Author: AbuVlad

DeFi 2.0 refers to a new paradigm in DeFi protocols wherein protocols are the primary owner of their liquidity. To best understand it, it is important to define liquidity and its problems which DeFi 2.0 came to solve

Pre-DeFi 2.0, protocols issued their token, and outsourced the liquidity provision to the market. A token would be issued, and some token holders would act as liquidity providers (LPs) by making them available on exchanges for a fee

This approach worked for a while but had a glaring misalignment of interests: protocols are long-term oriented (want liquidity to be always available for their token) while LPs were short-term oriented (want to provide liquidity to the highest yielding assets). This caused a couple of issues:

• Inefficiency: Adequate liquidity was only available to a constantly changing small set of assets
• Expensiveness: Protocols and exchanges attempted to incentivize liquidity with additional token distribution to LPs, however it was expensive and only lasted while the incentives lasted

To address these issues, Olympus pioneered protocol-owned liquidity (POL) mechanism in which the protocol itself is responsible for providing liquidity for its token rather than outsourcing it to LPs. In other words Olympus is the LP of its token OHM owning ~99% of all liquidity pools, guaranteeing that a holder of OHM will always find a buyer to trade with at fair value, and that buyer is the protocol itself