A breakthrough no less significant than the birth of blockchain: How to master DeFi 2.0

The DeFi 2.0 concept bears even less resemblance to DeFi 1.0 than NFT 2.0 does to NFT 1.0 (and far less to 0.1—the pre-ERC-721 era). The mechanics appear the same, the tools similar, but the level of abstraction is significantly higher. Vladimir Menaskop, a Web3-entrepreneur, explains what DeFi 2.0 is and how it differs from first-generation decentralized finance. 

DeFi — what is it?

If you think about it, decentralized finance can be described in several ways:

1. In a broad sense. Then in DeFi all kinds crypto assets and the methods of working with them.
2. In a narrow sense. This is the classical approach, where we talk about stablecoins, AMM and other DEX, derivatives and other categories described in the book “Как это DeFi“.

DeFi 2.0 erases the boundary between these approaches, because everything becomes interoperable. On one hand, L0 synthesizes the capabilities of L1; L1 interacts with L2 and in various perspectives, and on the basis of L2 one can build entire arrays of appchains (L3 and higher — developments from Archway, zkSync, Arbitrum, Octopus Network, Ankr, Xai Foundation). On the other hand, DeFi products themselves are based on programmable assets and even entire pools — as in Uniswap v4.

DeFi 2.0. Structure

Let’s describe DeFi 2.0 through its elements that are unique to it:

1. Programmable assets — from NFT 2.0 to OFT, which reside inside pools. This approach is well described at EYWA, though one could look at LayerZero and analogues. 
2. Programmable pools. They combine the capabilities of programmable assets and create a set of rules for their interactions. Uniswap is, as always, the leader. 
3. Narrowly specialized oracles. Chainlink — undoubtedly an excellent project and the infrastructure bedrock, but data is growing and the RWA-segment requires its own approach, and NFTs — their own. 
4. Cross-chain strategies. There will be more of them, and they will become more complex, since liquidity is the most constrained and important resource in the market. 
5. ZKP and reversible encryption. Creating index and other strategies without revealing them themselves, but with yield verification (APR/APY) — a need that will become a trend in the coming years. 
6. Modular structures. Starting with those appchains and ending with SDK-specialized protocols. On this path, MetaMask has already gone (snaps) and Trust (WaaS), but others will follow, since building a blockchain from scratch is hard, time-consuming, and above all — expensive.
7. Algorithmic stablecoins 2.0. Essentially this is a hedging instrument inside any local system (from DAO to ecosystems). 
8. Insurance. In the form it exists, one could say it does not exist, but items 5 and 6 together with items 1-2 give hope for the birth of innovative tooling. 
9. Flash loans 2.0. More precisely, the birth of innovative on-chain instruments that are not inherited from CeFi/TradFi markets but operate exclusively in the crypto-asset market. Close to this are perpetual futures.
10. There are also smaller trends.

In any case, the point is not to abandon AMMs and create new types of DEX, but that they will still be created; and not that dollar-pegged stablecoins are unnecessary, but that revenue-extraction mechanisms even from such primitive assets will develop. 

DeFi 2.0 — is it dangerous again?

Yes, of course. And this is a plus, because such danger acts as a red, constraining line for novices, as well as for those who are used to traditional financial markets. And yet we will pause on three aspects separately.

1. Main danger of DeFi 2.0 and at the same time its main plus is that AI in trading (MEV-bots, interoperability bots and others) will grow exponentially in the next three to four years. 
2. DeFi 2.0 will intersect with RWA more than the previous generation, and thus with CeFi/TradFi. And this will inevitably lead to the appearance of much larger VC giants than Terra, Celsius, 3AC, FTX and the like. 
3. Finally, this segment requires far more liquidity, than the previous one, and hence the role of complex derivatives will rise. Once we cross the threshold of their collateralization, everything will crash — and far more abruptly than in the 2008 crisis.

But these dangers are inevitable because centralized structures bring their old ills and cut off entire continents of opportunity (as in reality with the worlds of South and North America, where millions died from lack of immunity, not to mention outright genocide). 

