Key Points

  • Crypto enthusiasts, particularly those interested in passively earning from decentralized finance (DeFi), should know about Curve Finance.
  • DeFi presents various ways of earning passively which include liquidity provision, staking, yield farming, lending and borrowing. One of the most popular protocols that showcase the majority of these attributes is Curve Finance.
  • Curve Finance is an Automated Market Maker (AMM) protocol that offers an efficient way of exchanging tokens at low fees and minimum slippage by accommodating liquidity pools consisting of tokens that show similar features. This protocol incentivizes liquidity providers by not only integrating with external DeFi platforms but also issuing rewards in the form of CRV tokens and other interests.
  • This guide explores the Curve Finance protocol, how it works, and what makes it an interesting choice for users.

What is Curve Finance?

Curve is an AMM platform that shows similar features to Uniswap and Balancer, but is quite different because it accommodates liquidity pools with tokens that have similar behavior. These tokens are either stablecoins or wrapped versions of other crypto assets such as WBTC or WETH.

By accommodating liquidity pools with similar tokens, Curve is able to use more efficient algorithms and has the lowest level of fees, slippage, and impermanent loss among decentralized exchanges (DEx) on the Ethereum network. Unlike Uniswap where tokens can be swapped provided there is liquidity, Curve focuses mainly on stable assets such as DAI, USDT, USDC, and TUSD.

The amount of liquidity Curve provides makes room for other DeFi applications to use the platform’s pool as part of their ecosystem. Applications such as Yearn Finance and Compound often use Curve as a farming solution.

The Curve Token

After Curve Finance launched its decentralized autonomous organization (DAO) in August 2020, its native token CRV was also launched to control the Curve DAO ecosystem. The token can be either bought or earned through yield farming.

Yield farming is a process where an investor deposits assets into a liquidity pool and earns tokens as a reward. For instance, if the DAI stablecoin is deposited into the Curve liquidity pool, there will be a chance to earn CRV tokens in addition to fees and interest. By farming the CRV token, investors can be incentivized to become a Curve liquidity provider, allowing them to gain ownership of a strong DeFi protocol.

Investors who own a minimum number of vote-locked CRV tokens can propose and make updates to the protocol such as changing fees, creating new liquidity protocols, adjusting yield farming rewards, etc.

By choosing stability and composability over volatility and speculation, Curve has grown to become one of the most popular DeFi platforms.

Curve’s Automated Market Maker (AMM) Model

Curve’s AMM allows digital assets to be traded “permissionlessly” and automatically through the use of its liquidity pool which is composed of stablecoins and wrapped tokens. Investors supply tokens to Curve’s liquidity pool, and the token prices in the pool are determined by a mathematical formula.

When the mathematical formula is altered, the liquidity can be optimized to fit several purposes. Investors who have access to the internet and own some ERC-20 tokens can supply tokens to Curve’s liquidity pool. The liquidity providers could earn some fees which are paid by traders who interact with the liquidity pool, as well as some CRV tokens that serve as incentives.

Curve’s Stablecoin Liquidity Pool

When Curve was launched, it had a target of creating an AMM exchange with low fees and yield generation for liquidity providers. To mitigate against volatility, Curve focuses on stablecoins, giving investors room to earn high-interest rates from lending protocols. Curve’s model, when compared with other AMM protocols, is quite conservative as it not only works against volatility but also prevents speculation.

With Curve’s AMM, liquidity pools constantly try to “buy low” and “sell high.” Consider this rebalancing with USDC (a dollar-pegged stablecoin) and DAI (an algorithmic stablecoin). If an investor sells DAI on Curve, a series of events outlined below will be triggered.

  1. More DAI will be added to the pool.
  1. An unbalance will be triggered as DAI becomes more dominant than USDC.
  1. The pool moves to incentivize the balance by selling DAI at a slightly discounted price.
  1. The pool rebalances the DAI and USDC ratio.

When DAI is sold at a discounted price, the pool attempts to restore itself to its original state. Trading assets on Curve occurs with minimum volatility because assets in the pool are similar to each other in price. A common feature of Curve is that the platform limits the pools and the types of assets in each pool to minimize impermanent loss. Impermanent loss is a phenomenon where liquidity providers encounter a loss in the value of their token in relation to the market value of the token due to volatility in the liquidity pool.

By embracing DeFi composability, Curve attracts liquidity providers. This gives investors the opportunity to use what they have invested on the platform to earn rewards elsewhere in the DeFi ecosystem. Curve does not always keep the value of different assets equal to each other. This ensures the platform keeps liquidity concentration near the ideal price for stablecoins (1:1) to have the liquidity where it is much needed. As such, Curve has a higher liquidity utilization than can be achieved with stablecoins.

