What is DeFi 3.0?

What is DeFi 3.0, and what is its background?

The term DeFi stands for Decentralized Finance and refers to a set of financial instruments that allow users to make autonomous transactions in the crypto market using smart contracts, such as:

• Crypto asset exchanges (swaps);
• Liquidity mining and Yield Farming;
• Deposits and lending;
• Transfers of crypto assets between blockchain bridges;
• Buying and selling non-fungible tokens (NFT);
• Crypto asset management.

The first platforms in the DeFi 1.0 marketplace were AMM protocols, also known as decentralized exchanges (DEXes), such as Uniswap, Sushi, and PancakeSwap. Automated market maker protocols allowed cryptocurrency to be exchanged via smart contracts directly from a crypto wallet without depositing and withdrawing funds from exchanges. The main problems of first-generation AMM protocols were high commissions and unstable pool liquidity.

Later, new protocols emerged that sought to optimize liquidity management through mechanisms such as Protocol-Owned Liquidity (POL). This was the starting point for the DeFi 2.0 market, and projects of this generation include Curve and Alchemix. In other words, DeFi 2.0 was mainly aimed at improving capital efficiency.

However, the DeFi 3.0 marketplace first integrated a modular protocol architecture that made AMM protocols more performant and cost-effective and made them interoperable, i.e., compatible with many blockchains. For this reason, the new DeFi protocols have even come to be called "crypto-LEGO" because developers can modify them by adding or removing individual elements, which ensures ease of development and high flexibility.

In addition to cross-chain solutions, the main attributes of DeFi 3.0 include AI strategies, energy efficiency as part of green initiatives (ESG), and so-called "real return models" using RWA assets (including tokenization of physical assets).

DeFi 3.0 is a new stage of development in decentralized finance aimed at increasing the scalability and accessibility of financial Web3 applications such as DEX exchanges, lending platforms, NFT marketplaces, cross-chain bridges, and other AMM protocols.

The main principles of DeFi 3.0

While in the early stages of the crypto market, AMM protocols focused on growing the functionality of decentralized applications, DeFi 3.0 focuses on the value aspect of being as helpful and accessible to the masses as possible.

The first principle of DeFi 3.0 is scalability. Early AMM protocols were based on specific, generally slow, and generally low-performing blockchains, which loaded them even more heavily.

The second major principle of DeFi 3.0 is cross-chain compatibility or interoperability. Before the advent of cross-chain solutions, AMM protocols were effectively isolated from other ecosystems, causing liquidity fragmentation.

The third principle of DeFi 3.0 is to provide stable liquidity. Many protocols, such as DEX exchanges and lending platforms, face liquidity shortages due to the exodus of liquidity providers.

The updated AMM protocols introduce new, more efficient liquidity management models. Such models include concentrated liquidity, which was introduced in the latest version of the Uniswap V3 protocol. Equally crucial in solving management problems is pooled or aggregated liquidity — where one exchange provides pools to supplement the liquidity of another. This solves issues with liquidity shortages in individual venues.

The fourth principle is the introduction of new areas and compliance with regulatory rules, as DeFi protocols are attracting increasing attention from supervisory authorities. In addition, DeFi protocols are increasingly integrating new tools being developed in the Web3 sector: artificial intelligence (AI) and real-world assets (RWAs).

Developers need to adapt their protocols to changing market conditions. For example, the updated version of the Uniswap V4 protocol introduces "hooks," a new primitive that allows the creation of customizable smart contracts. In addition, Uniswap will introduce checks to identify traders and liquidity providers to increase transparency and investor protection.

Last but not least, the fifth but equally important principle is user-friendliness. AMM protocol developers strive to improve their interfaces to make them more user-friendly and intuitive.

Examples of DeFi 3.0 protocols

1. Uniswap V4 — updated DEX protocol with support for hooks and nearly 100 times less pooling compared to version 3;
2. Balancer — automated market maker with dynamic liquidity pools to increase the flexibility of the capital used;
3. GMX — decentralized exchange for trading futures contracts;
4. Synthetix — an exchange for trading synthetic (tokenized) assets such as stocks or gold;
5. SingularityDAO — a platform for creating customized baskets of crypto-assets (DynaSets) to be managed by experienced investors and traders.