Primer – Known for its highly efficient pegged-asset swaps, Curve is a popular non-custodial DEX touted for its stability and composability in an otherwise speculative and volatile market. Introduced by Michael Egorov, a Russian physicist, the AMM (Automated Market Maker) platform enables fast and low-friction stablecoin trading while boasting low fees and low levels of slippage.
Introduction to Curve
The math behind Curve is complex and beyond the scope of this article. However, the idea is simple; Curve came into existence to facilitate high-volume stablecoin trades. Prioritizing asset stability, Curve has carved a niche in stablecoin trades and similarly priced assets (in a 1:1 ratio). Avoiding volatile crypto assets, focusing on assets pegged to the same value, and leveraging a unique AMM design enable Curve to deliver a highly efficient stablecoin trading platform. The aforementioned strategy and Curve’s StableSwap mechanism maximizes liquidity and allows large swaps between stablecoins with reduced slippage and minimal fees. Moreover, liquidity providers can mitigate impermanent loss, a unique risk associated with providing liquidity because Curve limits the type of assets in each pool and provides pairs of similarly behaving assets only. Thus, access to deep liquidity pools and provision of the best possible rates help Curve address the inefficiencies associated with the trade of stablecoins, making it the preferred choice of users.
Curve is one of the most prominent players in DeFi, with TVL (Total Value Locked) significantly higher than its competitors. Curve’s popularity can be attributed to the following:
-Low trading fees – Trading fees of 0.04% for each stablecoin trade compared to Uniswap’s 0.3%.
-Low slippage and no impermanent loss – High trade volumes are often subject to price slippage. Using similarly priced assets in a single pool ensures low price volatility even while trading huge volumes. This strategy and StabeSwap Invariant enable Curve to reduce slippage and offer efficient trading for large transactions, particularly useful for whales. In addition, supplying stablecoins to pools with assets trending towards the same price helps liquidity providers overcome the risk of impermanent loss.
-Composability – Curve allows users to earn from interoperable tokens (e.g., Compound’s cTokens). The composability benefits enable Curve users to enhance their rewards, and Curve integrates with several external protocols such as Yearn Finance, Synthetic, Compound, etc., to deliver said benefits.
Curve’s offerings exceed that of a regular DEX. The tokenomics and incentive structure around $CRV has created a fly-wheel effect and is hugely responsible for Curve’s exponential growth.
Curve’s ve (vote-escrowed) Tokenomic Model
Locking stablecoins into the Curve pools enables users to earn a share of the trading fees (reflected in the base APY of these pools) and CRV tokens. Curve’s novel Vote-Lock mechanism allows CRV holders to vote and influence CRV emissions. The mechanism entails locking CRV into the protocol for a period ranging from one week to four years. The amount of veCRV (vote-escrowed CRV) that users acquire is directly proportional to the locked period. Per the docs, a user’s veCRV weight gradually decreases as the escrowed tokens approach the lock expiry. In case of most protocols, the token rewards paid out to LPs have restricted use cases such as governance rights; however, CRV has three uses: voting, staking and boosting. To access these additional utilities, LPs need to vote-lock their CRV. veCRV tokens confer on users voting rights and higher yield generation capabilities.
The longer the lock -> the greater the voting power -> and the larger the boost.
The governance participation in the protocol is crucial as it enables users to vote on the distribution of the CRV emissions across the various liquidity pools (aka Gauge weight voting). All gauges on Curve are weighted, and yield is driven to the pools with the highest allocated votes. The votes occur bi-weekly via Snapshot.
To summarize:
-Curve rewards LPs with governance tokens (CRV) in addition to the trading fees.
-Vote lock entails locking CRV tokens for veCRV.
-The longer the lockup period, the higher the amount of veCRV and the higher the rewards.
-veCRV allows users to vote on the allocation of CRV emissions to different pools.
-More votes to a pool mean more CRV rewards to users of that pool resulting in more stakers and consequently more liquidity.
