Curve Finance ($CRV): Beginners Guide
If you don't know much about curve then go through this article. It provides an overlooked yet extremely essential service to the DeFi ecosystem and everyone should know about it.
If you’ve clicked on this article I’m assuming that you do not know much about curve and may have just read about it somewhere in passing. So I have made this beginners guide to help you understand the CurveDAO and why it is so important in the DeFi space. It was launched in august of 2020 and has seen tremendous growth every month since its launch. Initially, it launched on ethereum but now like many other protocols it is embracing a multi-chain future and offering its services on other Layer 1’s as well.
What is curve?
To understand Curve.fi you can look at it as exchange where the main goal is to allow DeFi users and protocols to exchange stablecoins through its multiple liquidity pools (more on this later). The major benefit that makes Curve so attractive is that the exchanges can take place with low fees and low slippage. For those who don’t know what slippage is, it is the difference between the price you want the trade to be executed at the price it actually gets executed at, so the lower it is the better it is. Most importantly, Curve is completely non-custodial which means that the core team and developers have no direct access to your funds, the funds simply sit in the smart contracts
Okay, but how does it actually work?
As I mentioned earlier, they use this thing called liquidity pools rather than directly matching a buyer to a seller. A liquidity pool is basically a pool of funds that sit in a smart contract. For the sake of simplicity let’s look at a pool with two stablecoins DAI & USDT. When the pool is created it starts with an equal amount of each token. So, in this case it’s 100 DAI : 100 USDT. Trader 1 comes along and wants to switch DAI for USDT so he deposits 10 DAI and gets 10 USDT which temporarily changes the pool to 110 DAI : 90 USDT. Then the next trader sees he can get more DAI for his USDT and executes a trade where he deposits his USDT for DAI. So it creates a sort of self-correcting atmosphere by incentivizing traders to keep the price stable and at the point it should while keeping the number of tokens in the pool the same.
To get funds into the pool in the first place you have something called a Liquidity Provider or LP for short. These LPs take on the risk of providing funds to the pools because they get high APRs in return. APR is the annual percentage rate which represents the interest a person can earn in a year for providing liquidity or investing in a protocol. The APR on curve is especially attractive because it’s made up of two elements. The first is that a percentage of the fees taken from executed trades is distributed to all LPs which is why on days of high volume and volatility the APRs increase. The second element is that the liquidity pools are actually deposited on protocols like Compound and Yearn in the background so LPs earn additional interest over the top.
It’s important to note that as a LP when you choose a pool to deposit funds into and if you put only one stablecoin, it will still get deposited equally across all the tokens in the pool. For example, if you have a pool with USDC:USDCT:DAI and you deposit 99 USDT into this pool. It will be split into 33 each automatically by the protocol. Another tip is that if you deposit funds, check the balance of the pool before. If there is less DAI in the pool for example and you deposit DAI you get a deposit bonus because pools are always trying to balance themselves so if you deposit the token with the lowest share then you get and instant reward. When you withdraw funds it’s the reverse, if you withdraw the coin with the most share in the pool you get a bonus but ofcourse if you don’t want to do that you can withdraw any coin.
Why is Curve needed?
Stablecoins have quickly become one of the biggest and most important parts of the DeFi ecosystem and with valid reason. To have a financial system you need a stable place where funds can be held, you need a stable currency if you want to establish payment system or even conduct investments and trades, and it also gives people quick and easy access to different currencies. So if someone in Bangladesh wants to buy US dollars he may find it extremely difficult to do it through traditional systems but it’s super easy to buy stablecoins on DeFi.
With the obvious demand for stablecoins established, this led to a race between different companies and foundations for who can make the winning stablecoin and the result was the DeFi ecosystem having dozens of stablecoins all with different pegging mechanisms. Now regular users and other protocols have so many option and each have their different benefits but there was no place to easily swap one stablecoin for another. This is where Curve stepped in and provided a great product for moving from one stablecoin to another while having the potential for great arbitrage opportunities.
You don’t have to believe me when I say that it is an important product. The stats speak for themselves. On August 12th the Total Value Locked (TVL) in the protocol was $200 million. On October 6th 2021 the TVL is $13.6 billion. It’s been a little over a year since the protocol has been launched and calling the growth and usage exponential may actually be an understatement.
CRV token + tokenomics
Like most protocols in DeFi, the native token for Curve Finance $CRV is a governance and utility token. The $CRV token has 3 main purposes which are voting, staking, and boosting. For the voting aspect you use a mechanism called vote-locking wherein you put your CRV tokens into this mechanism and get veCRV in return which can then be used to vote on various DAO proposals. That is the governance aspect of it. The utility aspect comes from staking and boosting. With staking you can choose how much CRV you want to stake and for how long and then you get the veCRV in return and 50% of all trading fees are redistributed to veCRV holders. Boosting is an incentive for being a LP and vote-locking your CRV. You can get up to 2.5x boost rewards on the liquidity that you are providing on Curve.
Let’s also take a quick look at the tokenomics. They are fairly straightforward. The total supply of CRV is 3.03 billion and they are distributed as follows:
· 62% to community liquidity providers
· 30% to shareholders (team & investors) with 2-4 year vesting period
· 3% to employees with 2 year vesting
· 5% to community reserve
On launch date the token supply was at 0 and the release rate of the tokens was and still is 2 million coins per day. Another good sign is the long vesting period of investors, team, and employees which shows everyone involved has a long term vision for the project and they will not dump on you immediately like most scam protocols.
Risks
Like everything in DeFi there is always a fair share of risk involved and it’s the same with Curve.
1. Smart contract risk – the code for curve has been audited by trail of bits but just because code has been audited it doesn’t mean that it is safe, there is always a chance of a hack or a bug where users can lose funds.
2. Admin keys – Curve DAO is almost completely decentralized except for one thing. They have the Curve Emergency DAO which is able to pause and unpause pools. This DAO has 9 members and in the event of a hack or a bug they can execute the Kill_me function which completely shuts down all functionality on the protocol except for withdrawals so users can still take their funds out in time. Some people may consider this an issue and hence I’ve put it under risks
3. Losing the peg – you may know that stablecoins are far from perfect and many of them lose their peg very often and some even go into the so called ‘death spiral’ where it never regains its peg. In that case, the liquidity providers on the pool that has the stablecoin that lost its peg will effectively be holding all their funds in that stablecoin because of the balancing mechanisms. Therefore, a significant amount of money can be lost
4. Staking risks – very similar to smart contract risks because when you stake you interact with multiple smart contracts which means you are exposing yourself to the risk of every smart contract.
Concluding remarks
Curve is a brilliant and innovative protocol with a great team behind it. If you have been keeping up with DeFi recently then you may have noticed that there are multiple new Layer 1 chains coming up to compete against Ethereum and Curve is embracing this multi-chain future by offering its services on other chains. In an interoperable and multi-chain future stablecoins will become even more prominent as they will be the primary medium of exchange and with Curve providing the essential service of easy swaps, the future for Curve is extremely bright.
As always, If you enjoyed this article please consider subscribing to the substack for more content helping beginners
follow me on twitter @LeftsideEmiri
Thank you for reading.