Title: Does "DeFi 2.0" Really Upgrade DeFi?

Author: Tangyuan, Hive Finance News

In the past month, while major DeFi protocols have been stagnating in growth, the term "DeFi 2.0" suddenly spread in the crypto community. With the addition of 2.0, is it a real upgrade or just a concept?

The first mention of "DeFi 2.0" can probably be traced back to the developers of the lending protocol Alchemix. Its developer Scoopy Trooples stated during an online live stream that DeFi applications built on first-generation protocols can be considered second-generation protocols, referred to as "DeFi 2.0," due to their innovative advancements from 0 to 1.

However, this classification has not been well received by the DeFi community of players and developers, especially since DeFi itself has the "Lego block" openness. Therefore, there is widespread debate about which types of protocols can be categorized as "DeFi 2.0," making the concept of 2.0 difficult to define precisely.

Before understanding "DeFi 2.0," it may be necessary to clarify what "DeFi 1.0" is.

We know that the early decentralized financial infrastructures formed the current DeFi landscape, such as decentralized exchange applications DEX (Uniswap, SushiSwap, etc.), lending applications (Compound, Aave, MakerDAO, etc.), stablecoin applications (Curve), liquidity mining applications (Yearn, etc.), and so on.

These applications have already established basic product functions and their respective economic systems, having undergone at least two rounds of market testing, attracting a large number of users, and forming the mainstream application direction of the current DeFi market. As they continue to evolve, protocols are also interconnected; for example, leveraging DEX liquidity pools to create leveraged farming protocols. Therefore, calling them "DeFi 1.0" may not be entirely accurate; it is more like the "1.5" era.

According to Scoopy Trooples' understanding, if innovations are made on these early, relatively mature DeFi applications, resulting in new products or mechanisms, then these protocols can be classified as "DeFi 2.0."

Thus, innovative product features and new economic models are likely important characteristics of DeFi 2.0.

Currently, some protocols are being classified as DeFi 2.0, such as new functional components built on existing mainstream DeFi protocols. Examples include the low-slippage cross-chain protocol Convex built on Curve and the floating algorithm protocol OlympusDAO, which adopts innovative incentive mechanisms on the original DeFi protocol.

From the user's perspective, the upgrade represented by 2.0 also needs to have characteristics that improve the experience of DeFi players, such as improving token economic models, reforming DeFi liquidity yield farming methods, enhancing capital utilization, smoothing risk transfer, and having more reasonable community governance forms and structures…

According to the characteristics of the internet and its products' iterations, 2.0 can only be truly named when user needs and experiences can be significantly enhanced through iteration, such as the migration of internet users to mobile internet, or the replacement of physical buttons with touch screens.

Before DeFi becomes a mainstream financial product supplement or alternative, it is still in the early stages of development. Even though well-known DEXs, lending applications, stablecoins, and asset management applications have attracted a large number of users and funds interacting with DeFi applications, these applications are still in a relatively mature state and cannot yet achieve the smoothness and security of mainstream financial scenarios.

Perhaps we do not need to get entangled in the upgrade numbering of DeFi. For users, the most important thing is what new functions have emerged in the DeFi protocol market, whether these functions can change previous experiences, and whether they can maximize the value of held crypto assets.

Of course, pursuing new experiences in the DeFi market often comes with risks and pains. Players sometimes become the collateral damage of innovators' experiments, and such phenomena are occurring.

While the concept of "DeFi 2.0" injects imagination into users, the price surges of so-called 2.0 representative tokens like OHM (OlympusDAO) and CVX (Convex) have also given users a shot of adrenaline, followed by shock. Not long ago, rumors about issues with the OlympusDAO contract code led to OHM plummeting from a high of $1400 to $500.

Additionally, since many DeFi 2.0 applications are anonymous projects, there are questions about the technical capabilities of the founding members and the security of the application code. Whether it is 1.0 or 2.0, these are common risks in the current DeFi market, and attempts should be made with sufficient understanding. From the operational mechanisms of various 2.0 concept applications, these applications can be described as somewhat "borrowing from chickens to lay eggs." The potential security risks of DeFi's "Lego block" characteristics and liquidation risks in a highly volatile market are all "minefields" that users cannot ignore.

This issue of DeFi Hive will introduce the most frequently mentioned and highly focused "DeFi 2.0" applications, taking a glimpse at what functional changes these applications have made in DeFi while warning of risks.

Cross-Chain Yield-Bearing Asset Lending Application Abracadabra

Introduction

Abracadabra.money (SPELL) was originally established as a cross-chain yield-bearing asset lending protocol on Ethereum and is now deployed on multiple chains, operating on BSC, Arbitrum, Avalanche, Fantom, and other public chains.