So there is no need to dwell on these negatives, but it is wise to know them.

So what is DeFi 2.0?

Many, including giants like Chainlink, see in DeFi 2.0 something like LEGO: here are bricks — go and assemble. But that is true only in part. More importantly, you can not only assemble the elements themselves, their interactions and behavior, but also pick the best practices on the fly. In other words, the winner will not simply be the fastest, the most resourceful, or the smartest, but the one who lives in many systems at once.

Thus encapsulation in different forms and types has become a trend, and it will continue to develop. 

In the end one can offer the following definition: DeFi 2.0 — this is decentralized finance that operates in any blockchain/DAG-ecosystem simultaneously, both through synthetic assets (stETH/cbETH) and direct (ThorChain and analogues) thanks to its own programmability and flexibility of financial models. 

That DeFi 2.0 has been born is a fact. How long will it take to ramp up? I do not know, but I am convinced the first hype will occur during the period 2024–2027, i.e., very soon. All the problems of the DeFi market here will triple, but the opportunities will increase by 10 times or more. 

How to prepare for this market?

First, go through the basics:

1. Standard P2P exchanges, including OTC.
2. Exchanges via pools (AMM).
3. Creation of symmetric pools (Uniswap).
4. Creation of asymmetric pools (Balancer).
5. Studying routing in practice (1inch).
6. Staking, liquid staking (Lido, Rocket).
7. Farming of any kind (Harvest).
8. Liquid farming (ENVELOP).
9. Flash loans.
10. MEV-bots.
11. Derivatives of various orders (Maverick, Pendel). 

In items 9–11 there can be different, more or less complex options, since one thing is watching MEV-bots, another is building them. One thing is automated systems for working with derivatives, another is configuring complex routing to create your own. But overall this approach as a baseline I have been proposing for about five years, and it only evolves with the appearance of new elements. 

Which projects to study?

First, focus on the NFT 2.0 pioneers: DAO ENVELOP, Charge Particles, Solv Finance and others. Find them easily on the NFT 2.0 aggregator. To broaden your outlook you can study the digests on the topic and a Hackernoon article on the subject. If in doubt, NFT 2.0 includes projects such as: Uniswap starting from v3, Collab DAO, BitDAO (Mantle), Rangeprotocol, ENS (v2 and beyond), 1inch (in the wrapper aspect), EYWA and many other projects, including Chainlink, which has already been mentioned more than once.

The next point is a broader market of programmable assets: it differs in that here there can be both NFTs and interchangeable tokens, primarily OFT, semi-fungible tokens (Semi Fungible Tokens, SFT) and a number of others, including synthetics. 

It is important to monitor ZKP in the context of developing new DeFi strategies, especially regarding verification of numerical indicators of various linkages. In this regard, Stark is even more interesting to watch. 

And, of course, narrowly specialized oracles and the entire fundamental history built on them. There are such projects as Envelop and Mnemonic. Different AMM variants also fit: DDAMM, CPAMM, and so on. 

In short, the evolution will go “faster, higher, stronger.” One can look at Olympus DAO and its peers, or study it in a sequential and scalable fashion — through progress:

• crypto assets;
• liquidity;
• and the DeFi-tooling itself (tooling). 

Conclusions

Talking about DeFi 2.0 could be lengthy, or very lengthy. But I would recommend talking less and testing more, since the combination of ZKP + programmable assets is a breakthrough no less significant than the birth of blockchain at the turn of 2008–2009. All the elements of the latter existed before Bitcoin, but Satoshi managed to connect them — correctly and precisely. 

And today as well: everything seems to exist, but connecting them in the right proportion is not so easy, and even a single genius is not enough here. And that means this is a whole field for new discoveries, ventures and startups. 

It seems that segments such as ReFi, RWA, DeSoc and many others are unlikely to evolve without DeFi 2.0, since the latter handles not only financial but also reputational models, and these are exactly what will be needed in a world of upcoming CBDC and credit ratings.