I would’ve made a lot of money if I had been learning about crypto during DeFi summer, which is what we call the summer of 2020 where lots of new projects launched and gas fees weren’t as bad. Instead I was off learning about SEO, designing the interior of a house, and taking motorcycle trips. Nevertheless, we all may get a second chance. Oh by the way, stick around to the end of this video, as we have a special guest who’s another crypto Youtuber creating and sharing experiments on his own channel, including some DeFi 2.0 projects.
DeFi 2.0 is a New Idea
We as humans love to categorize things. We love making things black and white or putting everything neatly into a category so we can wrap our minds around it. This is exactly what’s happening with Web 1.0, Web 2.0, Web 3.0, and even DeFi 2.0. We are just bundling up ideas and collectively calling them something to refer to them easier. With that in mind, let’s move on considering that DeFi 2.0 isn’t some magical term that’s going to make you tons of money, but simply a name to categorize a new idea currently happening in the world of decentralized Finance.
What is Liquidity?
Here at WhiteboardCrypto, we recently posted a poll about why our viewers enjoy watching our videos, and the answers pointed to the fact that we explain things really well. That means it is our job to make this as simple as possible. Continuing with this humble brag, Liquidity is the amount of money available for trading. Let’s use an example of a pawn shop. You’re going to a pawn shop to buy a TV, and you look around and see only 5 TVs. This means that the pawn shop has 5 TVs liquid, or that their liquidity is 5 TVs. They can only sell you a maximum 5 TVs. When it comes to cryptocurrencies, this liquidity number is really important because of where we go to buy crypto.
I’m not talking about Coinbase or Binance or the big companies that sell you crypto (although their liquidity definitely matters too), but for DeFi 2.0, I’m referring to the liquidity that decentralized exchanges, or Dexes, like Uniswap and Pancakeswap have. These applications work using a specific algorithm, called a constant-product automated market maker, which sounds really complicated, but if you’ve made it this far in the video, you’ll understand our explainer videos on those topics too, check the links in the description if you want.
These Dexes only have liquidity if people give it to them. So you can only go to PancakeSwap and buy safemoon if someone else has come along and given them safemoon for you to trade with. Those people who give Pancakeswap their tokens actually give 2 tokens in a pair like Safemoon and then USDC… and they do this because they can earn a small fee that you pay to make your trades between these two tokens. So all day long traders come to Pancakeswap and trade Safemoon for USDC and then USDC for Safemoon using the tokens someone else provided. Here’s why it’s important. If there isn’t much liquidity, then the price is VERY volatile.
I’m talking if there’s only $10,000 worth of liquidity, or tokens provided to the exchange, a whale could come along and 10x the price very easily. However, if there are millions of dollars in liquidity, a whale can’t affect the price and it takes large moves to start affecting price simply because there’s more liquidity. Hopefully you understand that, but if you don’t click the subscribe button because soon we are going to release a video explaining how Liquidity is even more important than MarketCap when it comes to crypto, and that video might fill in some gaps.
What is Liquidity Mining?
Next up, a big part of DeFi 1.0, or the old system was that to incentivize people to provide their tokens to places like PancakeSwap or Uniswap, someone would give them EXTRA money. So they would earn a small percentage on the trades automatically, but then they would earn even more due to these incentives. These incentives are commonly referred to as ‘farming’ or even ‘liquidity mining’. The purpose of this was to increase the liquidity so there would be more money for traders to trade with, affecting the price less and making the price not as volatile. But there’s a problem. Where’d the ‘extra’ money come from? It was usually paid out in the token you’re supplying to, meaning you provide the token, and then earn it… which technically means it was very inflationary and that other people would earn it and sell it, causing the token price to drop. It also meant that when the extra rewards ran out… nobody would stick around because… well… they came for the money!
The solution for this is simple. It’s for a protocol to own it’s own liquidity, instead of trying to incentivize other people to provide. That’s exactly what OlympusDAO is attempting to achieve.
Olympus Owning it’s own liquidity
So as a recap, DeFi 1.0 is characterized by a bunch of crypto protocols that rely on other crypto users providing their own tokens as liquidity for other people to trade with. This is okay for a while, but it has some downfalls. For example, if someone sells their share of a large majority of a liquidity pool, reducing that token’s liquidity, the token suddenly becomes much more volatile and can be affected by whales. As another downside, users who provide their tokens can experience something called impermanent loss, a complicated way of saying they have a risk of losing money without an even amount of upside.
The solution is that instead of having users provide their liquidity and taking on these risks, that a protocol itself actually provides liquidity, or at least buys it back from the users. To put it simply, a protocol can own it’s own liquidity. This way a whale can’t sell their portion of the liquidity pool and cause the price to become volatile. In the case of Olympus… a new version of a stablecoin that’s actually backed by the protocol’s own funds is created.
Changes long term can be decided upon by members of a DAO. A DAO is a crypto term for an organization where members who hold the token get to vote on changes. The more tokens you hold, the more votes you get. This idea, of a protocol owning it’s own liquidity is the main idea of DeFi 2.0, and has caused many new projects similar to OlympusDAO to be formed. With that popularity, these projects are able to offer crazy interest rates, of which they’ve been able to actually hold for a decent amount of time.
If you want to go down this rabbit hole of how Olympus actually owns it’s own liquidity, soon we’ll be releasing a whole video on the specific Olympus protocol, but until then, let’s get into how much money you can make from using it.
We want to give a special thanks to Jesse not for helping to create this video, but for creating other amazing educational videos on his own channel. We at whiteboardcrypto are excited about anything with the word education and crypto in it, and Jesse seems to be capitalizing on that, testing out new DeFi applications and sharing his experiments with the world. Head on over to his channel and watch a few videos, they’re edited amazingly well and from one Youtuber to another, we appreciate your work!
Well, that wraps it up for this video, as always, we hope you enjoyed this video, we really hope you learned something, and most of all… we hope to see you in our next video!