Decentralized Finance looks like the next logical step for the financial industry. Loud and often covered with regalia skeptics talk down Bitcoin and Ethereum. However, they have become excellent examples of how cryptocurrencies can reach the necessary size and relevance to withstand any regulatory push. Even governmental centralized authorities have to admit that they became too large to fall.

You can engage with the best DeFi 2.0 tokens in a variety of ways. Speculative traders may launch an AI crypto bot to target highly volatile assets. Conservative investors may be interested more in staking their assets for continuous returns. The method of investment does not matter as much as the target asset and its specific features.

Since the market for top DeFi 2.0 coins is very saturated, finding the right one is quite challenging considering the sheer variety of options. Unfortunately, a single correct method of picking a great digital asset to invest in simply does not exist. Technical analysis can be quite useful in determining future trends, but has its own downsides when applied to the highly speculative crypto market.

To make the selection process slightly easier for retail traders, we decided to put together a comprehensive list of the best DeFi 2.0 crypto projects. You  should have them on your watch list. While many of these platforms have been around for quite a while, there is still insufficient information on how they work. Unfortunately, it is hard for investors to do their due diligence. We won’t cover separate intriguing platforms in detail, but will provide a good overview of the market and give you a list of tokens to consider.

What is DeFi 2.0?

The second generation of decentralized solutions that were designed in a way that allows for better implementation of interoperability and scalability solutions is referred to as 2.0. Note that many existing platforms simply updated their technology to match the philosophy of the current iteration of the industry with a stronger focus on security, user experience, and scalability which were weak points of the first wave of decentralized finance solutions.

In some sense, the best DeFi protocols use the 2.0 term as a marketing ploy and not much else. Just like “AI integration” and “machine learning”, it is a buzz word that, nevertheless, has a meaning. The current generation of platforms is a more robust version of what we had before the “crypto winter”, which exposed the weaknesses of the decentralized finance ecosystem.

The best DeFi crypto projects that exist today feature many distinct advantages:

• Improved liquidity. Each new generation offers more elegant liquidity provision methods. OlympusDAO ensures that the protocol itself holds liquidity and eliminates external providers from the equation to create a more reliable environment for users. With over $700 million in assets dedicated to liquidity provision, it is one of the greatest examples of the improvement that had to be found for many of projects to be sustainable. At the same time, better capital allocation through automated rebalancing of yield positions can be used to improve returns with instruments like Convex Finance.
• Sustainable incentive programs. Token emission seemed to be the only viable way for many startups to incentivize users to participate in the ecosystem. However, it is an inherently inflationary mechanism that often creates more problems than solves. A great example of a top DeFi crypto project that wants to solve this problem is Tokemak with its liquidity pools that ensure that the platform does not need constant token emission to sustain itself.
• Better security. The high failure rate of many incentives programs in the past led to the realization that successful “survivors” must incorporate risk reduction measures and be more resilient to technological failures of badly written smart contracts. Decentralized insurance is a good way of addressing this issue. Additionally, some platforms incorporate security audits and regular verification procedures for smart contracts. These measures are implemented by Aave among others.
• Better interoperability and cross-chain communications. The first wave of L2 soutions was a clumsy attempt by the blockchain community to improve layer 1 transactions and introduce utility to the decentralized finance ecosystem. Now, we must refine these ideas and technologies. Building on the foundation of robust systems like Optimistic Rollups, the Lightning Network, and ZK-Rollups is a great way to improve scalability solutions and make it easier for participants of the larger ecosystem to interact.
• DAO governance. Many experts and enthusiasts have an unshakeable faith in the future of the industry if it manages to stay independent and democratic. Just like old republics, any DAO offers some power holders a way to influence the future of any platform. At the same time, voters remain anonymous and can make the best DeFi projects to invest in even better with smart voting and passionate participation in the community.

In 2023, the total value locked was over $200 billion with many platforms. Many reported that they had notable increases in cash inflows. The adoption of the concepts conceived by the new generation of L2 and the rapid deployment of the much-needed functionality quickly attracted forward-thinking investors and made it possible for the ecosystem to expand.

The same is fair for the user count which increased dramatically during the last five years. By 2021, over 4 million users engaged monthly with different DeFi platforms. By the end of 2023, the number doubled. Statista says that over 7.5 million users were using these useful protocols more often than occasionally to do all sorts of stuff.

We are living in an era of advanced DeFi 2.0 solutions that have a great potential to change the world of finance and democratize finance by providing equal access to unique services to millions of users across the globe.

How to pick the best DeFi crypto tokens?

