LIke Uniswap, Curve is a decentralized exchange (DEX) that makes use of liquidity pools to help people trade tokens in a decentralized way. The major difference unique to Curve is that it makes use of high liquidity with minimal slippage for stablecoins. (If you don’t understand what slippage means, keep reading. Everything will be crystal clear in a few moments.)
As a result, Curve’s DEX has come to play an important and unique role in Ethereum’s DeFi ecosystem.
Using the platform’s automated market maker, or AMM, traders can exchange stablecoins like USDC, DAO and other assets — like Wrapped Bitcoin and RenBTC (which follow the price of Bitcoin or Ethereum).
Curve’s AMM ensures you don’t need a buyer or a seller on the other side of your trade. Even if no one in particular is selling on the day that you swap using Curve’s DEX, you can still get the trade you want.
When you are swapping one crypto for another on Curve, you are trading with their liquidity pools instead of directly trading with another person. The liquidity pools get “filled” with crypto by other users prior to your trade.
So why would other users deposit their own crypto into a liquidity pool?
Simply put, to earn rewards and extra yield on their crypto. This helps the platform by providing the liquidity that the AMM relies on to make trading available on the other end. So users who provide liquidity are rewarded for the service with a percentage of the platform’s trading fees, CRV tokens, and sometimes other perks - which we get into below.
This is a form of passive income for liquidity providers. And it’s a quick, decentralized, and anonymous way to swap tokens for folks who wish to trade, take advantage of arbitrage opportunities, or exchange tokens for any other reason.
Curve has a very different user interface. The dApp is built to look like the early days of the web, with a web 1.0-type look.
Despite this, it’s helping pioneer the financial technology of the future, going into web 3.0.
Nonetheless, the interface is designed to be approachable for users who might be intimidated by learning something new. And it’s simple and straightforward to pick up right away.
So trading using the DEX is all well and good. But that’s only half of it. You can do even more with Curve finance on the other side of the trade: Contribute to the pool and earn passive income.
Finally, Curve is a unique DEX because of how it addresses the issue of impermanent loss.
Impermanent loss in a nutshell: this is a term used to describe the opportunity cost you could incur due to the composition of your pooled funds. See, when people trade on the DEX and exchange their tokens for the pooled tokens, the percentage of different funds in the pool (i.e., the percentage of the total pool made up of ETH vs. the percentage of BAT for example) won’t always stay the same as it was when you first put your tokens in. That means the relative weighting of your stake in the pool may change, and you’re not in control of your allocation of assets.
Each DEX addresses this issue differently (and some not at all).
Curve addresses this by only letting you provide assets that are equivalent in price in any given pool. This has earned Curve its reputation as an Automated Market Maker specifically for stablecoin trading.
The purpose is to swap between two coins of the same denomination. Most notably, you can swap USD denominated stablecoins like Dai and USDC. But you can also swap Bitcoin-denominated coins and ETH denominated coins like real Ethereum and Staked Ethereum.
This has allowed Curve to be used in a variety of unique ways, many of which you may have actually already used without knowing it. We’ll get to that in a second. But first, let’s talk about the…
Founder & CEO - Michael Egorov
Michael Egorov started his career as a Russian scientist. In late 2013 when he was doing a postdoc after receiving his PhD in physics, he first started buying bitcoin. He soon abandoned that to move to the United States and work a job in the tech industry - at LinkedIn.
In 2015, he co-founded a company called NuCypher, which inadvertently came to use crypto building privacy-preserving infrastructure and protocols. That’s how he got his feet wet and started learning a lot about crypto.
Over the years, Egorov said he has become a heavy DeFi user, which eventually inspired him to create Curve. He started out swapping coins all the time on Coinbase. This was not effective because of the fees, tedious process, and general inefficiency. Not to mention, centralization.
He developed some trading bots to fix this at first, and that soon evolved into the idea of how to swap between stablecoins effectively using a DeFi protocol.
That’s what started Curve Finance. In the beginning of 2020 he finished the implementation of his algorithm in Viper and the basic UI, and Curve was born.
Egorov is also the founder of a decentralized bank and loans network called LoanCoin.
Curve’s regular team is part of the CRV allocation structure, and receives tokens according to a two-year vesting schedule as part of the initial launch plan.
In August 2020, Egorov said that he “overreacted” by locking up a large amount of CRV tokens as a response to yearn.finance’s voting power, awarding himself 71% of governance in the process.
Supplying Liquidity to Pools
You can supply liquidity to curve pools in order to generate token rewards. These are token rewards on top of the fees you collect from providing liquidity.
