The Primary focus of Defi 2.0 is to tackle liquidity problems faced by on-chain protocols that have native tokens. The Defi ecosystem is one of the most influential and successful innovations in the field of blockchain, this is mainly due to their adoption of the first “money LEGOs” such as Liquidity provider (LP) tokens and decentralized stable coins. Defi refers to decentralized finance where coins and tokens that have a value of a currency are means of exchange. The other main factor which makes Defi so successful is that it eliminates the need for third parties like banks to authenticate transactions and allows users to have full control over their money. This blockchain-fueled ecosystem (DEFI) now has billions of users with new financial primitives and an economy that is becoming more user-friendly, secure, and accessible.
Defi 2.0 is a subnet of emerging protocols built on top of money LEGO’s to facilitate its liquidity provisioning and incentivization. Current Defi platforms rely on their tokens to provide liquidity to their users who participate in yield farming, lending, and collecting the reward. This process limits the current platforms to be composable with a larger defi ecosystem since the entire system is bootstrapped by tokens provided by their own native Defi platforms. To solve this issue the Defi platforms needed access to a large pool of funds to allow their users to trade their tokens.
AMM protocols — The protocol allows third parties and users to act as liquidity providers for a fair native token price. This means that the LP has to take the risk of any impermanent loss in exchange for minimal fee revenue from swaps. Swaps use priority fees to ensure the fastest possible on-chain settlements. Without sufficient liquidity, there is a risk for slippage between the liquidity Provider LP and the users.
DeFi 2.0 Sustainable Liquidity solution by Olympus DAO
One of the solutions that have been proposed in the Defi community is protocol-owned liquidity (POL) by Olympus DAO . The protocol uses Bonds to exchange LP tokens from third parties for protocols native token. Through bonds, the Defi protocols can buy their liquidity for their native tokens. this would remove the potential for liquidity to exist and build up a long last pool that can generate revenue for the protocol
This model was proposed by Olympus DAO which introduces bonding as a service. The protocol — owned Liquidity Flow (POL) controls the rate of tokens exchanged for liquidity and the total amount of liquidity exchanged. The Bonded LP tokens can be purchased for a lower price than the actual value of the token price For Example — if the price of token X is 500$ the protocol offer a discount of 10%. The user can bond $450 worth of LP tokens to receive $500 in token X. The result is a net profit of $50, dependent on a short vesting schedule realized normally around 5 days to a week to help prevent arbitrageurs from existing value.
The new Defi 2.0 protocols are clear that liquidity is not going to go away, and it is owned by non.
