DeFi 2.0: An Alternative Solution to Liquidity Mining

The defi 2.0 eliminates subsidized liquidity and replaces it with protocol-controlled liquidity. Protocols that employ the concept of “protocol controlled liquidity” (PCV) do not reduce their token supply to accommodate transient deposits. They instead purchase liquidity from the market or rent it from other protocols.

Decentralized financial (DeFi) systems have been around for a long time, but large-scale test projects were launched for the first time in 2018. DeFi Summer 2020 was created in July of this year as a result of Synthetix’s first-ever liquidity incentive plan. In just a few months, smart contracts went from being valued a few hundred million to being worth $20 billion.

This marked the beginning of the DeFi revolution. This year’s defi 2.0 Summer was canceled due to “mercenaries” (explained later) breaking their systems. DeFi is still in its early phases in terms of how well it will work in the long run. One of the most serious issues with DeFi is liquidity mining, which will be addressed in version 2.0.


What’s wrong with liquidity mining today?

The majority of protocols use liquidity mining incentives to attract users and assist them in getting started. When a “mercenary’s” current incentives run out, they will hunt for better conditions elsewhere.

As a result, doing the same useless things over and over has become the norm. Dumping and selling pressure harm the system and push down the value of tokens. There is no certainty that receiving subsidies will aid in the establishment of a new firm.


What is DeFi 2.0 and how is it different from DeFi 1.0?

defi 2.0 eliminates subsidized liquidity and replaces it with protocol-controlled liquidity. Instead of reducing the number of tokens accessible for short-term deposits, “protocol-controlled liquidity” (PCV) attempts to purchase market liquidity or rent it from other protocols. It is simpler to understand these notions when examples are provided.

Olympus DAO has halted liquidity mining by implementing a bonding system. Users can also swap their assets at a discount for the local currency (OHM) (OHM). The bonding strategy spreads the discount over five days. One of these assets is LP tokens, which provide liquidity to DEXs. Another option is DAI or FRAX. To generate its own liquidity, the protocol purchases LP positions from the market. According to their data page, the protocol owns 99.9% of the OHM-DAI liquidity.

OHM is the data on which LP currencies are founded.

Because Protocol controls the LP defi crypto, it also owns the underlying liquidity.

Since it has LP tokens, the protocol is its own source of liquidity (like OHM-DAI).

Olympus Pro was recently launched in order for LaaS to be integrated to the DeFi ecosystem and bonding technology to be used by other protocols. Trading fees are paid to protocols that purchase their own liquidity, however there is a danger that these protocols will lose money.

Tokemak is a decentralized alternative to liquidity mining. Tokemak uses the asset’s own token to manage the flow of money into its reactor (TOKE). When a liquidity source provides a token to a reactor, token holders or liquidity directors make this call.

Protocols receive tokens for assisting in ensuring that their environment has a currency. Users can also limit how quickly the token can be bought and sold by staking TOKE. This liquidity mining technique might benefit both boards of directors and liquidity suppliers. Tokemak, unlike Olympus Pro, manages liquidity while also protecting trading commissions and making a loss. Liquidity providers risk losing all of their money if they exclusively lend to one party.

These new methods of extracting liquidity are an upgrade. Most new DeFi protocols lack a moat and so cannot pay users back through liquidity mining payouts. Protocols can now choose to mine for cryptocurrency. If any of these concepts are successful, they might be added to existing defi solution protocols to strengthen the system. The release of DeFi 2.0 piques one’s interest. Together with DeFi 2.0, the aforementioned efforts were able to obtain or lease money.


DeFi 2.0 projects

Here are a few instances of DeFi 2.0-related work.

Another example of a DeFi 2.0 project is Tokens that pay interest, such as yvWETH and yvUSDC, can be used as collateral for loans or to create dollar-linked Magic Internet Dollars (MIM).

Tokens that aren’t being utilized but are earning interest can be exchanged for other tokens and sold for a profit. The interest rate on the loan is still the lowest it has ever been. The platform’s governance token is SPELL. SPELL token holders can use their tokens to pay platform fees and cast votes on proposals.

Convex Finance

CVX is the brand name of Curve Finance’s DeFi platform (CRV). Interest rates and trading fees for holders of CRV tokens or Curve LP are rising. Curve pays out more money to limited partners and holders of CRV tokens than Convex.

Convex Finance clients create curve liquidity pools when they combine their CRV. These pools have higher payouts than other liquidity pools. As a result, users can pay Convex Finance trading commissions with CRV tokens, which are included in the platform’s trading charge. Each Convex Finance LP receives a base interest rate, a share of the Curve trading platform fees, additional prizes, and CVX tokens.

Olympus DAO

One of the most advanced defi smart contract development products is the Olympus DAO. The platform’s currency is the OHM coin. Because DAI and FRAX support the OHM coin, its price remains constant.

Olympus, like any other DAO, allows token holders a say in how the firm proceeds ahead. Clients can increase their OHM token supply by staking their tokens. Users can use staked OHM to purchase DeFi systems. When sOHM tokens are burned, they are converted into OHM. Bond sales can generate revenue for members of the Olympus DAO. When purchasing bonds and OHMs, you can save money by using LP tokens.


Should you invest in DeFi 2.0?

So far, we’ve discussed how defi development services works. They benefit users while also contributing to DeFi’s “decentralized” nature by raising liquidity and granting more people the chance to vote.

There are still some issues with DeFi 2.0. A number of shows have been the subject of rumors and disputes. Sifu, an employee, was reported to have launched a cryptocurrency exchange that lost $169 million in January. MIM and SPELL prices have both dropped significantly.

Take the Olympus DAO as an example. Skeptics believe that the platform’s predicted annual staking yield of 7,000% (through the creation of new OHM coins) is unlikely to occur.

What are your thoughts on financial investments? DeFi 2.0, like any other cryptocurrency project, requires extensive investigation. Often, the outcome of one endeavor determines the difference between success and failure. Read about it to learn more about the project, its creators, and how it was created.