The so-called "yield-bearing assets" can be simply understood as assets that generate income, usually obtained by locking native assets. You can think of it as a deposit certificate or receipt obtained from locking native assets, and some people refer to it as "yield-bearing bonds" in tokenized form—Interest bearing tokens.

These yield-bearing assets often come from the locking of native assets from mainstream DeFi protocols like SushiSwap, Yearn, Curve, etc., representing the yield generated from locked native assets. For example:

• xSUSHI—This is obtained by users locking SUSHI on the SushiSwap platform, and holders of xSUSHI can receive periodic dividends from SushiSwap trading fees;

• veCRV—This is the yield-bearing asset obtained by users locking CRV on the Curve protocol, and holders of veCRV can receive a share of Curve's trading fees and vote on the mining yield rates of LP funds on Curve;

• yvVault assets—This is a collective term for yield-bearing assets like yvYFI, yvUSDC, yvUSDT, yvWETH, which come from the locked tokens in the Yearn V2 liquidity pools for YFI, USDC, USDT, WETH, etc. Holding yvVault allows users to earn yields from the corresponding liquidity pools on Yearn V2.

Before the launch of Abracadabra.money, users holding yield-bearing assets like xSUSHI, veCRV, and yvVault could only periodically receive income dividends or voting governance rights from the respective locking protocols. However, since they were not supported for circulation or trading in the market, many of the yield-bearing assets could only sit in wallets, unable to be utilized efficiently.

The Abracadabra protocol was created to "release the liquidity of these yield-bearing assets," helping yield-bearing asset holders better manage their earnings, with the goal of increasing the utilization rate of yield-bearing assets.

Abracadabra.money Official Website

Operational Mechanism

Users can deposit yield-bearing assets into the Abracadabra application, then use these yield-bearing assets as collateral to mint the stablecoin MIM (Magic Internet Money). MIM can circulate and trade in the market like USDT, DAI, and USDC.

For example, Jack has yield-bearing assets xSUSHI worth 5000 USDT, and he urgently needs to cash out 1000 USDT for real-life expenses but does not want to destroy his yield earnings on SushiSwap. At this point, he can collateralize xSUSHI in the Abracadabra application to mint 1000 MIM, and then exchange this 1000 MIM for 1000 USDT on the stablecoin exchange protocol Curve. Once his funds are back in order, he can redeem the 1000 MIM debt and retrieve the original amount of xSUSHI. If he does not repay, the Abracadabra application will deduct an equivalent amount of xSUSHI from his account.

By allowing users to collateralize yield-bearing assets to borrow the stablecoin MIM, Abracadabra releases the liquidity of the collateral.

Additionally, Abracadabra has issued the application token SPELL, with a maximum total supply of 21 billion tokens. The main function is that users can stake SPELL in Abracadabra to earn sSPELL. Holders of sSPELL can vote on which yield-bearing assets can be listed on Abracadabra and can also vote on decisions regarding Abracadabra's lending rates, liquidation rules, etc. Of course, like many yield-bearing assets, holding sSPELL also allows users to receive income dividends from the Abracadabra application.

Currently, users can participate in liquidity yield farming on Abracadabra by depositing assets like xSUSHI, veCRV, yvVault, FTM, etc., to earn SPELL rewards.

Data

According to Defillama data, Abracadabra's total value locked (TVL) in crypto assets is $3.19 billion. SPELL is currently priced at $0.019, with a circulating market cap of $1.346 billion.

Decentralized Leverage Application Fodl Finance

Introduction

Fodl Finance (FODL) is built by the team behind the DeFi whale address 0xb1. It is a decentralized leverage application that allows users to trade with leverage without paying funding rates. It is important to note that this application is developed by an anonymous team.

The Fodl team claims that they discovered significant volatility in on-chain asset trading, requiring users to manage risks associated with assets like WBTC and WETH. To ensure the safety of funds, users often need to hedge their risks. However, when market volatility is high, the amount of funds needed for hedging also increases, leading users to pay high rates for the liquidity needed to obtain leverage.

Fodl Finance Official Website

In centralized financial markets that provide leveraged trading, investors typically need to borrow or lend the corresponding assets from trading platforms and pay funding rates to counterparties to hold long or short positions. During peak periods of leveraged trading, the funding rates paid to counterparties are also high. Whether in CEX or DEX, when users most need to utilize leverage to hedge their investment portfolios, the funding costs are also the highest. For example, during the bull market phase of the crypto asset market in April this year, if users held leveraged long positions in assets like BTC and ETH, about 30% of their profits would be consumed by funding rates.

