A brief opinion about Curve: A giant crossbeam of the De-fi ecosystem
Curve finance is one of the giants in the Ethereum De-fi ecosystem which was a bit of a late starter compared to other projects like Synthetix, Uniswap, Aave, or Compound. Curve with it’s dope UI, gained traction with their unique concept: A decentralized exchange with extremely low fees, low slippage, and liquidity farming with almost no impermanent loss (IL). Let’s dig in to how Curve is different, its ups and downs along with my opinion/analysis on it. Please keep in mind, these are views of my own and they are not financial advice.
- Low fees? Low slippage? Heaven for Arbitrageurs
Curve has a surprisingly low trading fee of 0.04 % (Uniswap 0.3 %). Also, with all the liquidity pools consisted of stable assets or pegged assets, the slippage is typically close to zero. Low fees and slippage allows huge trades by whales unlike other decentralized exchanges such as uniswap, where the slippage makes whales hesitant to trade high amounts. The high volume trades that can be facilitated on curve makes it easier for arbitrage to happen. When one stable coin is a bit off the peg, arbitrageurs are able to profit with less fee and slippage loss.
Some people might consider arbitrage to be something unhealthy as they profit from market inefficiencies. However, I consider them a necessary evil to maintain health in the market as they actually exploit market inefficiencies to restore efficiency. As arbitrage exists, the slightly lost peg of stable coins are able to return to its original peg. Also, curve contributes to stabilizing the peg by having the stable coins locked up in a liquidity pool. This makes curve the ultimate contributor to maintaining the stable coin pegs and holding up the stable coin market.
Thus, we can frequently see big chunks of swaps happen in many curve pools and this leads to higher fee generation attracting more liquidity providers and the positive cycle goes on… But for curve, these are just the basic facts.
2. Incentives for Liquidity Providers
So the question rises for users: With such low fees, why would we even provide liquidity to curve?
i) High liquidity utilization
Fees are ultimately divided between liquidity providers. The higher the portion of my pie in the liquidity pool, the higher the fee returns. Since the trading volume is relatively high for the major stable coin pools, this somewhat compensates the low fees in general.
ii) No impermanent loss
If you are a de-fi user, we all have memories of a painful IL. You can sleep in peace with no worries of your pool becoming full of worthless coins. (Especially with the Tether case dropped…!)
iii) Gauge emissions
For liquidity providers, they can farm CRV tokens by staking their LP tokens which is the main instrument of providing sufficient incentive to the users.
However, the fear looms with the tokenomics of CRV, as it spooked out so many users, including me.
3. The ‘Ultimate’ Governance Token: CRV
CRV’s inflation rate did sure freak people out. Curve initially dumped to sub 50 cents briefly after its launch. After all, the supply was bursting out tothe market as incentives were handed out without governance token functions well in place.
However, things started changing when users started locking CRV tokens into voting escrows. Locking CRV gives users a veCRV position where they are able to use them to vote in the governance. But there’s more to it than just voting which is essential for sustaining the protocol.
i) veCRV allows users to boost their gauge emissions up to x2.5
This is a such a smart design as the constant emission from the gauge actually motivates the users to partially take profit but also partially hold on to CRV tokens and lock them up to obtain more veCRV.
ii) veCRV allows users to vote for gauge allocations
Users can use veCRV to vote for different pools which will decide the future gauge allocation. This ultimately decides the portion of CRV emission a certain pool would take away from the whole pie. Again, liquidity providers are motivated to lock more veCRV, vote for more allocation for certain pools.
iii) veCRV allows users to obtain half of all the fees: admin fees
Among the 0.04 % fees, half of it is accrued separately as admin fees. These admin fees are evenly distributed to the holders proportional to the amount of veCRV, rewarding the contribution to the protocol. And again, governance participants are motivated to lock even more veCRV, even just for the sake of profits.
4. My take on Curve finance: A Giant Crossbeam
As the defi space keeps evolving, yield farming has become more common with more complex strategies utilizing multiple smart contracts. Especially with asset management platforms that use stable assets, curve is typically the main underlying platform they use to maximize profits, how complicated the strategies are. If we look at Yearn’s highest earning vaults, they are basically all employing the ‘Curve’ strategy.
This also means that the whole yield farming profits of the whole ecosystem does partially rely on the price of the CRV token itself: with this only, the farmers can be motivated to maintain CRV price. CRV is no longer a governance token for its own platform, but it has become a profit generating mechanism lubricant for the whole defi ecosystem.
With curve as the ultimate stable coin ‘stabilizer’, yield ‘booster’, fee ‘generator’, it has well exceeded my expectations. It is started to seem like a proof of concept of a successful governance token design/architecture. With 45.67% of all circulating CRV locked as veCRV, it might not really be a far fetch to say that the one who rules veCRV dominance rules the yield farming space. And Yearn definitely knows that…! They let users lock CRV forever: yveCRV
CRV will still always get profit taking sell pressure, that’s for sure: but once inflation rate slows down…sell pressure slows, supply can’t match lock up demand: the story after that -- I’ll leave it up to your imagination. Even just for the Arbitrage opportunities and no IL, big institutional players will start dabbling with curve only to realize the importance of the platform on in the defi space.