When you’re supplying liquidity to a pool, you’re providing users of the Dex with an opportunity to swap their tokens one for another. However on Curve, you don’t have too much risk from impermanent loss.
So you can supply liquidity for traders on Curve. But there have been a number of unique incentives that have been provided by project teams in order to increase liquidity for their tokens.
If you head over to the Curve Finance home page, you can see all the liquidity pools which you can join.
On top of the generalized APY you can expect from supplying liquidity, you also get additional rewards:
Rewards like YFI, REN, SNX, and BAL tokens are deposited to your wallet as extra incentives in certain pools.
For example, you might want to supply liquidity to a pool of synthetic bitcoin so you can be exposed to bitcoin and also earn returns on it.
Not only can you receive SNX and REN from the balancer token, but you’re also earning Balancer rewards.
You can supply any of the other pools there, including the USD stable coin pools, if you would like to hold the dollar value of your investments.
You can supply coins at the proportion of your choosing. But because you’re at no risk of impermanent loss, it’s probably the best idea to supply them in equal proportion.
Then, once you’re okay with the parameters in terms of GAS and contract approvals, you can deposit and stake.
This will unlock the crypto from your wallet and stake it on the Curve contract.
Curve also just released their own governance token: CRV. CRV is given to everyone who is supplying liquidity to Curve pools. It was also given to people who were providing liquidity prior to the launch.
How Curve Addresses Slippage.
In this section we’ll talk about the custom solution Curve has come up with to address the problem of Slippage.
But first, here’s what slippage is: Most DEXs provide liquidity to users wishing to swap by adjusting the fee of the order up, based on the size of the order the user is placing relative to the pool of liquidity. If there are smaller pools, this will lead “slippage” of that price.
This has the benefit in that it ensures the pool will never run out of liquidity. But it can be a negative because if you’re trying to swap a lot of coins in a smaller pool, the fees could be astronomical.
For example, nobody wants to swap 10,000 USDT for 9,800 USDC.
In Curve, when you are trading you can set the max slippage you desire before you swap. But even aside from that, Curve has achieved high liquidity with very low slippage compared to most DEXs for stablecoins.
This high liquidity with minimal slippage of stablecoins is all possible through the use of what Curve calls “bonding curves.” The exact mechanics of it are beyond the scope of this overview and can be quite complicated. But it’s basically a method that involves a lot of math to minimize price slippage.
Also, it helps that Curve is trading mostly stable assets that are typically never volatile.
This gives Curve a slippage basis of just -.06%. Which ensures that stable coin trades are more efficient, and that traders get almost exactly the price they want.
You can see in the blow diagram from one of Curve’s whitepapers that the price impact from swaps on curve is less pronounced than it is on Uniswap, for example:
So even though you do have the ability to set your “max slippage” on any swap you want to place with Curve, that’ll have much less of an impact because of Curve’s built-in unique bonding mechanism that helps even slippage out anyway.
Other DEXs like Uniswap have much higher slippage, and as a result, can add up to higher fees if you’re not careful. This is because users need to be able to trade more volatile crypto assets from those pools without suffering repeated failed transactions.
Why Other DeFi Protocols Use Curve:
You may have already used Curve and just not known it:
Many other DeFi protocols like Compound and 1inch exchange are plugged right into Curve -- to take advantage of their stable coin trading market with very low slippage.
Again, Curve’s big selling point is stablecoin trading with low slippage. But you can also trade other BTC and ETH based assets.
This could be good news for long-term CRV token holders. As more DeFi protocols emerge and seek to provide unique solutions, Curve might just become the go-to plugin for stablecoin trading. And the more people there are using Curve, the more people will be invested in CRV tokens.
Users who engage in yield farming will probably also have interacted with Curve at some point or another.
Those who wish to profit from the best stable coin returns on Yearn Finance, for example, will definitely have used Curve through the back end of the Yearn platform.
In some Curve pools, users can also earn trading fees from other platforms. An example of this is the sUSD and sBTC pool, where liquidity providers can deposit stable assets that belong to the Synthetix platform. The users who commit their crypto to this pool earn both CRV and also a designated share of the Synthetix SNX token.
When Curve became a Decentralized Autonomous Organization or DAO in the summer of 2020, it also launched its own token — CRV.
Among other things, CRV tokens give holders the ability to vote on governance and decisions about the platform and network moving forward.
Seeing that the Curve DEX already had a lot of traffic, there was a lot of hype leading up to its release…
But the CRV token price was a bit of a flop initially: It fell from an initial $30 to just $3 within a week of becoming available.
Investors were unhappy about the governance and tokenomics of CRV initially, because around 71% of the voting power was allocated to founder Michael Egorov. This makes the token centralized, and the crypto community does not like centralization.
