ICHI

DeFi 2.0 is a broad term used to describe a series of evolutions over the past year developed to improve upon the original innovations made during DeFi summer in 2020. When early DeFi pioneers like <a href="https://aave.com/" rel="noopener noreferrer nofollow">Aave</a> and <a href="https://uniswap.org/" rel="noopener noreferrer nofollow">Uniswap</a> emerged, they were something the world had never seen. The era of DeFi 1.0 was born, creating life-changing wealth for many by providing financial services that had previously been inaccessible.
DeFi 1.0
The early decentralized automated market makers (AMMs), Uniswap and Bancor, were the first DEXs to allow users to swap tokens without giving up custody, at least at scale. Aave and Compound provided decentralized lending and borrowing, allowing for on-chain yield for deposits and permissionless access to operating capital. Yield aggregators such as Yearn emerged soon after, taking care of the active management of the growing number of DeFi strategies so users could just deposit crypto, sit back, and watch number-go-up. Thanks to DeFi, any individual could finally access a plethora of financial services in a global marketplace without the intrusion of costly intermediaries or central authorities demanding KYC documents.
However, DeFi 1.0 was not without limitations. Issues with scalability, security, protocol liquidity, and centralization were apparent. This is where the second generation of DeFi protocols stepped in and attempted to solve these problems in today’s DeFi ecosystem.
While there have been many innovations in DeFi over the past year, such as self-repaying loans from Alchemix and impermanent loss insurance from Bancor, the term DeFi 2.0 is typically used to describe protocols that address the ever-present need for token liquidity on DEXs.
Liquidity
Creating sustainable liquidity is the focus of some of the pioneers of the DeFi 2.0 movement. <a href="https://medium.com/ichifarm/liquidity-the-lifeblood-of-defi-34b38bd9238d" rel="noopener noreferrer nofollow">Liquidity is the lifeblood</a> of any token. The less liquidity on DEXs, the harder it is to buy or sell a token, and the more the price moves with each trade.
To this day, the most common solution to the liquidity problem is to entice users to pour more capital into the market by rewarding them with additional tokens. This concept is known as liquidity mining, or yield farming, which incentivizes liquidity providers (LPs) to stake or lock up their crypto assets in a smart contract. The returns come in the form of token rewards, typically the same token for which liquidity is being incentivized. In traditional economies, liquidity exists through financial institutions like banks or the government. However, in DeFi, we rely upon engaged and devoted users to provide liquidity, cutting out these traditional financial institutions.
However, recent studies have shown that more than half of liquidity providers’ positions are actually losing money when they provide liquidity, which is outrageous because the whole point of liquidity provision is to be rewarded for supporting the project and risking your tokens. The reason for this is the unfortunate reality of today’s Decentralized Exchanges, which create a zero-sum game between two key players:
<ol>
 <li>Liquidity Providers (LPs) who provide the liquidity (market makers).</li>
 <li>Arbitrage traders who buy that liquidity and sell it elsewhere for a profit (market takers).</li>
</ol>
Most liquidity programs in practice favor arbitrage traders, who take the user’s undervalued liquidity to another exchange and profit on the difference. They take advantage of this practice because traditional liquidity programs are hard to manage and costly for liquidity providers as well as the projects that rely on them.
Solving the Liquidity Issue
ICH provides the infrastructure needed to solve the above-mentioned liquidity issue by running sophisticated algorithmic strategies on Uniswap V3. Liquidity providers can utilize <a href="https://app.ichi.org/vaultinfo" rel="noopener noreferrer nofollow">ICHI Vaults</a> to manage their liquidity in an automated, capital-efficient, non-custodial manner.
Vaults are an improvement upon <a href="https://uniswap.org/blog/uniswap-v3" rel="noopener noreferrer nofollow">Uniswap V3</a>, and they combine single-token deposits with concentrated liquidity in order to provide LPs with yields. Vaults are actively managed to ensure that the price range of each LP’s position remains within the most profitable range — maximizing its efficiency and paying users higher fees. You can learn more about concentrated liquidity and ICHI Vaults <a href="https://medium.com/ichifarm/introducing-greedy-liquidity-16deebe2496b" rel="noopener noreferrer nofollow">here.</a>
Traditional market makers are inefficient because the tokens provided in a DEX’s liquidity pools are spread out across a price range from zero to infinity, the AMM allocates an equal number of tokens available for a trade at current prices as it does at prices outside this range. Since liquidity is spread out equally across a price curve from zero to infinity, the vast majority of tokens represented on this curve are never utilized for swaps except in pools with extremely low liquidity.
This means the people who are providing liquidity to facilitate these swaps are losing money as only a very small fraction of their deposited tokens will generate revenue while the rest of the tokens are sitting idle. With <a href="https://app.ichi.org/vaultinfo" rel="noopener noreferrer nofollow">ICHI Vaults,</a> liquidity is concentrated around the current market value of a token, so capital efficiency is increased exponentially compared to first-generation AMMs. Concentrated Liquidity Market Makers (CLMMS) increase the capital efficiency of decentralized exchanges overall, and it’s an excellent source of yield for liquidity providers. For example, 10 tokens deposited in a CLMM can return the same yield as 1000 tokens inefficiently deployed from zero to infinity.
