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DeFi or Decentralized Finance refers to an open ecosystem of financial applications being built on public blockchains like Ethereum and Solana beyond centralized control.
The sector has seen immense growth from effectively nothing 3 years ago to now over $100 billion in crypto value locked into major platforms like Aave, Uniswap and Lido.
However, critics argue limitations still remain around volatility, scalability and real world connectivity. This has led rise to “DeFi 2.0” ambition encompassing more disruptive models and interlinked services attempting to address structural limitations.
This piece analyzes some emerging innovations and risks as DeFi builds towards more disruptive phase targeting global finance.
While DeFi 1.0 gains have been staggering allowing trusts minimized alternatives to lending, trading and stable assets, limitations still pose barriers to institutional and mainstream adoption including:
1. Stable asset demand
Fiat backed tokens rely on fragile centralized collateral raising black swan depeg risks seen by historical failures like Iron Finance and Basis Cash. Fully decentralized stablecoins are still early experiments.
This poses reliance on external USD making DeFi susceptible to chokepoints by wary banks hesitant to embrace exposure.
2. Scalability
Ethereums ~15 TPS throughput caps DeFi capacity leading to soaring gas fees during peaks pricing out users. While layer 2 rollups and sidechains alleviate, more base layer improvements needed matching traditional speeds.
3. Data Connectivity
On-chain protocols cant directly leverage valuable off-chain data like credit scores, identities and bank APIs needed for disruptive models around lending, derivatives and stock trading. This hampers real world connectivity.
Solutions to these limitations form the motivation behind much DeFi 2.0 ambition as we analyze next.
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