Egorov told Decrypt at the time that only 6.7% of the nearly 10 million CRV tokens in circulation were “vote locked” -- meaning very few token holders were actually participating in governance.
This made it fairly easy for an address controlled by yield aggregating platform yearn.finance, which runs a Curve liquidity pool, to obtain a significant proportion of the voting power (they had close to 58%).
In an apparent move to counter this, Egorov extended a vote lock for a total of 621,860 CRV tokens (worth $1.7 million) under his single address. This gave him 71% of the voting power. And he can’t just sell the coins once he locks up the tokens:
The longer a user locks up their tokens, the more voting power they have. Egorov maxed out his vote time to four years. “Maybe too much,” he later said.
And the community at large generally considers him to be right about that. This essentially makes voting as a CRV token holder pointless.
Egorov has said that he “overreacted” by locking up a large amount of CRV tokens as a response to yearn.finance’s voting power, awarding himself 71% of governance in the process.
He later said on Telegram: “Terribly sorry. Let’s fix that. I mean, I can abstain from voting but better to fix it in a proper way.” He told Decrypt he doesn’t want to wield so much power, and that he hopes his voting power will decrease over time as the system becomes more decentralized.
“Right now, looks like everyone else [is trying] to add some more voting power. Which is… the eventual intent,” he said.
The Curve team is optimistic that the balance of power will even out eventually and the whole protocol will be truly decentralized.
Other than governance, the CRV token doesn’t have a whole ton of additional use cases. But it is distributed primarily to reward users who provide liquidity to the Curve protocol.
Curve also shares the problem of high gas fees with other Ethereum-based platforms. But they actually sought to address this by partnering up with the scalability solution Polygon Network.
So this gives Curve users the opportunity to save on gas fees, and also to earn the Polygon MATIC token in Curve liquidity pools. So long as DeFi on Ethereum continues to grow, Curve’s efficient liquidity solution should continue to grow alongside it.
The platform is still offering new pools and trading pairs, and seeing a high volume of user activity.
Solutions like this show Curve is perhaps one of the best examples in the crypto space of the ‘’MoneyLegos’ ethos - meaning platforms that can be integrated into other platforms, to take advantage of an ever-more interconnected financial world.
IF you’re a liquidity provider, you earn CRV automatically by depositing liquidity to the pool, like USDC for example. From the time you deposit forward, the CRV accrues in your wallet on a second-by-second basis.
Curve is also giving more CRV to some users to incentivize certain pools. They’re also giving higher CRV payouts to users who are both providing liquidity and have their existing CRV locked into a governance contract.
There is a considerable inflation rate. And it will continue to be pretty high for some years. Part of that is because the founders, early investors, and employees all have a vesting period where their initial token locks are going to be slowly investing over the course of 1 - 4 years, depending on which category they fall into after that initial 71% mishap.
Egorov has a 4-year vesting period from the initial token launch date of August 19, 2020 before all his tokens are completely released and governance can be more decentralized. After the 4 years, his share will come out to closer to 25% of the total token supply.
The total CRV supply is 3.03 billion tokens. It will be distributed as such:
62% to liquidity providers, 30% to shareholders (team and investors) with 2-4 years vesting, 3% to employees with 2 years vesting, and 3% to the community reserve.
This distribution shows the community and the team have a view of creating stability and prosperity for the whole DeFi ecosystem. It shows in things like this where they’re delegating most of the supply to the people actually using the application.
Granted, it will take some time -- 4 years or so -- before the liquidity providers actually match the amount of tokens that have been released with the founding team and early investors.
So it will take some time for the to CRV token to become truly decentralized.
From its initial launch price of $30 in August 2020, CRV fell almost immediately to around $3 (likely due to Egorov’s 71% mistake) and hasn’t gone back up past $5 since. As of this writing, CRV is hovering around $2.12. It has a total market cap of $979.8M
In the short term, we at Keystone do not expect a big price surge in CRV tokens simply because of the governance not being decentralized. But the long-term is a different story.
The actual Curve use case, software, team, dApp -- everything else you can find about the project -- give it a place in the emerging DeFi space. The fact that the project has carved out its own space for trading stablecoins, and so many other decentralized exchanges are plugging into the network, are generally considered preferable features to investors.
Adoption of Curve has already taken off in the crypto community. And as crypto and DeFi grows and becomes more popular, we could see even more adoption of the platform in the long-term. And the more people providing liquidity to Curve’s pools, the more people there will be who own, hold, and trade CRV tokens.
This data report is provided by Keystone Investors Research. Keystone is the only Cryptocurrency research firm that is Officially partnered with a government regulated Cryptocurrency Trading Platform.
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