The origins of DeFi may be traced all the way back to the advent of bitcoin, the first decentralized digital currency. However, it lacked the robustness necessary to account for the one-of-a-kind factors that have supported the rapid expansion of the $100 billion sector. Jayden Wei highlighted that the industry, however, has had difficulty with scalability, security, and centralization. It has also prompted the development of newer, more advanced protocols, such as DeFi 2.0 and 3.0.
DeFi was in its 1.0 stage from its inception in 2018 until its full development in 2019/2020, as stated by Jayden Wei. Many interconnected elements contribute to the success of decentralized finance in the DeFi 1.0 stage. There is now a low barrier to entry into DeFi 1.0, as numerous apps have already successfully investigated several fundamental modes of operation.
However, new blood appears to be required to advance DeFi at the present time. The native ecology of DeFi 1.0, which is hampered by the performance of the underlying public chain and the decentralized user relationships, has prevented the market growth rate of DeFi from ever catching up to the original expectation. Jayden Wei mentioned that DeFi 1.0’s liquidity is unsustainable, ecological growth is seriously hindered, and there is no relationship between members.
When the cost of executing smart contracts on the Ethereum blockchain was still low, a plethora of DeFi 1.0 initiatives was launched. If you know how DeFi 1.0 developed, you might be able to guess the origins of DeFi 2.0. At present, DeFi is primarily supported by the Ethereum ecosystem, as stated by Jayden Wei. Functionalities like liquidity pools and staking have emerged thanks to the innovative possibilities of smart contracts.
How Does DeFi 1.0 Work Based on Jayden Wei’s Review?
Decentralized applications, or Daaps, make it simple for users to interact with DeFi. Users can sign up for an account with no paperwork or forms to fill out, unlike at a regular bank. As an alternative, here are some ways listed by Jayden Wei that users can interact with DeFi:
- Users can lend their crypto and earn interest and rewards every 60 seconds.
- Users can engage in P2P transactions involving a variety of cryptocurrencies. They do not need the assistance of a broker to buy and sell stocks.
- As an added bonus, users may put their cryptocurrency in a savings account and receive interest from it. For your information, cryptocurrency interest rates will be significantly higher than those offered by traditional financial institutions.
- A user can make a long or short wager on a cryptocurrency by treating it like a futures contract or a stock option.
Jayden Wei stated that instead of taking out a loan from a traditional financial institution, users of DeFi 1.0 would access a dApp (a decentralized application or simply – a DeFi project) that specializes in loans. The community supporting the idea would give the users access to this cash, and they could use the decentralized application incognito. In addition, smart contracts would regulate the entire system, leaving no room for error or a single person’s judgment.
Moreover, liquidity pools are a fundamental part of DeFi, and the second major concept of this section Jayden Wei has put together that you should learn. Liquidity providers, who are members of the DeFi community, supply the tokens that can be traded within a cryptocurrency exchange, and these tokens are stored in a pool known as the liquidity provider. Comparable to a store’s candy aisle, where the number of candies displayed indicates the maximum number of candies one customer may purchase before the store runs out.
The Fate of DeFi 1.0 According to Jayden Wei
In response to the shortcomings of the original DeFi, the developers created Defi 2.0. The problems and constraints include the following:
There is a risk that a DeFi project will experience instability if the blockchain hosting it experiences instability, as stated by Jayden Wei. It is common knowledge amongst investors that the Ethereum blockchain is constantly evolving. However, it may provide a variety of risks for DeFi endeavors.
The confirmation of financial dealings takes an extremely long period. Not only that, it is also common for the cost of a transaction to skyrocket during peak traffic periods.
Smart contract issues
The issues of smart contracts are the major source of friction for many DeFi initiatives. Any flaw in the smart contract coding can result in a catastrophic loss of cash.
Jayden Wei highlighted that ETH is the primary battleground for DeFi 1.0 at this time. The increasing number of ETH pledges is based on optimism about Ethereum’s long-term viability and scalability. However, ETH is one of many options; ecological public networks like Polkadot and EOS are quickly replacing it as the preferred choice. It would appear that KeplerSwap is the trailblazer for DeFi 2.0. Hence, the pioneers who suggest novel ideas are held in high esteem in this sector, with the expectation that their efforts would be recognized and rewarded, paving the way for more breakthroughs along the path to decentralization.