Selecting the right target asset for your portfolio is extremely important and should be considered a prioritized task for any retail investor. It is hard to find something that works universally, but we have a couple of tips for those who want to invest smartly and work with the best DeFi 2.0 tokens out there.

Do not ignore the fundamentals

Some retail investors say that they feel bored and intimidated by the amount of research that they need to do. However, without closely examining many sources like the white paper or roadmap, you won’t get a good grasp on the project and its strong suits.

Here are things that you must focus on:

• Read the whitepaper and available technical documentation to ensure that you fully understand the goals of the development team and the implications of the technology they use. A whitepaper usually includes a detailed roadmap outlining significant milestones the dev team plans to achieve.
• Make sure that the project solves an existing problem that requires a solution. If a project does not have a compelling use case and struggles to explain why its existence matters, you should not invest in it.
• Look at the list of founders and advisors to identify projects that have real authority and expertise behind them. Top DeFi protocols always have many experts backing them and providing their insights to expedite the development process.

Tokenomics matter

It is important to check how the proposed tokenomics model works. Upcoming projects may sound amazing with generous rewards, rapid emission, and high projections for liquidity. However, these promises often do not materialize. Even the best DeFi crypto tokens may have tokenomics unsustainable in the long run.

Here are things you should look into:

• Supply and distribution of tokens matters if you plan to seriously invest in a token. If tokens are distributed and allocated unfairly, in a couple of years these glaring discrepancies will hinder the development of the ecosystem. Unbalanced supplies are also susceptible to market manipulation.
• Consider potential inflation rates which can be quite high with rapid emission and market saturation. If a project does not have a sustainable model, do not buy its tokens for long-term holding.
• Utility is another important factor contributing to the overall value of the project. If tokens provide additional functionality and can be used across the cryptocurrency ecosystem, they will have better legs and stronger market presence.

Security and smart contract audits

The technological risk of having a badly implemented smart contract is something that should scare any retail investor. Despite the open-source approach to development, some smart contracts may have vulnerabilities that may lead to significant financial losses. If a development team takes its mission seriously, it will invite independent auditors like CertiK or Quantstamp to ensure that their smart contracts do not have weaknesses.

Some of the best DeFi protocols have active bug bounty programs to incentivize talented hackers to search for potential vulnerabilities for a reward. Often these rewards are paid out in native tokens.

Community is the backbone of any DeFi platform

Without a strong group of enthusiasts, any startup will inevitably fail. Users provide the necessary level of activity, liquidity, and growth to decentralized platforms. The public image of a project is something that any retail investor should look into before buying tokens.

Here’s how you can conduct this type of research:

• Visit communities dedicated to the protocol. If social media groups, forum threads, and Discord communities are full of discussions, it means that the project inspires users to be active and engage with the platform.
• Partnerships within and outside of the blockchain industry are quite important for the future growth of any startup. However, these should be genuine to be worthy of note. For example, the now infamous FTX made sponsorship deals with dozens of household names and still collapsed into obscurity.

Be mindful of market metrics

Top DeFi tokens usually perform well in the open market and spread far away from initial offerings on DEX platforms. It is important to trade coins that have healthy metrics such as market cap and volumes. When a token is listed on many CEX platforms, it is also a good characteristic of a proper target asset.

• Price action trends often signal about the future direction of the asset in the long run. Do not ignore technical analysis and use all the tricks in the book to try and predict how the token will behave in the near future.
• High liquidity is indicative of the investor interest toward the token. If it has sufficient liquidity to support large volume trading, it means that many institutional traders, market makers, and liquidity providers are doing their job well.

Technological impact of the platform

Top DeFi crypto projects have something unique and useful to offer. Without technological innovation, many of these decentralized finance platforms would be copycats of each other. It is important to invest in tokens issued by promising projects.

How a platform can introduce innovation:

• Protocol improvements can be expressed in better security measures, new ways to improve scalability, or adding a twist on a traditional economic model. With the diversity of the DeFi sector, coming up with an innovation can be challenging, but it must be done to attract the attention of investors and end users.
• Look how the platform interacts with other networks. Cross-chain capabilities of modern DeFi solutions must be great to allow for smooth user experience, fast asset movement, and improved utility.

Top 10 DeFi projects to invest in

With over 400 different digital assets actively traded on a variety of DEX and CEX platforms, it is impossible to cover every single token that deserves your attention. We decided to mention 10 top DeFi 2.0 coins by market capitalization. These projects appear to be reliable and may produce high returns for brave retail investors.