Providing a CLMM with liquidity can require a lot of active management if users wish to keep their concentrated position tightly around the current price. This means having to close their positions and set up new ranges when the price moves towards the boundaries of their current range, otherwise, they will experience <a href="https://medium.com/ichifarm/liquidity-pools-explained-f8e4b3bd83c7" rel="noopener noreferrer nofollow">Impermanent Loss</a> and earn zero fees. ICHI’s Vaults take the study time, costly fees, and stress out of the equation by actively monitoring those positions, so you don’t have to. You can retain control of your assets and let ICHI do the rest while you decide which token rewards you’d like to receive.
Overall, increased capital efficiency in DEX trades benefits users seeking additional yield opportunities by maximizing their tokens on hand, and the entire DeFi community should benefit from the boost in liquidity. With crypto projects now being able to utilize these profitable strategies that also help support the price of their tokens, concentrated liquidity means that projects and their LPs are united in their incentives and, more importantly, their goals.
Other Major DeFi 2.0 Projects
Olympus DAO is one of the first pioneers in the DeFi 2.0 movement. Olympus DAO has introduced one of the most promising liquidity control concepts, using the bond mechanism as an alternative to liquidity mining. Bonds enable users to purchase OHM from the protocol by trading assets, including LP tokens. Because of this protocol-owned liquidity (POL) model, they no longer need to “rent” liquidity with expensive farming programs.
The Olympus DAO project has gone much further, introducing a bond marketplace called Olympus Pro. Protocols can apply to the Olympus team to be included in the marketplace, and once accepted, can configure the parameters of their bond program(s). When users buy bonds through Olympus Pro, the protocols can accumulate liquidity that they then own indefinitely at no ongoing cost.
Other major players include Tokemak, an aggregator that gives users the ability to provide liquidity to a DEX and DeFi platforms while earning yields, or Convex Finance which helps investors and liquidity providers earn higher rewards compared to the existing market.
Empowering DAOs
Centralization is an issue that DeFi is solving, and DAOs like <a href="https://ichi.org/" rel="noopener noreferrer nofollow">ICHI</a> are providing a solution to the centralization problem. Such projects choose to form as decentralized organizations for further governance and development. The project becomes controlled by the community. Each contributor — owning a share of the tokens — participates in the project’s development by suggesting changes and voting on proposals; click <a href="https://ichi.org/governance/" rel="noopener noreferrer nofollow">here </a>to view more details on the ICHI’s governance process.
As the DAO model proliferates and DAO tooling improves, we look forward to seeing more DeFi protocols progressively decentralize. As long as protocols are becoming more decentralized over time and are transparent with their communities about the remaining points of centralization, we’re moving in the right direction.
Scalability
In addition to the innovations we’ve seen over the past year, scalability has improved.
Most new DeFi protocols originate on the Ethereum network. However, the high cost of transacting on Ethereum Mainnet is prohibitive for smaller transactions. As a result, many of DeFi protocols are now available on a growing number of Layer 1 and 2 blockchains offering lower transaction fees. Evolutions in blockchain scaling and cross-chain bridging have made this possible by allowing protocols to easily re-deploy on Ethereum Layer-2 solutions such as Optimism, Arbitrum, and Starknet as well as alternative Layer-1 networks like Solana, Avalanche, Gnosis Chain, etc. These alternatives offer more transactions per second and lower fees, allowing even the smallest token holders to participate in decentralized finance.
The DeFi Evolution Continues
The rapid advancement of DeFi 2.0 is a testament to the ongoing evolution of the DeFi space. DeFi 1.0 could be considered as the experimentation phase, and, DeFi 2.0 projects now have a wide-open design space to keep pushing decentralized finance forward.
Despite its advances, DeFi 2.0 still shares some of the risks of its predecessor. There is a threat of potential hacks and regulators; however, the potential that could be unlocked through the successful implementation of DeFi 2.0 concepts is significant, which the overall market sentiment reflects. There are ways to mitigate risks, for example, by educating users, employing rigorous smart contracts, auditing procedures, and ensuring that failures do not affect the broader ecosystem.
About ICHI
ICHI enables users to earn yield with any token using liquidity management strategies on Uniswap V3. ICHI started in 2020, has developed two protocols, and looks to continue growing its DeFi ecosystem. Learn more by visiting the ICHI website, <a href="https://medium.com/ichifarm" rel="noopener noreferrer nofollow">Medium</a>, <a href="https://twitter.com/ichifoundation" rel="noopener noreferrer nofollow">Twitter</a>, <a href="https://t.me/ichifarm" rel="noopener noreferrer nofollow">Telegram</a>, or <a href="https://discord.com/invite/Bm6pUHjHUC" rel="noopener noreferrer nofollow">Discord</a>.

DeFi 2.0: The Second Generation of DeFi

ICHI Foundation

Andre artikler udgivet 7. mar. 2023

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