models, users should not act blindly. Proper research and risk management are essential. For instance, in the Abracadabra protocol, if there are issues with the collateral assets of the protocol, problems will arise. Additionally, regarding liquidation, the project's mechanism heavily relies on the stability of MIM and sufficient liquidity from Curve pools to support transactions. Furthermore, Olympus' OHM token exhibited high volatility, fluctuating between price spikes and corrections, indicating higher risk. While recognizing their advantages, it is crucial to acknowledge the potential risks.

Conclusion

The DeFi 2.0 race is built upon the foundation of DeFi 1.0. With more projects introducing new concepts and ideas, continuously improving various aspects of the DeFi ecosystem, users can gain a better experience. Therefore, to determine whether a project embodies the DeFi 2.0 concept, it is essential to consider if there are innovative features in the incentive mechanism and other critical characteristics.

Furthermore, the DeFi market is constantly evolving, with rapid changes and updates. Opportunities and risks coexist. While being optimistic about project growth, thorough research and preparation are necessary to deeply understand project backgrounds, operating models, and mechanisms. The development of DeFi 2.0 requires a long-term observation and strategy.

For more dynamic data and content on the DeFi ecosystem, click the Footprint link to access more project dashboards and analysis content.

The above content is for personal perspectives, for reference and discussion purposes only, and does not constitute investment advice. If there are any obvious misunderstandings or data errors, feedback is welcome.

Footprint Analytics Website: https://www.footprint.network/
Discord Community: https://discord.gg/3HYaR6USM7

About Footprint Analytics

Footprint Analytics is a one-stop visual blockchain data analysis platform. Footprint helps solve the problem of on-chain data cleaning and integration, allowing users to enjoy a zero-threshold blockchain data analysis experience for free. It provides over a thousand table templates and a drag-and-drop charting experience, enabling anyone to create personalized data charts within 10 seconds, easily gaining insights into on-chain data and understanding the stories behind the data.