What is Curve?

Curve is popular for its transactions focusing on stablecoins. It improved the AMM model to enable users to trade stablecoins with low fees, low slippage, and low impermanent loss.

Curve has an innovative design for its token mechanism. Its VeToken model has attracted various projects to accumulate $veCRV by staking CRV and competing for Curve’s governance rights. This represents an incentive for users to hold the token for a longer term, making it a paradigm of mechanism design. In the meanwhile, it drives the growth of Convex-related protocols and is planning to issue stablecoins to expand its ecosystem.

In this article, we will provide you with a clear understanding of the origin of Curve, the characteristics of the protocol, the tokenomics, and how it developed at such a high speed within 2 years and became the most influential stablecoin among various DeFi protocols.

Image: Curve Logo

Source: Curve website

Curve: the stablecoin version of the AMM platform

Curve was launched in 2020, aiming to provide traders with an AMM exchange with low fees, low slippage, and high liquidity. By focusing on stablecoins and similar wrapped assets, Curve protects investors from the risks posed by more volatile crypto assets while enabling investors to earn high-interest rates from lending protocols. Compared with other AMM platforms, the Curve model is more conservative as it evades volatility and speculation and treats stability as its major concern.

Image: Curve Pools

Source: Curve.fi website

We can see from the Curve official website that almost 90% of the pools are stablecoin pools or similar wrapped token pools. For example, the 3pool provides the swap service of the three stablecoins — DAI, USDC, and USDT, and the BBTC pool provides a route for swapping four wrapped Bitcoin tokens, specifically BBTC, WBTC, renBTC, and sBTC. Users who provide liquidity for these pools will be rewarded with CRV, and some pools may provide other tokens as rewards. For a few liquidity pools of wrapped tokens of non-stablecoins, users need to assess for themselves whether to invest, as the risk is high. Such high-risk pools rarely provide CRV as rewards.

Curve’s algorithm does not attempt to keep the values ​​of different assets always equal or proportional to each other, which allows Curve to pool liquidity around the ideal price of similarly priced assets (in a 1:1 ratio) so that liquidity is available where it is most needed. Therefore, when compared with other platforms, Curve can achieve a higher liquidity utilization of similar assets. At the same time, Curve’s algorithm and the design of like-asset trading pairs can still guarantee they are pegged to each other when trading with highly volatile assets such as Bitcoin. To put it simply, the tokens in the Curve pool do not need to be stable. They just need to be stable relative to other tokens in the same pool.

What makes Curve competitive?

Curve is competitive due to its technological innovation capabilities, use cases of mainstream assets, and excellent economic model. Since its launch in 2020 when DeFi was booming, Curve has put its focus on the stablecoin market. At that time, a large number of projects such as Compound and Balancer started liquidity mining, which created a huge demand for stablecoins. Curve seized the stablecoin trading market by launching the AMM service specifically for stablecoins, which helped Curve gain a large number of loyal DeFi fans due to its advantages of low slippage and losses. Following that, Curve also enabled $CRV mining and the composability to increase the rewards users can get for using financial services on the Curve platform.

• Example:

  When you lend $DAI on the Compound platform, you will get a liquidity token called $cDAI, which automatically accumulates interest for the holder. But on Curve, users can combine the borrowed $DAI tokens with other stablecoins and re-stake them to get a liquidity token called $3CRV. With $3CRV, users can share the trading fees of the Curve platform, additional interest, and external token rewards.

With the prosperity of the Curve ecosystem, along with the support from its partners like Convex, Curve brings considerable yields for users through composability. This means that the same amount of investment on Curve generates returns extremely higher than that of other platforms, which is very attractive to institutions, investors with abundant funds, and risk-neutral investors.

Types and use cases of the Curve token

Curve’s tokenomic is relatively complicated but delicately designed. It truly combines incentives and governance systems to link users with the interests of the ecosystem. There are three types of tokens in the Curve ecosystem, with each enjoying different use cases and approaches to obtain.

• $CRV: The governance token of the Curve platform. It is issued for the main purpose of incentivizing users and getting as many as possible involved in the governance of the protocol.
• $veCRV: It is generated by vote-locking $CRV for a fixed period of time. The longer you lock $CRV, the more $veCRV you get.
• $3CRV: $3CRV is the LP token for 3Pool (also known as TriPool). A portion of the trading fee will be distributed to $3CRV holders.

