Introduction

Curve Finance started as the best new place to trade stablecoins. Established AMMs worked well in handling volatile assets, but their designs weren’t specialized for stable assets. There was a solution, and it involved next-dimensional math and llamas.

Curve’s AMM for non-volatile assets launched in 2020, offering the lowest slippage in the game and harboring the most liquid pools for the most highly regarded stablecoins. The low-fee trading hub has become the heart of onchain liquidity, commonly referred to as the “backbone of DeFi”. Curve is ready to take the competition head-on with its V2 release, and its already existing influence is noticeably widespread.

The Problem

An automated-market maker (AMM) is the magic behind a majority of DEXes. Instead of being matched against another order in an order book, DEX users trade directly with a liquidity pool. When a user swaps for something, the pool knows how much to dispense back thanks to the AMM formula.

Before Curve, AMMs for volatile assets dominated the DEX landscape. Early stage AMMs were not ideal for stableswaps, tacking on unnecessary losses to stablecoin trades in the form of slippage. This drove trades and liquidity offchain to centralized exchanges and their order books, sacrificing a huge portion of potential TVL in DeFi.

Similarly, DEX protocols struggled to incentivize liquidity providers. Projects that pursued liquidity mining reward strategies often ended up diluting their own token or sinking their revenue in exchange for temporary liquidity. This problem, along with the lack of stable-specific AMMs, created a roadblock to further adoption for DeFi.

The Goal: V1 AMM

Curve introduced the first ever AMM designed explicitly for efficient stablecoin swaps. By using a formula that concentrates liquidity around a single price point (1 USD), Curve can minimize price impact for stablecoin trades.

People trade stablecoins for several reasons. Their yield and perceived risk are constantly changing, so holders need to be able to easily move between stablecoin positions. Lots of stablecoin pegs are maintained by traders taking some kind of arbitrage opportunity, so this will also be a portion of stablecoin volume. The demand for stableswaps is always there, and Curve’s goal is to efficiently meet this demand with its novel AMM solution.

With most pools being stablecoin-only and experiencing low volatility, Curve LPs incur relatively little impermanent loss. Anyone can provide liquidity to Curve pools to earn the fees traders are paying. If a pool is approved for CRV rewards (a rewards gauge), then the pool’s liquidity providers also get a share of daily CRV inflation on top of their fees. This % fluctuates and is decided by veCRV voters every few weeks, and I will explain why this is important later.

The Goal: V2 AMM

The Curve V2 contemporary era expanded the AMM to also support volatile assets. Curve was no longer just a stableswap platform, but now a robust DEX/AMM supporting any token imaginable. Curve V2 pools are a non-exclusive avenue for all DeFi projects to incentivize LPs with $CRV rewards without diluting their own token.

First tested as proof of concept with the wBTC/WETH/USDT tricrypto pool, the release of V2 invites any project to launch a liquidity pool and/or gauge for their token. V2 also coined the concept of metapools. Curve metapools allow a single token (e.g. FRAX) to pair against an entire pool of multiple tokens. The most popular base pool for metapools is 3crv, which consists of DAI, USDC, and USDT.

How Does it Work? The DEX

The Curve Finance website offers the unique feeling of being on Windows 95 (check out the updated UI here!). To trade or deposit, visit the Pools tab and choose one to interact with. Check out the DAO tab to view pool gauge weights and to lock CRV for veCRV. The Stats tab has more relevant data, and there’s even a Risks page.

Traditional AMMs usually use the x*y=k formula, but this generalized design is unsatisfactory for swapping stablecoins. This lead the Curve team to devise their own Stableswap formula which was ideal for assets that float around a single price range. This design lessens the impacts of slippage for traders and impermanent loss for LPs.

How Does it Work? The DAO

veCRV holders make up the DAO. veCRV holders vote on various important decisions like which pools get a rewards gauge and the weights of each pool’s gauge. Each pool receives a % of daily emissions relative to their gauge’s weight, which is directly determined by the pool’s proportion of total DAO votes each round. If a pool gets 50% of the votes, it will receive 50% of daily CRV emissions until the next round of voting.