What Products Does Curve Offer?

Just like other decentralized protocols, Curve Finance covers a range of services. These services comprise swap, liquidity provision, gauge system, staking, and vote-escrowed CRV (veCRV) tokens. Each of these products has some features which many crypto investors find interesting.

Curve Swap

Curve Finance offers swapping services that involve converting one stablecoin for another. Some of the features of this product include:

  • Low fees and slippage as its liquidity pools have high total value locked (TVL) and trading pairs with nearly similar prices.
  • Trading fees are around 0.04% and are usually determined by the Curve DAO.

Liquidity Provision

Curve Finance focuses on stablecoins and assets that have similar behavior (ETH and stETH). The protocol’s liquidity provision service allows investors to deposit crypto assets such as stablecoins and wrapped tokens in its liquidity pools in order to earn rewards (typically CRV tokens) and fees paid by traders. Curve’s liquidity pools are classified into two:

  • Base: Also called Vanilla pools, represents the most popular pools on Curve liquidity pools and contains three of the largest stablecoins – USDT, USDC, and DAI.
  • Meta: also known as single tokens are pooled with other base pools (i.e GUSD-3pool). GUSD-3pool allows traders to swap between GUSD and one of the 3pool stablecoins. This act prevents the liquidity providers from removing liquidity from 3pool and to a specific GUSD-stablecoin pool which would have less liquidity.

The Gauge System

This particular product works in a way that when users stake their liquidity providers (LP) tokens to receive liquidity mining rewards, the rewards are distributed according to the weight of each gauge. For instance, 30% of all CRV rewards are allocated to the 3pool (USDT, USDC, and DAI).

The gauge weights determine the share of CRV inflation a pool receives. Other features include: 

  • VeCRV holders can channel their voting power to pools where they want to receive CRV rewards.
  • The more gauge weight a liquidity pool has, the more CRV inflation it receives.
  • Even though gauge weights are typically updated weekly, voters can change their voting weight only once every 10 days.

Staking on Curve

Curve’s staking feature mainly allows users to stake CRV tokens for veCRV which can be used for governance voting. The time frame for which CRV tokens are staked determines the amount of veCRV an investor receives. This means the longer a CRV token is staked, the more veCRV tokens users receive. The minimum staking time is one week, while the maximum staking time is four years.

Additionally, CRV ‘stakers’ can earn up to 50% of the platform trading fees. These fees are often used to buy 3pool LP tokens and redistributed to “stakers.” When investors lock their CRV, they will be able to boost their rewards for pools to which they provide liquidity. Depending on how long CRV tokens are locked, rewards can be boosted by as much as 2.5 times the regular incentives.

Voting tokens

The voter-escrowed CRV (veCRV) tokens are used for governance voting in the Curve Finance ecosystem. Some of the features of this product are outlined below.

  • veCRV tokens are used for governance proposals.
  • With any number of veCRV tokens, an investor automatically has voting rights.
  • Investors that own over 2,500 veCRV tokens can move to create new proposals.
  • As time progresses, the weight of veCRV decreases as the lock expiration date approaches.

Why Investors Choose Curve Finance

There are several reasons why crypto enthusiasts choose Curve Finance and they include:

  • Low risk: Curve focuses on stablecoins and other assets that have similar features to minimize volatility and the risk of impermanent loss. In addition, the platform is a decentralized protocol that is less prone to security breaches.
  • DeFi composability: These features allow investors to use the tokens they earn on Curve in various applications in the DeFi space
  • Minimal slippage: Because Curve focuses on assets with similar features, there is absolutely little to no room for slippage to occur when trading.
  • CRV staking: Investors who stake CRV have the opportunity to earn veCRV tokens which can be used for voting purposes. Those who choose to lock their tokens for longer periods can have their rewards boosted by 2.5 times.
  • Liquidity removal: Because Curve uses an AMM protocol, investors can take out their liquidity at any time.

Frequently Asked Questions (FAQs)

What is the future road map of Curve Finance?

Curve Finance has made a significant impact in developing AMM-decentralized exchange with numerous features. The Curve DAO helps in deciding future pool parameter changes and gauging weight to determine how much CRV is allotted for each pool.

Curve recently added cross-chain support on Fantom. There are also plans to integrate Curve on Polkadot. 

Where can investors buy Curve tokens?

While the CRV tokens are earned as rewards when investors provide liquidity, they are also popular and are traded on several crypto exchanges.

What is a DAO?

A DAO is a structured entity that is not controlled by a central authority. It can be considered as a group of people with similar interests whose rules and regulations are bound by a smart contract and no member is more powerful than another.