In the ever-changing financial industry, the introduction of new products and services is a constant phenomenon. From credit cards and online banking to contactless payment and more recently, peer-to-peer lending, each financial product or service goes through multiple iterations.
In the same vein, the DeFi space has also undergone a process of evolution and development, with the initial offerings being restricted to creating decentralized versions of traditional financial products such as loans and insurance. However, as DeFi protocols have undergone testing, strengthening, and improvement, the user experience has been notably enhanced, and a wider range of use cases have been developed.
With this ongoing momentum in innovation, it is likely that soon, DeFi applications will be even more user-friendly and advanced compared to traditional banking apps or earlier versions of DeFi apps.
What are some of the features and technologies that set DeFi 2.0 apart from its predecessor?
Emphasis on community governance and collaboration
DeFi 2.0 is characterized by an emphasis on community governance, collaboration, and the integration of new technologies such as decentralized autonomous organizations (DAOs), non-fungible tokens (NFTs) and advanced smart contract protocols, which result in a new generation of transparent, accessible and inclusive financial applications. The use of newer technologies like DAOs allows for decentralized decision-making, enabling users to actively participate in the governance of the organization by holding and voting with tokens that represent ownership.This, in turn, creates a more equitable ecosystem where users have a greater say in the direction and management of the project rather than being solely at the mercy of centralized actors.
Additionally, DeFi 2.0 projects also leverage new protocols that make cross-chain interoperability more seamless and efficient. This allows assets and services to move seamlessly across different blockchain networks, further promoting a truly open and decentralized financial system.
This has the potential to create new possibilities for decentralized applications, enabling them to interact with one another, and creating an ecosystem of interoperable services that can be used in a variety of different ways, it can bring interoperability between different chains like Ethereum and BSC, also brings interoperability to DeFi applications and other centralized applications as well.
Use of NFTs as a customer retention tool
As the DeFi space continues to advance, it’s becoming increasingly apparent that the integration of NFTs will drive the next wave of innovation in the ecosystem. While DeFi 1.0 models, such as yield farming, have been successful in generating growth in the space, they have limitations in creating long-term revenue streams for users, leading to liquidity leakage as users constantly search for the next profitable opportunity.
NFTs, on the other hand, offer a potential solution to this problem by serving as rewards for loyal behavior and potentially increasing in value, as well as bringing yield through a royalties-like feature. NFTs can act as a strong customer retention tool, breaking the negative patterns of liquidity leakage seen in DeFi 1.0.
This can be observed in the ongoing projects like Aave NFT mining, where users earn yield, as well as NFTs (Aavegotchis), which increase in value based on their participation and loyalty in a game closely aligned with Aave lending market economics. NFTs have the potential to reshape the future of DeFi by creating more engaging, sustainable, and profitable revenue models for users.
Potential for DeFi to reach mass adoption and serve billions of users
In conclusion, the decentralization finance space has come a long way from the initial days of creating decentralized versions of traditional financial products. The current advancements in DeFi 2.0 are further strengthening the ecosystem and making it more user-friendly. With community governance and collaboration at its core, integration of newer technologies and protocols for cross-chain interoperability, scalability and security are set to take the movement to the next level and drive wider adoption of DeFi in the coming years. It is expected that the DeFi can serve billions of users in the coming years, building on its current user base of 300 million.
The trend of the last few years, and the trajectory of the industry, suggests that DeFi will play a major role in shaping the future of the financial services industry.
Imagine, in 2021, with limited features and use cases, the global market cap for DeFi expanded to over $150 billion. With the increased scalability, security, and liquidity that DeFi 2.0 promises, think of the kind of scale and opportunity that it will bring. Let’s seize it and shape it for the betterment of all.
Gaurav Arora is SVP- DeFi Initiatives at CoinDCX
