DeFi Deep Dive #8: Curve Finance

A Weekly Series Profiling Protocols Featured on DeFi Llama

🦙 DeFi Llama tracks over a hundred protocols. How well do you know them all? Each week our staff of llamas perform a deep dive on one of the protocols🦙

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Curve Finance

Curve Finance recently got a lot of attention after the sudden release of Curve v2. The protocol had traditionally focused on like-kind stablecoin pools. With the release of v2 they announced an advanced new algorithm that would allow pools of differently priced assets.

Curve has grown into a pillar of the DeFi ecosystem. Along with Uniswap and Sushiswap, these primarily Ethereum-based protocols are in a three-way horse race for top volume locked by DEX. At the moment Curve tops the charts with nearly $10B. Uniswap v2 + v3 claims $7B and Sushiswap just under $5B.

Unlike Uniswap and Sushiswap, Curve’s raison d'être is minimizing slippage. Whenever large amounts of coins are removed from liquidity pools, the withdrawal causes the price to change as the pool becomes imbalanced. Before the launch of v2, Curve attacked this problem in two main ways:

1. Primarily focusing on like kind (ie dollarcoin to dollarcoin) pools, which have less price sensitivity.

2. Curve’s Stableswap Invariant, detailed in its white paper, combines a constant-sum invariant and a constant-product invariant to reduce slippage while maintaining asymptotic behavior at extreme values:

Indeed, on the typical trade, slippage is very low on Curve, as low as 6 basis points relative to Uniswap’s 80.

Curve currently provides stablecoin pools denominated in Dollars, Euros, Bitcoin, Ethereum, and Chainlink, with more denominations in the pipeline. As of mid 2021, Curve tends to see hundreds of millions of dollars in trading volume each day in these pools.

Liquidity providers stake about 10 billion dollars into Curve’s stablecoin pools across Ethereum, Polygon, and Fantom. The benefits of being a liquidity provider are to receive a portion of any trading fees, as well as reward gauges offered in some pools. Most pools also provide the option of receiving rewards in $CRV, the native governance token.

A major benefit of $CRV is the ability to lock it for veCRV, which earns owners an even greater share of trading fees. Owners of veCRV also can vote on Curve governance issues, including a mechanism for boosting liquidity provider rewards in certain pools. Two other major protocols, Yearn and Convex, rely heavily on veCRV boosts to generate yield and are locked into what some fans refer to as the “Curve Wars.”

Curve is not just a money factory. The existence of Curve’s stable and secure liquidity pools has allowed an entire ecosystem of DeFi projects and services to be built off of Curve’s backend. Curve operates a pool factory, allowing users to generate their own pools built on Curve’s infrastructure. Many sites within DeFi integrate directly with Curve pools to allow users to make transactions or earn yield on coins.

Prior to v2, Curve relied on the Synthetix backend to allow cross-asset swaps between any denomination of Curve pools. This allows for large exchanges between, say, dollars and bitcoin with very low slippage. As of the time of this writing, nearly a billion dollars worth of cross asset swaps have been performed.

With the release of Curve v2 we’re likely to some volume of cross asset swaps directly through pools containing different denominations of currency. The TriCrypto pool containing dollarcoins, Ethereum, and Bitcoin looks to be the first of several pools allowing direct trading.

If you are interested in learning more about Curve, they maintain an active community on Telegram and Discord. Additionally, their contracts are all open source and hosted on Github.

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