Take OlympusDAO and Tokemak as examples to interpret the new story of DeFi 2.0

This usually attracts large amounts of capital and quickly accelerates the growth of the agreement. What's the problem with that? The vast majority of liquidity has no loyalty and moves on to the next project if it offers a better incentive. This has created significant selling pressure on native tokens. Unfortunately, the price of the token is often related to the overall quality of the project, and can sometimes make or break a project.

Some agreements try to mitigate this problem by adding "release periods" to their liquidity mining incentives, but this is usually a palliative that will eventually face the same problem.

Each agreement that offers a liquidity mining program hopes to remain attractive to users, stand out from the competition, and attract lasting liquidity after mining is over by building a reputable brand. This is often referred to as the "moat" for establishing agreements.

If it's a decentralized exchange, the protocol is designed to have deep liquidity so users can execute their trades at the best price.

As for lending agreements, their goal is to provide attractive and sustainable lending markets for lenders and borrowers.

Uniswap is one of the best examples of a "moat" agreement. At the time of this writing, Uniswap has a 67% market share of all decentralized exchanges on Ethereum. Although the agreement has not provided any additional incentives in the form of UNI tokens for nearly a year, the market share remains very high.

What are the reasons? Strong brands and high transaction volumes enable liquidity providers to earn good returns from transaction fees alone. Uniswap, of course, also benefits from being one of the earliest protocols in the DEX category, which is increasingly difficult to replicate over time.

Today, we see a lot of deals that attract millions or even billions of dollars of liquidity that will lose their appeal in the long run as capital moves to new, cool deals with better returns.

All new deals face huge difficulties. How to bring users and liquidity in a sustainable way, rather than just attracting mercenary capital. To make matters worse, the number of tokens for liquid mining schemes is usually limited, so agreements are in bad shape and they either succeed in the liquid mining scheme cycle or they don't.

To address this issue, a new set of DeFi protocols has decided to propose innovative protocol designs that turn the usual liquid mining scheme into something more sustainable.

To get a better idea of how the new design works, let's take a look at a few of the protocols that started the movement and are now at the forefront of DeFi 2.0.

OlympusDAO

OlympusDAO is a good place to start.

Olympus is a decentralized reserve currency protocol based on OHM tokens. Each OHM token is backed by a basket of assets stored in Olympus's Treasury. This in turn creates a floor for OHM so that the actual price should not fall below a certain level.

To participate in Olympus, users can stake and get new OHM from rebase rewards with their existing OHM tokens, or trade different assets for discounted OHM.

The latter, also known as bonding, is one of the main concepts that allows protocols to have their own liquidity.

Bonding takes place in the following ways:

The agreement sells its own token (OHM) at a discount to its market value in exchange for other assets. The trade-in OHM is released within a few days, usually five.

Currently, the protocol supports bonding of two main asset types: LP tokens representing liquidity that are added to decentralized exchanges (such as Uniswap or SushiSwap), and single assets such as DAI, FRAX, wETH, or LUSD.

When users exchange LP tokens for discounted OHM tokens, the LP tokens are essentially controlled by the protocol itself. As we know, LP token owners have complete control over underlying liquidity. In the case of Olympus, the protocol has the LP tokens of the most common OHM transaction pairs such as OHM-DAI, OHM-WETH, OHM-FRAX or OHM-LUSD, which in turn means that the protocol has its own liquidity.

At the time of this writing, Olympus has over 99.5% of its own liquidity in all markets and exchanges.

The bonding mechanism used by Olympus not only opens up many new possibilities for Olympus itself, but also opens up new possibilities for other protocols through OlympusPro.

The Olympus team recently launched Olympus Pro, which allows other protocols to take advantage of the same bonding mechanism that made Olympus successful and offer bonding to them as a service.

Olympus Pro began to attract more and more deals, seeking a more sustainable way to generate long-term liquidity. Some of the protocols involved in Olympus Pro include Alchemix, Frax, StakeDAO, and Pendle.

Olympus Pro has also launched a dedicated market for bonds. Investors would be able to buy tokens of different agreements at a discount in this market in exchange for other assets that would then become part of the Treasury of the agreements.

Olympus will soon release version V2 of their protocol, which will improve and optimize some of the existing features. One of them is to improve the bonding mechanism, so that the OHM being bonded will be pledged to the agreement during the bonding period.

Olympus is clearly one of the most interesting new deals, and perhaps it should be singled out for full explanation.

Tokemak

Another protocol that iterates on the concept of fluid mining is Tokemak.

Tokemak focuses on creating sustainable liquidity in DeFi through decentralized market-making agreements.

In Tokemak, each asset has its own pool, called a reactor, in which the protocol token TOKE is used to channel liquidity.

The liquidity provider provides only one token to a dedicated reactor, while the TOKE holder becomes the liquidity facilitator, deciding where the liquidity should go.

This design democratizes access to liquidity and provides incentives for liquidity providers and liquidity facilitators.

After successfully channeling the flow of its ETH and USDC genesis pools, the Tokemak community has now begun voting on the project that will start the reactor. Soon, these reactor assets will be paired with genesis Pool assets and deployed on DeFi.

The Tokemak, Olympus Dao and Olympus Pro deals are just some of the new ones that have innovated in liquid mining. It will be interesting to see other protocols further test their protocol designs.

conclusion

DeFi 2.0 May seem like a temporary narrative, but the core concepts behind it are likely to stick around and make liquidity mining more sustainable.

The new DeFi protocol will have a way to attract persistent liquidity without getting stuck in an endless cycle of subsidizing users with liquidity mining rewards, and without competing with new protocols from forks themselves, which can launch new tokens in a matter of days.

This does not necessarily mean that liquidity mining will disappear soon, rather, projects will have the means to get them into a fast-start phase or attract initial capital to a new chain or L2. At least that would be an option, not the only possible way forward.

So do we really need a new name for all this? Maybe, but whatever we call it, it won't change the fact that there are protocols out there to experiment with new designs and improve on things that haven't worked as intended before.

The good thing about creating a new narrative is that it can inject some fresh excitement into the field and allow more people to discover DeFi's potential.

The question that often arises when discussing DeFi 2.0 is, what about the existing DeFi agreement? Do they become obsolete over time?

I don't think so.

One of the main benefits of open source development is that existing protocols can adopt new things that prove themselves to work well. Maybe bonding liquidity via Olympus Pro, maybe redirecting liquidity using Tokemak, maybe something else. Some existing DeFi protocols adopt the DeFi 2.0 concept, which is quite normal in the future.

In addition, the new agreements will be able to take more risks and try protocol designs, because they won't have as much capital risk as the agreements already established. This will benefit the entire DeFi space, allowing new and existing protocols to evolve together.

It is important to note that very little of the potential of the whole DeFi field has been realized and we should focus on making the whole pie bigger together.

The original link