The idea here was to create a way for liquidity providers to vote in favor of the pools they’re in, earning more rewards by locking CRV and participating in governance. This has now transformed into a mighty arms race between protocols to maintain the highest gauge weights on their liquidity pool(s). Using strategies to obtain more voting power, protocols vote in the DAO in favor of their pool gauges.

Partnerships

Curve has a closely-knit relationship with a protocol built on top of it known as Convex Finance. Built in part by members of the Curve team, Convex is a “yield optimizer” for CRV holders and Curve LPs. It passes down extra yield to CRV holders who lock with Convex instead, and also passes down extra yield to Curve liquidity providers who deposit their LP token on Convex. The launch of Convex transfigured the Curve Wars to an extent that made Curve what it is now, and it controls ~53% of Curve governance as of today.

Tokenomics

$CRV Price: $1.07

Market Capitalization: ~$420 million

Circulating Supply: 391,958,099

Total Supply: 1,811,925,805

SOURCE: Coingecko

Learn more about token distribution here.

The CRV token’s launch was extremely unique. CRV daily emissions pay liquidity providers, which are not expected to end for another 245 years. Anyone can lock CRV and for up to four years, where the longer the lock duration the more veCRV is received per CRV locked. Lockers get:

• 50% of all Curve trading fees (paid in 3crv LP token)

• up to a 2.5x multiplier on CRV rewards earned as an LP

• voting rights in the DAO

• any Curve airdrops

Earning fees, boosted CRV rewards, and the ability to direct emissions is incredibly valuable for individuals and protocols alike. Instead of inflating their own token to incentivize liquidity providers, other protocols and launch a Curve pool and fight for a higher gauge weight on their pool.

Protocols can buy and lock CRV themselves to direct emissions to their pool, and can bribe other CRV lockers to vote for their pool if that is cheaper. Right now, 522,341,554 CRV is locked for an average of 3.58 years. CRV emissions are reduced by 15% every year in August.

Curve benefits from any kind of market conditions, especially if they are high volume. Events like stablecoin depegs or changing risk perceptions are largely profitable for Curve and CRV lockers, as these events generate millions in total fees for veCRV holders and Curve LPs. This is paid in the 3crv LP token (USDT/DAI/USDC pool) where 3crv holders can withdraw their fees in the stablecoin of their choice.

The Curve Wars and crvUSD

The Curve Wars is a CRV arms race between various DeFi protocols, especially stablecoin protocols, who are constantly wrestling for more voting power in the Curve DAO.

The Curve Wars inspired (or were inspired by?) new ways for CRV holders and LPs to earn higher yield on their assets. For example, users of Convex Finance can lock their CRV to receive the cvxCRV token. Stakers of cvxCRV get the same trading fees and airdrops that veCRV holders get, as well as some extra yield paid in CRV and CVX. In return, Convex (CVX lockers) control the CRV locked by cvxCRV holders. CVX lockers can earn bribes from other protocols depending on how they vote with the veCRV they control.

The Curve Wars are made possible by Curve’s novel tokenomics (veNomics) and overall protocol design. Curve was the first DEX to pioneer the concept of governance-directed emissions, setting the stage for a total gamification of deep liquidity and further cementing its product-market fit as a liquidity backbone.

There is confirmation of the development of a Curve stablecoin. We know that crvUSD will be over-collateralized with CRV (possibly with veCRV). Some suspect it will serve as a replacement to 3crv, where liquidity pools pair against crvUSD instead. The founder has confirmed the launch will come “much earlier” than the end of 2023.

Conclusion

Curve is a revolutionary progress of development, providing solutions to the most pressing needs in DeFi since its launch. These exotic innovations aren’t just used, but replicated by others to capitalize on their efficiency. Protocols who adopt the veToken model, governance-directed emissions, or bribes all use the underlying blueprint which originates from Curve Finance.

Curve is more than a single product. It is DeFi infrastructure, and it will no doubt leave a distinguishable legacy in the cryptosphere as a whole.

Part 1 of a 4 part series

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DISCLOSURE: $CRV is one of my largest holdings behind $ETH. I was not asked to write this article and have not been compensated in any way. The information provided in this article is solely for educational purposes and should not be considered as financial advice. The views expressed in this article are my own and do not necessarily reflect the official policy or position of any company or organization. Readers should always conduct their own research before making any financial decisions.