What is Curve War: Gain Insight Into Curve - The Stablecoin Exchange Leader

2022-03-17, 08:42

【TL;DR】

1. Curve has surpassed MakerDAO by TVL and become the DeFi application with the largest total staking value.
2. As a decentralized exchange built on Ethereum, Curve is currently a leading stablecoin exchange.
3. By holding as much CRV as possible, a group can stake and obtain the maximum veCRV possible. The more veCRV the group gets, the maximum the voting rights. Thus, the group can participate in the governance to improve the yield of the liquidity pool invested.
4. This closed-loop logic of competing for governance rights and improving profits is also the cause of the Curve War.
5. Different Vaults came into being with the purpose to collect CRV from users and are dedicated to mining Curve's returns.

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Presently, Curve has surpassed MakerDAO by TVL and became the DeFi application with the largest total staking value. Curve War, which is closely related to the record high staking volume, is intensified. So what is Curve War?

Image: DefiLlama

Curve: the Stablecoin Exchange Leader

Established in January 2020, Curve Finance is a decentralized exchange (DEX) built on Ethereum. Similar to the current largest DEX, Uniswap, Curve also utilizes an automatic market maker (AMM) algorithm. The liquidity pool is the counterparty for users’ exchange transactions, and the smart contract automatically controls the ratio of the two tokens in the liquidity pool.

However, different from the more versatile Uniswap, Curve focuses on the stablecoin exchange. Uniswap adopts a constant product price curve to price liquidity pools, while Curve uses a different Stableswap Invariant curve to price.

Compared to Uniswap, Curve provides a stablecoin exchange experience with less slippage and extremely low handling fees (less than 0.04%). Impermanent loss in the Curve liquidity pool is also small when the liquidity mining is carried out because the asset price changes exert little influence on the exchange price between the two assets.

Source: Curve’s White Book

Now Curve has opened up a relatively independent ecological niche outside of Uniswap and has become the best option for a large user number to exchange stablecoins. This is also fundamental to Curve Finance's operational advantages. In the meantime, Curve has also become a crucial exchange for the growth of stablecoin projects. New stablecoin projects often partner with Curve to launch their own liquidity pools and support a certain number of tokens as rewards for providing liquidity.

Nevertheless, excessively low handling fees can also cause problems. Even if there is a large stablecoin transaction volume, the handling fee revenue that can be distributed to liquidity providers won’t be too high. Therefore, the liquidity pools can hardly attract sufficient liquidity. And it is necessary for Curve to find its way out and provide other incentives to improve the return of specific liquidity pools.

Figure: Curve’s official website. A very retro interface refers to that of the operating system in the 1990s.

The Origins of Curve War: The Battle for Governance

The native token CRV released by Curve in August 2020 has both functions as a governance token and a yield token. Investors can purchase CRV from the secondary market or obtain it from Curve liquidity mining. CRV liquidity mining can largely improve the return of a liquidity pool. Curve DAO Governance decides on how to distribute CRV rewards in each liquidity pool (that is, change the "gauge weights" of a liquidity pool). Investors with governance tokens have voting rights to choose a liquidity pool and set a higher token subsidy for it, thereby increasing the yield (ie APY) of the liquidity in that pool.

Specifically, CRV owners have to stake their CRV holdings as veCRV (ve means "voting escrow") to obtain governance rights and revenue rights on Curve. The minimum staking period is 1 year, and the longer the user stakes at one time, the more veCRV they can get. Simply, you can get 1 veCRV by staking 1 CRV for 4 years at a time. If you only stake 1 year, you can only get 0.25 veCRV. The veCRV is untransferable, and the amount of veCRV will decrease linearly as the staking period approaches. It is best for users to stake the CRV for the longest time possible because the amount of veCRV held directly affects the voting weight and the income of the market-maker fee.

By holding the maximum CRV possible, a group can stake and obtain as much veCRV as possible. Thus, they can participate in the governance to obtain the maximum voting rights and improve the income of the liquidity pool invested, and then increase the income of its funds, which can further attract more CRV.

This closed-loop logic of competing for governance rights and improving its own benefits is just the origin of the Curve War.

Nested cycle: From yield races to governance

For individual users, the staking process of CRV is cumbersome and it is hard to withdraw from the stake. The non-transferable feature of veCRV also makes it difficult for individual users' governance votes to play a central role. Therefore, lots of vaults used to collect CRV from users came to being, dedicated to mining Curve's income.

As we all know, vaults in mining refer to those mining pools that are not limited to mining a specific currency but mining pools that can switch back and forth between currencies using the same mining algorithm according to the return. DeFi’s are no exception. They are also capital pools that are constantly competing for the highest returns. In the beginning, the competition logic of Curve War was relatively simple, that is, to simply increase the yield of its own “vaults” and attract more CRVs to join it, thus increasing its own governance rights in a spiral manner. At this stage, Yearn, Stake, and DAO, which had a competitive edge in the number of CRVs at the beginning, performed extremely well.

However, the gameplay of Curve War changed after Convex was born. Convex officially went live on May 17, 2021. In terms of interaction, Convex simplifies the original staking process of Curve and helps users realize one-click staking/mining. Moreover, Convex has also listed its own native token, CVX. When users stake their CRV on Convex, they can not only get the corresponding amount of veCRV, but also get a certain amount of CVX which also represents governance rights. By staking CVX on Convex, investors can vote to use the veCRV owned by Convex. That is to say, with Convex, users are not limited to only enjoy a better interactive interface and exit mechanism but also indirectly govern Curve.

Presently, Convex has controlled 42% of the CRV in the market, with a number of up to 142.6 million. It can be said that it has taken over half of the entire Curve.

Source: https://dune.xyz/banteg/misc

Conclusion

Curve Finance is one of the cornerstones of the entire DeFi industry. Projects including Convex and Yearn also play a role in optimizing Curve’s staking and earning experience, as well as increasing Curve’s popularity.
The subsequent articles will also introduce you to the specific mechanisms of Convex and the latest progress of the Curve War. Please stay tuned!

Author: Gate.io Observer: Edward H.; Translator: Cedar W.
* This article represents only the views of the observers and does not constitute any investment suggestions.
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