Therefore, Fodl Finance began exploring whether users could obtain long or short leveraged positions at low costs without relying on centralized trading counterparts.

Using leverage on-chain typically requires operations in DeFi lending applications like Compound and Aave. Users need to first deposit cryptocurrencies like WETH, WBTC, and USDC, then borrow DAI. The borrowed DAI is often repeatedly deposited and borrowed to capture yields in various DeFi applications. This requires users to calculate the funding risks they can bear based on the amount of funds they deposit to determine how much leverage to use. This also increases the operational difficulty for users, requiring a deep understanding of DeFi lending applications and knowledge of on-chain liquidation risks.

Fodl Finance began to package solutions to these pain points through a protocol.

Operational Mechanism

The Fodl Finance platform leverages the liquidity of assets from lending applications like Compound and Aave. This not only ensures that its application has sufficient liquidity but also allows users to directly leverage on Fodl Finance by using assets deposited in these lending platforms.

Fodl Finance believes that obtaining liquidity from the mortgage loan market can enable traders to use leverage for trading without paying financing rates and also earn token incentives from DeFi lending applications.

Essentially, Fodl Finance transforms traditional DeFi lending platforms into money markets, treating the assets deposited in lending applications as collateral and then providing leverage to users.

It is important to note that Fodl Finance is not a traditional leverage margin mechanism. In traditional leveraged trading, you only need to pay a small margin and a certain funding rate to use the required leverage. However, in Fodl Finance, the funds you leverage come from the assets you have in lending applications like Compound and Aave, and the amount of funds you can leverage depends on the amount you deposit in the lending application. Using Fodl Finance leverage means you are simply streamlining the process of circular borrowing or depositing on this platform, integrating your circular lending process. In addition to streamlining the process, Fodl Finance also aggregates the yields of each asset from lending, allowing users to choose suitable positions based on yield levels.

The specific operational process is that users first choose which lending application's stored assets to use, then select the amount of leverage and leverage multiplier. Fodl will automatically calculate the leverage that can be matched with the borrowed assets. When users open positions, Fodl will provide a flash loan, allowing users to open all leveraged positions in a single transaction without needing to perform circular operations.

If you want to hold a long position, the assets supplied to Fodl are non-stablecoins, while the borrowed assets are stablecoins, such as providing ETH and borrowing DAI; providing COMP and borrowing USDC; providing ETH and borrowing USDC… These positions are suitable for users who are bullish on the market and seek to profit from the appreciation of a certain asset/stablecoin's price.

If you want to hold a short position, the assets supplied to Fodl are stablecoins, while the borrowed assets are non-stablecoins. For example, providing DAI and borrowing ETH; supplying USDC and borrowing COMP; supplying USDC and borrowing ETH… These positions are suitable for users who are bearish on the market and seek to profit from the depreciation of an asset/stablecoin's price.

Currently, the test version of Fodl Finance has been launched, supporting users to leverage assets on AAVE and Compound. Additionally, users can also provide liquidity for LP pools like FODL-ETH, FODL-ETH in the Fodl application to earn FODL rewards. FODL is the ecological token of the Fodl Finance application, primarily used for governance in FodlDAO and also serves as a certificate for future income distribution from the Fodl Finance application.

Data

The test version of Fodl Finance was launched on October 15, and liquidity mining began on the evening of October 20. The current amount locked in the application is $87 million. The total issuance of FODL is 1 billion tokens, of which 200 million FODL were pre-sold on the Sushiswap platform at an initial price of $0.025, and FODL is currently priced at $0.85.

Algorithmic Reserve Currency Olympus (OHM)

Introduction

OlympusDAO (OHM) is an algorithmic token project built on Ethereum, driven by the community. OlympusDAO aims to create a freely floating reserve currency supported by a basket of crypto assets—OHM—through specific algorithms, hoping that OHM can become a purely crypto-native reserve asset.

OlympusDAO Official Website

In the current crypto asset market, due to the high volatility of assets like BTC and ETH, users need a relatively stable asset for trading, with various stablecoins pegged to the dollar becoming prevalent in the market. Users accept stablecoins because they believe stablecoins have the same purchasing power today and tomorrow. However, one issue is that as a fiat currency, the dollar is backed by the U.S. government and controlled by the Federal Reserve. When the economy runs poorly, the depreciation of the dollar can also lead to the depreciation of stablecoins.

Against this backdrop, OlympusDAO hopes to create an algorithmic currency in the crypto world that can maintain its purchasing power regardless of how the crypto market fluctuates, similar to how gold is determined by supply and demand.