Here are the best DeFi investment options that you should consider in 2024:

1. Lido Staked Ether is an elegant solution for retail investors who want to use staked ETH tokens and quickly liquidate their holdings on the market. STETH tokens are minted when deposited and immediately destroyed after being redeemed. A STETH token represent the value of your stake and potential rewards in a single tradable asset. At the moment, the market capitalization of the token is over $32 billion with good daily trading volumes.
2. Chainlink is a digital development framework that can be used to create Decentralized Oracle Networks suitable for seamless integration of real-world data into blockchain. With many potential uses of DONs and the utility of the LINK token, its strong market performance is not a big surprise for any informed retail investor. The $LINK token has a $8 billion market cap and strong daily trading volume numbers (over $355 million).
3. Uniswap has been around for over four years now. It is a great layer 2 solution for quick token swaps that offers liquidity provision utility and allows user from different networks to conveniently interact. Since $UNI tokens are used for various purposes including governance, they can be quite volatile depending on the market conditions and events within their native blockchain. Right now, $UNI has a $7.9 market cap and a massive daily trading volume (over $400 million).
4. DAI is a stablecoin from the Maker Protocol. Its multi-collateral token DAI is used for many purposes including lending and governance. The token is pegged to the US dollar which is important for investors who are concerned with market volatility and want to actively trade within the cryptocurrency ecosystem without worrying about price fluctuations between different networks. $DAI has a $5.1 billion market cap and shows healthy daily trading volumes.
5. The GRAPH is an elegant solution to the chaotic diversity of data stored on various blockchain. This project aims to standardize and organize the on-chain data and make it all accessible via the proprietary GraphQL application. As a prominent member of the DeSci ecosystem, the Graph positions itself as a tool for researchers and a useful provider of financial services. $GRT has a $2.2 billion market cap.
6. Maker (MKR) is a DAI-adjacent protocol that provides a useful lending service to the crypto community and has been instrumental in the adoption and spread of the DAI token. Today, MKR token is quite popular among speculators and market makers thanks to its dynamic daily trading volume and undeniable utility. The $MKR token has a $2 billion market cap.
7. Lido DAO is a governance token for the Lido project and can be traded on a variety of CEX and DEX platforms including DigiFinex, Gate.io, Binance, and others. Despite having less utility than many other DeFi tokens that are massively behind it in market cap and daily trading volume, it is a popular target asset for many retail investors.
8. ThorChain is the issuer of the $RUNE token that can be used to pay for the cross-chain exchange service offered by this DeFi protocol that connects various layer 1 networks. If you use RUNE, you can swap all sorts of L1 tokens including BTC, ETH, and DOT. Rune is currently traded at $5.4 and has a healthy $1.5 billion market cap.
9. The PYTH Network is a the most prominent of Oracle networks capable of delivering market data quickly and offering its service to over 40 different blockchains while maintaining low latency and quick delivery of information. The network is utilized by Binance, OKX, ByBit, and many other centralized exchanges, brokers, and other market participants. The $PYTH token has a $1.28 billion market cap.
10. Aave is fully decentralized protocol focused strictly on money making and liquidity provision by establishing an environment within which users can lend, borrow, and otherwise use their digital assets from the list of over 20 supported tokens. Aave has a $1.22 billion market cap.

Should a retail trader get busy trading DeFi?

Decentralized finance is the crucial componentin the development of the blockchain industry. Optimistic enthusiasts often feel that smart contracts are way more flexible and valuable than anything else that the crypto industry can offer. Supporters should be focused on functional tokens that don’t only serve as speculative instruments but provide scale and usefulness. They must do something. Appreciation is an afterthought and should be relegated to L1 coins.

The idea behind these protocols is that they can improve the user experience, make cryptocurrencies competitive against fiat, and provide additional functionalities to tokens. At the moment, fumbles and issues are inevitable so early into the long journey. You have to expect that your investments may not bring high returns.

On the other hand, there is a strong potential for massive gains if you are interested in speculative trading. For example, you may simply launch a crypto trading bot using market-making or GRID algorithms to actively trade assets that have high liquidity and fluctuate frequently. The variety of options for a retail trader is impressive.

Whether to invest in these tokens with utility or stick to layer 1 coins that have already established themselves as reliable digital assets is up to you. Make the decision based on personal preferences, risk style, and available funds. In some cases, staking your tokens and enjoying passive income is a much better idea than trying to squeeze every bit of profit from a market position involving a volatile asset.

We recommend doing your due diligence and using common sense to identify favorable investment opportunities in the cryptocurrency market.