Curve Wars
The power to vote may not be as impactful for individuals as for protocols with tokens on Curve. While DeFi is growing exponentially, it is plagued with the perennial issue of uninterrupted access to liquidity. Liquidity is the fuel that powers the financial markets. It is one of the most important aspects of any market/asset. Most DeFi protocols are centered around achieving liquidity for their tokens and incentivizing users to hold the tokens.
Curve offers a solution for protocols to accumulate liquidity by steering rewards to their liquidity pools through the control of veCRV. However, the number of tokens that protocols can acquire is limited owing to the hard cap of the CRV supply. The finite supply and race for token accumulation have given rise to a system wherein protocols bribe veCRV holders to vote in favor of their pools. The higher the bribe offered by the pool, the more attractive it is for the users to vote for it bringing in liquidity for the protocols and fueling growth. The competition between protocols for control over gauge voting, liquidity, and incentivization is called Curve Wars.
Curve, Convex and a Deep-Liquidity Battle
Convex is a DeFi platform/layer built on top of Curve. Understanding the powerful impact of voting on Curve, Convex Finance devised a mechanism to accumulate veCRV tokens helping it seize more than 50% control over the gauges on Curve.
Convex simplifies CRV boosting (without users depositing veCRV) by aggregating users’ CRV and staking it for the entire four-year term to unlock maximum yield. Users holding CRV can deposit their tokens on Convex to receive cvxCRV (at a 1:1 ratio), a Tokenized veCRV. Unlike veCRV (non-transferable), these tokens are liquid, freely tradable, and give users a reliable exit mechanism sans governance capabilities. The exchange from CRV to cvxCRV is irreversible; however, CRV can be exchanged on the CRV-cvxCRV pool.
cvxCRV gives users a share of the native veCRV rewards, potential airdrops to veCRV holders, and its native token $CVX making Convex the more profitable choice to farm on.
cvxCRV summarized:
-Users can deposit CRV tokens into Convex.
-Convex provides cvxCRV as a receipt of the deposit and stakes CRV for veCRV (assuming full ownership of veCRV).
-cvxCRV is liquid unlike veCRV.
-cvxCRV has no governance rights but offers amplified returns.
This strategy offering lucrative returns for staking CRV has enabled Convex to acquire vast amounts of CRV in circulation and thus significant voting power. Convex has made it mathematically impossible for any other protocol to gain similar dominance over CRV. The fight between Convex, StakerDAO, and Yearn Finance was short-lived, with Convex gaining supremacy in a few months of its existence.
Owning and locking CVX offers identical results to CRV. Holders of CVX tokens have the voting power to direct how Convex uses its veCRV. Convex has won the Curve wars and is most powerful in terms of veCRV and governance rights. For protocols seeking liquidity, acquiring CVX tokens trumps the acquisition of CRV tokens. More tokens enable more control. Protocols can either purchase CVX to gain voting power or bribe CVX token holders (vlCVX) to vote for their pool in the gauge weight voting.
Curve Wars evolve into Convex Wars (Bribe Economy)
The reasons protocols favor Convex over Curve are:
1. Flexibility – unlike CRV, CVX can be used to its maximum capacity by committing for 16 weeks only.
2. Yields – greater yields as compared to those offered on Curve.
3. Enhanced liquidity – by gaining voting power over Curve gauges.
Convex allows users to vote-lock CVX in return for vlCVX. vlCVX can be utilized for voting on proposals concerning veCRV. CVX must be locked for 16 weeks to participate in voting, after which it is automatically unlocked. As a result, bribing CVX holders to direct rewards towards their pools is a more efficient strategy than purchasing CVX. Based on competition from other protocols, the bribe amounts tend to change semi-weekly. This phenomenon has led to the emergence of a multi-layered bribe economy wherein protocols constantly compete to bribe CVX holders to influence CRV emissions in their favor.
With bribes, the returns to the vlCVX holders escalate as they now receive much higher rewards (an additional 1% fee on top of the normal staking rewards + money from the bribes). As a vlCVX holder, users can choose to either vote on the weekly allocations to claim rewards or delegate votes to Votium.
