Curve Finance is a decentralized exchange on the Ethereum protocol that’s famous for its focus on stablecoin yield farms. Curve uses an Automated Market Maker (AMM) model, which replaces order books, to supply liquidity to traders. Utilizing smart contracts makes trading more efficient, decentralized, and safer.
Today’s article discusses Curve Finance and the tokenomics behind it. You’ll learn all about how the protocol works, how CRV holders leverage its governance model, and how you can boost yield farming rewards by locking CRV tokens.
Curve Finance is a decentralised exchange on Ethereum designed for stablecoin trading and yield farming. Curve is based on an AMM design that utilises smart contracts for supplying liquidity and facilitating trading.
Like most DEXs, Curve Finance works by allowing investors to deposit tokens to liquidity pools (LPs). Traders wanting to exchange tokens pay a fee to the platform. The AMM takes this fee and gives it to the liquidity provider for providing tokens in the first place.
Liquidity providers generate passive income by depositing to LPs. The interest rate earned depends on multiple factors, including the number of investors participating in the LP.
Curve Finance stands out from most decentralised exchanges by focusing on stablecoins. The focus allows Curve to attract a lot of liquidity from whales and smaller investors. And because there is a lot more liquidity compared to other DEXs, the slippage traders experience is much lower.
The reason Curve attracts so much liquidity is because the DEX offers a much lower trading fee. Traders on Curve pay up to 0.04% per trade, while Uniswap traders pay 0.3% per trade. Although the fee might not make a big difference to the average trader, crypto whales benefit a lot from the lower fee and minimized slippage rate.
Being a DeFi protocol, Curve Finance has a governance model supported by the CRV token that allows holders to directly influence the protocol. A governance model allows Curve to stay decentralized and grant management of the protocol to people who are invested in it.
The following two sections tackle two important topics: CRV’s distribution and use cases.
Curve Finance’s CRV governance token hit the markets in August 2020. The token launched with a supply of 3.03 billion tokens, which were distributed in the following fashion:
Team members and investors received 30% of the token supply. Everyone falling into this group has their tokens vested for up to four years. Employees have their tokens vested for up to two years.
CRV launched with an initial supply of 1.3 billion tokens, representing 43% of the total token supply. The supply was distributed in the following fashion:
The initial pre-CRV liquidity providers had their tokens vested for up to one year. Employees and shareholders retained the original vesting period as described in the previous section.
At the time of writing, CoinMarketCap ranks CRV 85th on its crypto leaderboard. The token has a price of $0.65 and a market cap worth $346 million. The circulating supply stands at 531 million tokens, representing only 16% of the total token supply.
CRV reached an all-time high in August 2020 at a price of $15.37. The token reached an all-time low in November 2020 at a price of $0.33.
CRV is primarily a governance token that enables holders to propose and vote on governance proposals. The token’s secondary use cases are staking and boosting. All three functions require locking CRV tokens and obtaining the veCRV derivative.
Voting involves locking CRV and temporarily obtaining veCRV. You can use veCRV tokens to vote on a number of governance proposals and protocol parameter changes.
Anyone can create a governance proposals. However, all proposals must follow a formal structure which you can read more about at the governance forum. Submitting a governance proposal also requires submitting a corresponding CIP proposal.
You can also submit an official DAO proposal by having at least 2,500 veCRV. This proposal must have a thread on the governance forum that describes the proposal’s intentions, plans, and mechanisms.
There is a major difference between signalling and DAO votes. Signalling votes represent unofficial proposals used to gauge community interest and stir a discussion within the community.
Official DAO votes can enact changes to the Curve protocol. Such changes include editing protocol parameters, introducing new liquidity pools, and proposing new features or changing existing ones.
Staking involves depositing CRV tokens in order to earn yield generated from the protocol’s trading fees. All trading fees have a 50% administration fee which is collected and used to purchase 3CRV tokens. 3CRV is an LP token used on TriPool, and these tokens are distributed to veCRV holders – AKA those who stake CRV.
You can calculate the daily APY rate for staking by using the following formula:
Boosting is a mechanism that allows investors to boost rewards gained from providing liquidity to LPs. Boosting works by locking CRV tokens. Liquidty providers who also vote lock CRV earn a boost of up to 2.5x on the liquidity provided.
You can read more about vote locking here.
Curve Finance is a heavily specialized decentralized exchange that focuses on stablecoin trading and yield farming. Investors can contribute to Curve Finance by investing in CRV and earning the ability to participate in governance proposals. CRV holders can also stake their funds in order to receive an interest rate based on the protocol’s trading fees.
Curve Finance stands out from other decentralized exchanges by focusing exclusively on stablecoin liquidity pools. The DEX has much lower trading fees compared to other exchanges – which as a result grants Curve a lot of liquidity. This abundance of liquidity decreases slippage rates and attracts even more whales.
If you want to learn more about Curve Finance, I recommend visiting the following links:
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