Operational Mechanism

OlympusDAO differs from previous algorithmic stablecoin projects in that the price of minted OHM is not pegged to any asset. Each OHM is supported by a basket of assets in the OlympusDAO "treasury," such as the decentralized stablecoin DAI on Ethereum and the stablecoin FRAX issued on the Avalanche protocol.

The rules of OlympusDAO state that each OHM is supported by 1 DAI, rather than being pegged to it. This means that the OlympusDAO "treasury" needs to reserve DAI to support OHM. When the price of OHM falls below 1 DAI, OlympusDAO will buy back and burn OHM to reduce the supply of OHM, bringing its market price back to 1 DAI; when the market price of OHM is greater than 1 DAI, OlympusDAO will sell OHM at a discount to increase the circulating supply of OHM, causing its price to drop.

You might think that the intrinsic value of OHM is 1 DAI, or around $1, and its secondary market price should fluctuate around 1 DAI. However, the rules of the OlympusDAO protocol state that the actual price of OHM is determined by market demand and floats freely. Currently, OHM is priced at around $970.

Why does the market price of OHM deviate so much from the value of the assets that support its minting? The OlympusDAO team states that this is mainly because the value of OHM is not tied to another asset (such as the dollar) but is determined by the free market. Like any other non-pegged asset (gold), it is influenced by supply and demand. Additionally, the profits generated by the application empower OHM, and whether OHM is sold or bought back, it generates profits. Therefore, the price of OHM reflects the premium that OHM holders pay for the potential of OlympusDAO.

Why does OlympusDAO always make a profit whether selling or buying back OHM?

OlympusDAO responds that in this application, whether the trading price of OHM is greater than or less than 1 DAI, the protocol will make a profit. When OHM > 1 DAI, OlympusDAO can receive more than 1 DAI in sales fees, and when OHM < 1 DAI, it can buy OHM for less than 1 DAI. More importantly, OlympusDAO distributes 90% of these profits proportionally to OHM participants, with 10% allocated to the DAO.

For example, if OHM is currently priced at 981 DAI, when you buy 1 OHM on Sushiswap, the protocol receives 981 DAI, which it uses to mint 981 OHM. You own 1 OHM because that is the current price at which you purchased OHM. Of the remaining 980 OHM, 882 OHM (90%) enter the staking contract, and the remaining 98 OHM (10%) are kept in the DAO. The OHM in the staking contract is gradually redistributed to OHM stakers, and the circulating supply of OHM increases over time.

This means that if you hold OHM, 90% of all profits from future sales of OHM will flow to OHM holders. This attracts users to want to become OHM holders. However, in reality, this can lead to very unstable prices for OHM, especially when the trading valuation of OHM is much higher than its price floor of 1 DAI.

To balance the price of OHM, OlympusDAO has also created an OHM bond sale issuance mechanism, issuing LP bonds and DAI bonds. The bond duration (which can also be seen as an indicator of the time required for investors to recover their bond investment) is over 5 days. When the discount rate of the bond exceeds the staking return rate over 5 days, users are incentivized to purchase bonds. The assets obtained from the bonds are deposited into the treasury, and OHM is minted based on the amount of assets sold from the bonds, increasing the supply of OHM.

OlympusDAO has innovated the LP bond mechanism, allowing users to form LP assets like OHM-DAI and OHM-FRAX on SushiSwap, purchasing bonds at a low price with LP, which can be used to obtain OHM at a discount or receive additional OHM rewards.

In this way, OlympusDAO can control the OHM liquidity pool on DEX, and the protocol itself becomes its own market maker. Regardless of market conditions, it can promise to provide liquidity and ultimately reduce the price volatility of its tokens. At the same time, it introduces new demand channels for its native tokens.

The launch method of Olympus DAO is relatively unique among recent projects. The team did not distribute tokens through airdrops or liquidity farming but sold them to its Discord members, selling 73% of the genesis OHM at a valuation of $200,000, with each purchaser ultimately receiving 141 OHM at a unit price of $4. This is essentially an internal equal crowdfunding.

It is important to note that OHM is not only an algorithmic token in the Olympus DAO ecosystem but also a governance token. OHM can be staked to exchange for sOHM, allowing OHM holders to accumulate protocol profits and participate in OlympusDAO governance. However, the instability risk of stablecoins also becomes its biggest minefield, requiring participants to be vigilant.

Data

According to the OlympusDAO official website, as of October 20, the total value locked (TVL) in this application is $2.65 billion, and OHM is currently priced at $991.