What are the Curve Wars?
In stablecoin trading, Curve Finance leads the ranks because of its unusual capacity to ensure low slippage and fees. This unique ability has attracted many DeFi investors to the ecosystem.
The Curve Finance protocol comprises liquidity pools that support different stablecoin trading pairs and digital assets. Each liquidity pool can be funded by anyone — known as liquidity providers (LPs) — in return for Curve Finance’s network token, CRV.
However, liquidity is often in short supply, leading to fierce competition to attract the most LPs to each pool. To secure sufficient liquidity, many of these protocols employ tactics such as bribing veCRV (vote-escrowed CRV) token holders to influence voting decisions in their favor.
veCRV is a non-transferable variant of the CRV asset. It symbolizes voting power and is only generated when the CRV token is locked or staked. veCRV token holders also get rewards from the Curve ecosystem; however, these are often spaced out across four years.
While bribery may appear unconventional, it plays a crucial role in the financial context of the Curve Finance ecosystem. Currently, the decentralized application (dApp) controls well over $2.5 billion in combined total value locked (TVL) spread across 277 liquidity pools, according to DeFiLlama.
This chunk of liquidity is strategically aimed at attracting and retaining liquidity providers within their respective pools.
The Curve Wars extend across multiple fronts, and some of the most popular protocols competing for liquidity include Convex Finance, Yearn, and StakeDAO, amongst others.
Background on Curve Finance and the Irony of Voting Power
For a more comprehensive understanding of the battle in the Curve Finance ecosystem, let’s delve into the DeFi protocol itself.
Curve Finance is a decentralized exchange (DEX) protocol that allows users to trade crypto assets in a permissionless way. Instead of relying on a central order book, Curve Finance employs an automated market maker (AMM) model. Here, trading occurs through a peer-to-contract (P2C) approach instead of the conventional peer-to-peer (P2P) format.
While contemporaries like UniSwap enable swapping any cryptocurrency, Curve Finance is laser-focused on stablecoins – making it the DEX platform to buy and sell these digital fiat equivalents.
On Curve Finance, liquidity is provided by users for both sides of a trade. For instance, in a USDC/USDT pool, liquidity providers deposit funds in both of the underlying assets. Traders on Curve Finance can then use these funds to trade tokens while incurring a fee.
Curve Finance rewards liquidity providers with 50% of the trading fees, which are charged at a low rate of 0.04%. These fees are distributed as CRV tokens, which have utility in network transactions, staking, and governance.
Users also have the option to stake their CRV tokens in exchange for vote-escrowed CRV tokens. These tokens play a role in determining which liquidity pools receive CRV incentives every ten days. Users holding a significant amount of these non-transferable ERC-20 tokens stand a chance of pulling in a large chunk of liquidity to their respective pools.
However, there is a twist to this. Users must lock their veCRV tokens for a maximum of four years to receive sizable rewards.
According to the Curve Finance protocol, users can only earn one veCRV by locking up one CRV for four years. But these tokens, in total, cost billions of dollars, making it both impractical and costly for investors.
If a single entity can amass the requisite voting power, it can easily dictate how and where the CRV incentives should be channeled. This way, such a protocol will be able to generate the needed liquidity it needs for buying and selling different digital assets.
Who is Leading the Curve Wars?
Despite the battle enduring for several years, many DeFi investors have acknowledged that Convex Finance is leading the charge.
The dApp controls as much as 50% of the total supply of CRV, which means it has a high say in how rewards are shared amongst the liquidity pools every week.
For better context, Convex Finance controls over 85% of Curve Finance’s TVL, representing more than $2 billion, according to DeFiLlama.
What are the Different Strategies Being Used in the Curve Wars?
Acquiring liquidity in the competitive DeFi and DEX landscape is a fierce endeavor. Consequently, numerous protocols have devised strategies to attract the highest liquidity influx by solving the one crucial flaw of the Curve Finance protocol – staking.
Users need to lock up their funds for four years to get the maximum reward for staking CRV in veCRV. This is impractical, especially for retail users with small budgets.
Below, we discuss the different strategies liquidity pools use to attract users. Our focus is on Convex Finance due to its prominent position.
Convex Finance’s Winning Formula
Convex Finance is the largest holder of veCRV tokens in the Curve Finance ecosystem. It has risen to the top by addressing the long-term staking issue with Curve Finance. It allows users to stake their CRV on its platform to get cvxCRV tokens that can be withdrawn anytime.