Table: Curve Token Types

The Curve tokenomic model is well-designed as it leverages the relationship between governance and interests, in which $veCRV plays an important role. $veCRV can be applied in two scenarios. The first one is to create a new fund pool on Curve, which requires 51% of the holders to vote for it. This consequently leads to the creation of a unique income-earning project — bribery. If a project wants to add its own token to Curve’s fund pool, it’ll need to collect a large amount of $veCRV, initiate a vote and get more than 51% of all the $veCRV votes. However, it is rarely possible for the project to collect 51% of $veCRV. Therefore, project parties may bribe $veCRV holders to vote for their projects and share more earnings. The second application scenario of $veCRV is to determine the share of liquidity mining rewards each pool could get. Within a specific period of time, the pool that gets more $veCRV votes can obtain more rewards, and voters will also get profits.

Cross-Asset Swaps

Curve’s cross-asset swap service is launched in cooperation with Synthetix and leverages Synthetix’s technical advantages, allowing users to perform large-scale swaps between different asset classes with minimal slippage. By combining Synthetix’s zero-slippage synth conversions and Curve’s deep liquidity and low fees, we can conduct fully on-chain cross-asset swaps at scale with a 0.38% fee and minimal slippage.

In conclusion, cross-asset swap has the following features:

1. Users can enjoy extremely low slippage when swapping assets;
2. It takes 6 minutes for a transaction to complete due to the Synthetix settlement period and the price will change during that period;

3. The assets you trade must be of different classes (e.g. USD, ETH, BTC, etc.) and must be exchangeable for synthetic assets in Curve’s pool (e.g. sBTC, sUSD, etc.)

      How it works:
   

Image: The ratio of one million DAI to wBTC

Source: Curve website

When we want to buy $wBTC with $DAI, we need to convert assets according to the following route:

$DAI - $sUSD - $sBTC - $wBTC

The first part of the trade requires you to convert $DAI to $sBTC. To achieve this, $DAI should first be converted to $sUSD in the Curve stablecoin pool, and then convert $sUSD to $sBTC on Synthetix. After the settlement period, an erc721 NFT will be generated, serving as the unsettled certificate of the transaction. When the 6-minute settlement period ends, click "Complete trade" to perform the final part of converting $sBTC to $wBTC.

Curve’s cross-asset swap service is currently in beta. Compared with other platforms such as Uniswap and 1inch that have sufficient market depth, the service has no other advantages except for low fees. When there are large trading amounts, the exchanged assets devalue sharply due to insufficient depth. According to Curve’s latest technical announcement, it will continue to conduct more extensive tests and development on cross-asset swaps in the future.

An overview of the swap ratio on Curve, 1inch, and Uniswap:

Image: The ratio of 10 million DAI to wBTC

Source: Curve website

Image: The ratio of 10 million DAI to wBTC

Source: 1inch website

Image: The ratio of 10 million DAI to wBTC

Source: Uniswap website

From the data on the Curve website, we can learn that from the start of the test to February 19, there are 3,769 large trades completed through cross-asset swap, with a total volume exceeding $2.8 billion, of which the trading of stablecoins accounted for the vast majority, i.e. 70.4%.

Image: Cross-asset swap trades

Source: Curve website

CrvUSD whitepaper released

Curve officially released the $crvUSD stablecoin whitepaper in October 2022, which introduces its upcoming stablecoin $crvUSD in detail. According to CoinDesk, Curve plans to deploy $crvUSD in June 2023 officially.

Image: $crvUSD Stablecoin - LLAMMA Algorithm Schematic

Source: Github

Like other collateralized stablecoins, the dollar-pegged $crvUSD will be provided to users who deposit other crypto assets as collateral. According to the whitepaper, the issuance and liquidation of $crvUSD stablecoin will adopt a brand new algorithm called LLAMMA (Lending-Liquidating AMM Algorithm). In the lending market, the price of assets might be pushed up to manipulate the maximum borrowable amount, which causes a large number of bad debts. The new LLAMMA algorithm theoretically works in solving this problem. When a user borrows some assets with collateral, the $ETH deposited will be converted into the corresponding LP position of $ETH-$USD. If the collateral price falls, LLAMMA will gradually sell the collateral to smooth the liquidation process. Conversely, if the price of collateral rises, LLAMMA will buy the collateral back to get earnings.

The LLAMMA algorithm allows for smoother liquidations than lending liquidation mechanisms on other platforms, enabling very low slippage. In addition, the $crvUSD lending solely uses $ETH as the collateral, which avoids regulatory risks that might be brought if employing $USDC and $USDT as collateral.

Conclusion

Thanks to the team’s deep insights into the market, Curve is making larger strides along its road as a ‘stablecoin.’ Curve seized the stablecoin staking market through DeFi liquidity mining in 2020 and is planning to deploy $crvUSD stablecoin, demonstrating its ability to grasp the opportunity appropriately. Besides, stablecoin enthusiasts are also paying close attention to the development of $crvUSD. Will $crvUSD make greater success in the future? Will stablecoins generated through staking eliminate the demand for stablecoins backed by fiat currencies? Answers to these questions will get clearer over time.