Thursday, January 27

What is DeFi 2.0 and how does the pioneer OlympusDAO work?


The term DeFi 2.0 refers to the second generation of DeFi protocols, among which OlympusDAO stands out. Despite the boom in Decentralized Finance, most DeFi platforms still have scalability, liquidity and accessibility issues. The goal of DeFi 2.0 is to find a solution to all these problems through greater decentralization. To achieve this, most DeFi 2.0 protocols are based on the idea of ​​Protocol Controlled Liquidity (PCV). In other words, liquidity is controlled by the protocol itself, instead of users having control over liquidity.

What is DeFi 2.0 and OlympusDAO

Since its inception, the DeFi have been providing liquidity to its users through the Liquidity Pool, or liquidity reserves. Funds blocked in deposit through a smart contract. These reserves are what are used to provide the exchange and the decentralized loan. Therefore, they are a fundamental piece in DeFi platforms. The difference with DeFi 2.0 is the dominance of these funds.

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Funds on DeFi platforms are provided by users called liquidity providers. These users contribute their funds to the platform in exchange for earning commissions in proportion to their participation in the liquidity of the protocol. However, this solution creates numerous liquidity problems for platforms, as it encourages “intensive farming”. A problem that is generated when large “whale” investors deposit huge amounts of a certain token for a while and once they obtain the rewards they extract all the invested money and leave, leaving the protocol without liquidity and lowering the price of the token.

DeFi 2.0 and OlympusDAO

DeFi 2.0 solves this problem, since it is the protocol itself that provides the liquidity. An example of how DeFi 2.0 works is found in the OlympusDAO model. In this protocol, instead of rewarding liquidity providers, reward tokens are sold to users at a discount. In this way, investors are interested in providing liquidity, since they get it at a lower price than in the market. In turn, the protocol solves liquidity problems, since these funds become totally yours. In other words, the funds totally change hands: from liquidity providers to protocol.

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This mechanic solves the problem of “intensive farming” by providing much more sustainable reserves in the long term. DeFi 2.0 protocols no longer have to rely on liquidity providers not leaving when their loans are terminated or when rewards are reduced. These new protocols are fully owner of their reserves. In fact, as can be seen on the website of OlympusDAOCurrently 99.85% of its liquidity is in the hands of the protocol itself.

Token de OlympusDAO: OHM

This decentralized reservation system is supported by the platform’s native token, the OHM. Similar to algorithmic stablecoins, the token’s price is backed by other cryptocurrencies (DAI, FRAX, etc). However, the intention is not that its price remains stable, but rather to give the cryptocurrency an intrinsic value below which it cannot fall. That is, it is an algorithmic reserve currency backed by other decentralized assets.

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Each OHM is backed by 1 DAI. In this way, the protocol buybacks and burns OHMs when the OHM is trading below 1 DAI. Therefore, the value of the OHM will always be greater than 1 DAI (greater than $ 1 dollar as it is a stablecoin). In fact, it is considerably striking that the current price of 1 OHM is $1.099. On the platform’s own website, they assure that this high volatility is due to the fact that the project is in the initial phase and they warn that the price of the token could fall considerably if market sentiment turns bearish.

The objective of the platform is for the monetary system around the OHM to be controlled through a Decentralized Autonomous Organization (DAO) and for the DAO to make the correct decisions to control the expansion of supply. The current loan and bond system follows a dynamic based on game theory, in which participation and bonding are considered beneficial to the protocol, while selling is considered detrimental.

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