Cryptokoin.com – Curve has quickly become a leading player in Ethereum’s decentralized finance (DeFi) ecosystem since its launch in January 2020. Offering an environment for users to acquire in cryptocurrency and trade specific altcoins in a decentralized manner, Curve is among the largest rapidly growing protocols in the DeFi space.
By definition, Curve is a liquidity aggregator. But to put it more simply, it is a decentralized exchange that supports the creation of liquidity, an important aspect of any financial market, by offering incentives.
Like many other decentralized finance protocols, Curve was not completely decentralized at first. While this was a great concept and plan, Curve as a protocol was susceptible to being steered by a single entity.
However, this is changing, with a native governance token for the Ethereum-based application called “CRVé”, which will transform Curve into a decentralized autonomous organization (DAO).
What is Curve?
As mentioned above, Curve is a protocol focused on providing users with a platform to easily trade certain Ethereum-based assets. The founder of the project, Michael Egorov, explains:
“Curve is an exchange designed for Bitcoin tokens and stablecoins on Ethereum.”
Apart from Tether’s focus on USDT stablecoins like USDT, USD Coin and DAI, and Ethereum-based Bitcoin tokens like renBTC, Wrapped Bitcoin, what sets Curve apart from any DEX (decentralized exchange)?
Although the answer to this is a bit complicated, it depends on how the transactions are carried out and how liquidity is provided.
Unlike traditional decentralized exchanges, which require sell orders on a specific order to match buy orders; uses a market generation algorithm or algorithms to support the liquidity of the markets. This makes Curve an automated market maker (AMM) protocol.
A market maker is a software or asset that buys and sells financial instruments, while providing liquidity to a market while profiting from the difference between the bid and ask prices.
Thus, by applying a market maker algorithm, Curve can allow faster matching of orders on its platform. Egorov said the algorithm he applied could provide “100, or even 1000 times higher market depth than Uniswap or Balancer”:
“The key part of Curve is its market-building algorithm, which can provide 100-1000x higher market depth than Uniswap or Balancer for the same total locked value. This dynamic helps both traders and liquidity providers because for these people the underlying returns are higher than on Uniswap. Similarly, it is due to the same factor as market depth.”
This means that traders, even larger “power users”, can easily exchange cryptocurrencies for any other currency with minimal fees and minimal slippage.
Anyone can provide liquidity to the market
The interesting thing about Curve and other Ethereum-based DeFi protocols in its class is that anyone can provide liquidity to the market. While traditional market makers often use exchange-provided assets or their own assets to provide liquidity to a market, Curve; It offers all users assets backed by their markets to provide liquidity.
The liquidity provision is incentivized by the potential profits that can be made. These decentralized liquidity pools charge fees and these fees are then passed on to the liquidity providers.
The profits that can be made by investing cryptocurrencies into a pool can vary as it largely depends on the volume and deposits a pool sees on a daily basis.
According to Curve’s own statistics, the average liquidity provider in the Compound pool can earn 5.51% annually, while the average liquidity provider in the Binance USD pool doubles that.
While these returns may sound appealing, especially in a world with 0% interest rates and devaluation of fiat, it’s important to keep in mind that there are risks involved in providing cryptocurrencies to a pool.
Risks of providing liquidity to Curve, Balancer and other AMMs
The main risk of using Curve and other AMM protocols may be to suffer from temporary loss (IL).
To put it simply; A temporary loss is a type of loss that can be incurred by people who invest their cryptocurrency in an automated market maker protocol like Curve or Balancer instead of keeping it in a wallet. ILs arise when the price of a token in the liquidity pool diverges.
These losses may be temporary, but arbitrageurs who have the role of balancing each pool; Losses can become permanent when the pool rebalances against the price of assets on exchanges.
DeFi analyst and venture capitalist Andrew Kang shared the chart below in July 2020. It shows how underperforming Chainlink (LINK) is placed in the Uniswap pool and LINK held-only.
Again, this isn’t just a Curve issue. Other AMMs such as Uniswap and Balancer are also susceptible to ILs.
However, the size of potential ILs is lower in Curve than in other AMMs due to the composition of the pools: Curve is stablecoin-centric. Other AMM protocols allow trading of almost all Ethereum-based altcoins.
What is CRV?
Now that the basics about Curve have been explained, we can now take a look at exactly what CRV is.
As mentioned earlier, Curve was not fully decentralized at launch. While users can exchange ideas via Twitter, Reddit or other forums; The direction of the Ethereum-based protocol was largely dependent on the Curve team. That’s changing with Ethereum-based cryptocurrency CRV and decentralized CurveDAO that will use CRV as a governance token.
Unlike cryptocurrencies launched in 2017, the CRV will be distributed through an incentive program rather than an ICO. Details on exactly how the coins will be distributed are not yet clear, but a member of the Curve team wrote:
“Curve will be given to Curve.fi liquidity providers. There will be no public sales or ICOs. All users who provide liquidity on Curve will be given CRV based on how long and how much liquidity they provide to the CRV.”
This system means that those who have provided liquidity in the past or currently provide liquidity to Curve pools will be allowed to claim CRVs. The CRV supply was planned to be distributed as follows:
- 61% (1.85 billion) will go to liquidity providers. 3% (90 million) of this 61% will be distributed to liquidity providers active prior to the launch of the CRV
- 31% (939 million) will go to Curve shareholders.
- 3% (90 million) will go to Curve employees
- 5% (150 million) will go to combustible reserves to be used only in emergencies.
While CRV likely launched as a token for traders looking to profit from the DeFi frenzy; its primary purpose is to act as a governance token for CurveDAO.
CurveDAO, a DAO that leverages an Ethereum-based decentralized admin/creator Aragon, will allow CRV holders to dictate the direction of the protocol through a “time-weighted voting” system. This system puts more weight on the choice of those with longer-term CRVs.
The CRV will also use a variety of mechanisms to promote liquidity supply, governance participation and cryptocurrency retention.
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