DeFi 2.0 is a movement trying to upgrade and fix the problems seen in the original DeFi wave. DeFi was revolutionary in providing decentralized financial services to anyone with a crypto wallet, but it still has weaknesses. Crypto has already seen this process with second-generation blockchains like Ethereum (ETH) improving on Bitcoin. DeFi 2.0 also will need to react to new compliance regulations that governments plan to introduce, such as KYC and AML.

Let's look at an example. Liquidity pools (LPs) have proved hugely successful in DeFi, as it allows liquidity providers to earn fees for staking pairs of tokens. However, if the price ratio of the tokens changes, liquidity providers risk losing money (impermanent loss). A DeFi 2.0 protocol could provide insurance against this for a small fee. This solution provides a greater incentive to invest in LPs and benefits users, stakers, and the DeFi space as a whole.