Votium & Llama Airforce Union
Votium, an interface built on top of Convex, is an incentive platform that operates as a marketplace for bribes. It chooses the most profitable option for users who have delegated their voting rights. Votium enables users to retain custody of vlCVX. When users deposit their vlCVX with Votium, they hand over their voting rights in exchange for the best incentives. Votium has emerged as a handy tool owing to the large amounts of veCRV controlled by Convex. However, a significant drawback associated with using the platform is that users are rewarded in the tokens that make up the liquidity pool that has been voted for. This is especially problematic when users receive small amounts of several coins that aren’t worth the gas required to claim them.
To solve this problem, users can join the Union. Llama Airforce Union is a protocol built on top of Votium.
Their concept is simple and outlined below:
-Users forward all the bribe rewards to the Union.
-Rewards are collectively claimed and swapped for cvxCRV.
-Union puts cvxCRV in the auto compounder.
-Shares are airdropped to users.
It’s an impressive tool for individuals who want exposure to the Convex rewards but do not have the funds to compound their position manually.
Instead of competing to acquire more CRV or CVX, protocols use tools like bribe.crv and Votium to bribe veCRV and vlCVX holders to direct liquidity to their pools. Bribing proves to be the most efficient option for protocols to secure liquidity. Bribing also has significant benefits for the veCRV and vlxCVX holders.
Convex is one of the major players and is often dubbed the kingmaker in the race for liquidity because its share of veCRV supersedes that of any other protocol. Moreover, vlCVX, its vote-locked governance token, can influence the allocation of CRV emissions. This ability highly incentivizes protocols to bribe vlCVX holders and has given birth to a subset of protocols such as Votium, Llama Airforce, etc., providing valuable services and tools to support protocols seeking to increase their liquidity. What started with Curve has reached Convex with several protocols fighting for control over vlCVX to win the Convex Wars. DAOs with huge CVX ownership include FRAX, Badger, Redacted, Olympus, and Wonderland.
[Redacted] Cartel
An Olympus fork, the Redacted Cartel is one of the leading fighters in the Convex Wars. It aims to become a meta-governance DAO that creates and extracts value through the incentivization of governance in DeFi. Its progress in the Curve Wars speaks of its highly optimized strategy focused on acquiring influential governance tokens such as veCRV, vlCVX, TOKE, FXS, etc., through a bonding mechanism. Users can bond assets (such as CRV and CVX) to acquire discounted BTRFLY, enabling the Cartel to gain governance power over the protocols. Thus, holding a single asset (BTRFLY) will give users sway in multiple governance processes. It operates as a hedge fund of sorts trying to win the war for its investors while accumulating more power and revenue for BTRFLY holders.
Redacted has expanded to other ecosystems such as FRAX and Tokemak. Moreover, it’s a permissionless bribe marketplace called Hidden Hands that enables protocols with a veToken system to access a marketplace where others can bribe veToken holders to vote for their pools.
Curve and the DeFi Ecosystem
Featuring consistency and deploying an AMM model for stablecoin swaps, Curve is a disruptive force in the ever-growing realm of DeFi, and the infrastructure around it corroborates that. The dynamic capabilities and incentive structure around CRV tokens has laid the groundwork for several projects, including Convex, Votium, Warden, Llama Airforce, etc. In addition, Curve has facilitated the development of a new market of bribes. Regarded by several as having a negative connotation, bribes in the cryptosphere are common and fully embraced as an incentive mechanism that, unlike its traditional counterpart, is highly transparent and on-chain. As a result, several platforms have surfaced as voting middleware to support protocols in their endeavor to control liquidity.
Curve’s introduction of veTokenomics represents a powerful concept that has enabled it to successfully align stakeholders’ incentives with the protocol’s long-term performance. Deploying a vote escrowed model entails forceful locking up (from three months to four years) of the token to access maximum benefits. The veToken model serves a dual purpose of maximizing rewards through attractive yields (for users) and accumulating liquidity (for new projects).
Even though Curve pioneered this model, it is being replicated by many other DeFi protocols, having undergone several transformations. Time will tell if this mechanism for enticing and incentivizing users will succeed, but for now, what Curve started seems to be just the beginning. The fight for liquidity shall continue with Convex expanding to control votes on more pools, Tokemak aiming to become a central liquidity hub, and Balancer starting its own veBal battles.