Uniswap and Sushi have all proven that decentralized exchanges can beat Coinbase and other centralized exchanges at their own game.
But Curve Finance (CRV), a decentralized exchange for stablecoins, demonstrates something different altogether. It enables fast, efficient, and low-friction stablecoin swaps, proving that decentralized currency exchange not only works but is far better than traditional forex.
What is Curve Finance?
Like Uniswap, Curve is a decentralized exchange for trading cryptocurrency assets. The key difference between them is that on Uniswap, you can swap any ERC-20 token (as long as there’s liquidity), whereas Curve is specifically for trading stablecoins on Ethereum.
Curve currently supports trading for the following stablecoins: DAI, USDT, USDC, GUSD, TUSD, BUSD, UST, EURS, PAX, sUSD, USDN, USDP, RSV, LINKUSD. Additionally, you can trade ETH, LINK, and a handful of tokenized BTC assets like wBTC and renBTC.
How Curve Finance works
By now it should be clear that Curve is like Uniswap but for stablecoin trading. To grasp how Curve works, let’s do a quick review of what AMM protocols are — because Curve is an AMM protocol. The Curve AMM model has four main components:
Liquidity providers are people who deposit tokens to the Curve liquidity pools.
Liquidity pools are where liquidity provider tokens are kept to create exchange liquidity.
Traders swap tokens with the liquidity pool, creating buy and sell pressures that help determine token prices.
AMM algorithms efficiently price the tokens in the liquidity pool according to various factors, such as buy and sell pressures driven by traders.
AMMs, short for Automated Market Maker, work using smart contract-enabled algorithms to efficiently price cryptocurrency assets in liquidity pools on the exchange, thus eliminating the need for counterparties.
In contrast, centralized exchange trades are made against order books. Because order books entail that the centralized exchange owns the assets on the book, they are the counterparty to every trade.
Since trading stablecoins using Curve doesn’t involve an order book or counterparties, you might be wondering where the exchange’s liquidity is coming from. It comes from users who deposit supported stablecoins into liquidity pools to become liquidity providers.
Put another way, Curve crowdsources its liquidity, uses algorithms to determine the prices of liquidity pool assets, then enables traders to trade with the pool via smart contracts.
Why Curve is better than Uniswap for trading stablecoins
Curve is consistently ranked just below Uniswap in terms of TVL (Total Value Locked). According to the all-important DeFi Pulse charts, Curve has nearly $6 billion worth of liquidity locked in, just shy of Uniswap’s $6.86 billion.
The reason Curve keeps adding TVL despite less name recognition than Uniswap is Curve’s sole focus is swapping stablecoins, a niche with little to no competition. Being purpose-built as a crypto-forex market also means Curve offers both traders and liquidity providers key advantages:
Low trading fees — Curve offers traders far lower trading fees for stablecoin trades than Uniswap (0.3% per trade at Uniswap vs. 0.04% on Curve).
Minimized slippage — Whale traders and high-volume trading pairs are subject to slippage, but Curve’s similar asset pools minimize this.
No impermanent loss — Liquidity providers on Curve supply stablecoin pairs that nearly eliminate impermanent loss.
Uniswap always trades against ETH, so to accomplish as direct (and cheap) a trade as possible, you need to trade using ETH or for ETH. If you try to trade from USDT to USDC, Uniswap will turn your USDT into ETH, then trade ETH for USDC. Your swap will require two trades, making it more expensive to carry out.
Trading stablecoins on Curve is cheaper because Curve doesn’t require ETH as a base pair for trades. Stablecoin liquidity pools are brimming with supply, enabling you to trade stablecoins directly in one inexpensive swap.
If you watch DeFi Pulse when the cryptocurrency market dips, you’ll notice Curve retains TVL while other exchanges lose theirs. This has to do with the unique way Curve protects liquidity providers from impermanent loss.
Impermanent losses are LP profits lost when crypto price volatility unfavorably rebalances the pair assets. Since all liquidity pools require you to deposit a pair of assets, risk increases when one of them rises or falls faster than the other. Ideally speaking, you should maintain an even 50/50 value balanced between your pooled assets.
Curve uses stable pools to walk around the impermanent loss problem. All Curve pools are either 1:1 stablecoin pools (i.e., USDT/DAI) or 1:1 synthetic token/token pools (i.e., sETH/ETH). In keeping liquidity pool pairs restricted to assets that reflect one another in value, impermanent loss is a non-issue, making Curve a safe haven for liquidity providers like the one below.
