What is DeFi 2.0? How Olympus and TIME Actually Work

• DeFi 2.0 is a broad concept rather than any particular technology, and it refers to various projects that try to overcome challenges like liquidity issues, token incentives that are unsustainable, and dependence on external liquidity pools.
• Users in traditional DeFi protocols were encouraged to participate via giveaways of large numbers of tokens, but this practice led to a situation where users would deposit their funds into the platform to get rewards and then sell off the tokens.
• DeFi 2.0 platforms tried the concept of protocol-owned liquidity (POL), where liquidity is collected by the protocol rather than the users.
• Thus, the objective of DeFi 2.0 was to create a sustainable environment where protocols could develop their financial infrastructure.

How Does Protocol-Owned Liquidity Work?

• In a conventional liquidity pool, the participants contribute ETH and USDC, and get a share of the fees or tokens from the protocol.
• Protocol-owned liquidity means that the protocol is trying to get some of the liquidity into its possession and thus gain access to a permanent pool of assets.
• One of the most famous projects which implemented this model was Olympus, which utilized its treasury in order to get the assets and to back the OHM ecosystem.
• But merely having the assets in the treasury does not guarantee that the price of the project’s token will be stable or rise, since it could still lose its market value.

How Did Olympus DAO Work?

• The Olympus DAO was based on the OHM token and implemented a scheme whereby the treasury of the protocol had assets that were meant to back the OHM, like the DAI and liquidity pool assets.
• Olympus incorporated bonding as one of its major schemes. The users could deposit some assets into the protocol, such as the stablecoins or liquidity provider tokens, and get the OHM tokens at a discount after the vesting period.
• This was not the traditional form of liquidity mining since Olympus was essentially acquiring the assets for its treasury as opposed to just compensating users for providing liquidity.
• Another feature offered by Olympus included staking whereby the OHM tokens holders would lock their OHMs into the Olympus protocol and earn more OHM.

What Was Olympus Staking?

• Olympus encouraged users to stake OHM through a mechanism known as rebase, where additional OHM tokens were periodically distributed to stakers.
• The advertised APY could become extremely large because the percentage return was based on receiving additional OHM rather than simply receiving dollars or stablecoins.
• A high APY therefore did not guarantee a high financial return. If the price of OHM declined substantially, the value of the additional tokens received through staking could fall dramatically.
• This is one of the most important lessons from DeFi 2.0: a large token-denominated yield is not the same as a guaranteed investment return.

How Did Wonderland (TIME) Work?

• Wonderland is a DeFi platform based on the Olympus DAO project and running mainly on the Avalanche network where TIME was its primary token.
• Just like Olympus, Wonderland adopted a model which uses the treasury concept, along with staking and bonding which were aimed at increasing the amount of TIME and building up treasury.
• One could stake their TIME tokens for receiving more TIME according to the protocol, while bonding entailed exchanging other tokens for TIME with a discount for some period of time.
• This platform was completely dependent on the fact that the treasury, token rewards, and ecosystem would bring sustainable value for holders of TIME.

Why Did These Projects Offer Such High APYs?

• The extremely high APYs associated with Olympus and Wonderland were primarily the result of issuing additional tokens to participants through their staking and reward mechanisms.
• A quoted APY of thousands of percent can look extraordinary, but it does not mean an investor would necessarily multiply their money by that amount in real purchasing-power terms.
• As more tokens are created, the supply increases, and the market price can fall if demand does not grow sufficiently to absorb the additional supply.
• Investors therefore needed to consider both the number of tokens they were receiving and the market value of those tokens, rather than focusing only on the advertised APY.

What Happened to the DeFi 2.0 Model?

• The rise of DeFi 2.0 caught widespread attention amid the bull market in cryptocurrencies, however, there were many projects that had difficulties when the market environment started changing, and the prices of their tokens started going down.
• The projects, Olympus and Wonderland have become popular due to the extremely high yields, however, they both have suffered significant price drops from the top due to the risks related to high-emitting tokens.
• Moreover, Wonderland has gone through a serious crisis connected with governance issues due to information coming out about one person who is involved in the treasury management of the protocol.
• This experience has taught the important lesson which is that innovative tokenomics do not prevent basic risks like lack of demand, over-tokenization, bad governance, and loss of investors’ confidence.

DeFi 2.0 was a great experiment in the process of development of decentralized finance. Some projects, like Olympus DAO and Wonderland, tried to go beyond regular liquidity mining by creating protocol-owned treasuries, employing bonding, and rewarding users via tokenized staking.

Their past experience shows that in order to evaluate the potential of DeFi protocol one has to learn the source of APY, the way of token creation, the composition of the treasury, and whether there is any demand on the token.

The main takeaway from DeFi 2.0 is straightforward: high APY doesn’t equal high profits, and treasury-backed doesn’t mean valuable token.

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