Convex Finance can unlock the maximum yield by pooling together every user’s veCRV tokens and leaving them for four years.
Another strategy deployed in the Curve Wars is the trading fee and staking reward strategy.
For one, Convex Finance charges 17% in fees for all revenue generated through the Curve Finance protocol. 10% of this fee is given to cvxCRV stakers as CRV, while 4.5% is issued to CVX stakers.
Besides this, there is a variable annual percentage rate (vAPR) that stakers can earn from. They are variable because the rate changes often.
At the time of writing, this staking reward is split into 100% governance token rewards, where stakers get 17.19% in vAPR payable in both CRV and CVX tokens.
The second is the 100% stablecoin reward, which has a 13.99% vAPR, and investors are paid using USDT, USDC, and DAI stablecoins. All these strategies are a form of bribes (technically called the Cuve Bribes) for veCRV token holders to lock up their liquidity with the Convex Finance protocol.
These strategies have helped Convex gain a massive advantage over other liquidity pools in the Curve Finance ecosystem. This is because earning 17.19% in network tokens or 13.99% in stablecoins is quite a sizable return on investment compared to the meager interest rates banks pay their customers.
What Are the Risks and Rewards of Participating in the Curve Wars?
The principal benefit of these decentralized application protocols lies in their continuous liquidity generation. This ability allows them to cater to the demands of every DeFi trader seeking to buy and sell digital assets. However, there are huge risks before jumping into any of the protocols.
DeFi platforms are still unregulated, meaning investors’ funds could easily be stolen anytime. Most DEX platforms are not supervised by any global regulatory body.
Easy Target for Hackers
Cybercriminals are particularly drawn to this ecosystem, primarily due to the inadequate security measures in many platforms. A recent example is the US Department of Justice (DoJ) indictment of an engineer named Damian Williams (Shakeeb Ahmed), who reportedly stole $9 million from an unnamed decentralized exchange.
If a security breach occurs, stakers can lose their funds if hackers attack any of these protocols. Recovering these funds can often be time-consuming, and in some unfortunate cases, losses may prove irreversible.
Despite these challenges, engaging as a liquidity provider in the Curve Wars can yield significant benefits. This is primarily due to the substantial rewards up for grabs. Holding the CRV token automatically grants access to the veCRV asset.
With veCRV in hand, stakers gain influence over the allocation of funds among liquidity pools.
Earn Rewards Form Liquidity Pools
Prominent platforms such as Convex Finance, Yearn, StakeDAO, and others actively seek liquidity and consistently offer rewards and incentives to LPs who stake their veCRV tokens with them.
This approach enables these platforms to generate the liquidity necessary for their operations. In return, LPs and stakers get tradable and transferable cvxCRV tokens (in the case of Convex Finance).
Multiple Income Streams
Participating in a liquidity pool typically leads to the issuance of the pool’s native token. For instance, locking up a veCRV asset with Convex Finance will instantaneously allow the user to get a liquid and tradable cvxCRV asset. This, in turn, can be withdrawn or restaked for more rewards.
What Is the Future of the Curve Wars?
Liquidity is a precious commodity within the DeFi ecosystem, and Curve Finance is the best place to get such for a fraction of the cost compared to other DEX platforms.
As a result, increasing liquidity pools are poised to compete vigorously for CRV incentives, aiming to draw veCRV token holders into their folds in the foreseeable future.
Presently, Convex Finance takes the lead in this liquidity battle, but the tides may shift in the years ahead.
The Curve Finance ecosystem has been around for over two years since it launched in 2020. It is a seamless and cost-effective means of exchanging stablecoins while avoiding slippage (for retail stakers) and impermanent loss (for deep-pocketed liquidity providers).
Given that DeFi is rapidly gaining acceptance across the globe, Curve Finance will likely have a healthy role to play in enabling liquidity generation and earning from such activities. Crypto whales also use Curve Finance to rapidly swap assets and get the liquidity they need for other trades.
Nonetheless, the DeFi landscape is still in its infancy, and Curve Finance plays a huge role in its continued growth. For instance, the DEX platform has recently launched on Base a layer-1 smart contract protocol from the Coinbase exchange.
This further increases the blockchain ecosystems it runs on. With Curve Finance on the march, blockchain protocols already operating on the Base platform will be able to access dollar-pegged stablecoins effortlessly.
This, and many other benefits, makes Curve Finance a central figure in the drive for a decentralized economy.
Meanwhile, newer blockchain protocols may be drawn into crafting their liquidity model using ideas from the Curve Wars.