So, is Curve better than Uniswap for trading stablecoins? The answer is yes — and it’s also a safer place to park your stablecoins, ETH, and wrapped Bitcoin for steady yield income.
Using Curve pools to earn DeFi profits
Right now, Curve is the only name in crypto when it comes to stablecoin trades. Curve’s deep liquidity and efficient market maker attract frequent whale-sized trading volume (which you can follow here).
Curve’s daily trading volume is averaging just under $200 million. Every trade earns a 0.04% trading fee paid to LPs, but that’s not the only way to profit from providing liquidity to Curve.
Trading fees — Every trade conducted through the pools you’re LPing earns profits paid in proportion to your share of the pool.
Yield farming — Deposits in liquidity pools that aren’t utilized are deposited into other DeFi protocols to generate additional revenue.
High APY — Annual Percentage Yields for stablecoin deposits on Curve are high because Curve also yield farms with pooled assets.
veCRV token — Locking CRV tokens converts them into veCRV, which is used to boost your deposit APY.
Boosted pools — To garner additional liquidity, some pools offer incentives like ridiculously high yields for LPs.
Curve is a one-stop powerhouse for yield farming stablecoins. As a liquidity provider, you can mix and match any of the income streams mentioned above to maximize your yields.
Curve token (CRV) and veCRV explained
CRV is the native utility token of the Curve protocol. It has four main use cases: governance, LP rewards, boosting yields (as veCRV), and token burns.
Curve is a decentralized exchange and is community-governed. Decisions are made onchain at gov.curve.fi by CRV holders who vote-lock their tokens to convert them into veCRV.
Liquidity pool rewards and incentives are paid in CRV to LPs based on the size of poolshare.
Not all trading fees are redirected to LPs. A small portion of fees is collected and used to buy and burn CRV, thus reducing CRV supply.
veCRV stands for vote-escrowed CRV, a fancy name for CRV that’s been locked into the Curve protocol for a defined time. veCRV is used for voting in governance, boosting rewards, earning trading fees, and receiving airdrops.
When you time-lock your CRV into veCRV, you can select as much (permanent lock) or as little (one day) time as you want. Get the most from your CRV by locking it as veCRV for as long as possible. That’s because veCRV locks decay over time. If you lock CRV for one year and receive 200 veCRV, six months later you’ll have 100 veCRV — unless you maintain the one-year lock.
In other words, the longer you lock, the more veCRV you get for your CRV. Why do you want as much veCRV as possible? Because veCRV holders earn profits from exchange fees. Today, veCRV holder APY is roughly 10%, but that number is subject to change depending on trading volume.
Curve is a fairly complex protocol, which means veCRV adoption is low but steadily increasing as yield farmers begin to understand its true potential.
If you’re looking to stake a long-term, as in permanent, claim on Curve DAO fees, Yearn developers have built just the vault for you. Called the Backscratcher Vault, this vault allows you to permanently deposit your veCRV (and thus your CRV) for a lifelong claim on Curve’s yearly fee earnings. No, you won’t ever get your CRV back, but if Curve continues its upward trajectory, that shouldn’t be a problem.
Curve is the ultimate DeFi lego block
Cheap, low-slippage stablecoin trades gravitate people toward Curve, but the reason to stay is something else altogether. Simply put, no other DeFi protocol is so deeply enmeshed with the entire DeFi ecosystem as is Curve.
Ethereum-based DeFi apps and protocols able to natively plug and play with each other are called money legos. Like legos, Curve and other DeFi protocols connect to build financial structures that embody the saying the whole is greater than the sum of its parts.
DeFi applications like Yearn Finance, Compound, AAVE, Synthetix, Sushi, Badger DAO, Cream Finance, Pickle Finance, and Fantom all use Curve pools. The sheer volume of liquidity coming into Curve from these sources drives Curve’s overall TVL and puts pressure on CRV circulating supply.
For instance, Yearn offers high-APY stablecoin vaults that deposit tokens into CRV pools as part of their automated farming strategy. To increase returns to vault holders, Yearn buys CRV and automatically escrow-locks it into veCRV for the maximum of four years to gain an APY boost.
As time goes on, CRV tokenomics increasingly appear to have been created by a stroke of genius. A nexus of incentives and rewards around stablecoin pool yields turn billion-dollar protocols like Synthetix into CRV holders, along with retail farmers simply looking for the best yields for stablecoin deposits.
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