Curve Empire Chronicles: Capital Never Sleeps

Curve.fi - The TVL champion in the DeFi world, Curve.fi is not a complex DeFi product in terms of functionality, but its ecosystem derived from Curve.fi is intricate and deeply rooted, exerting a huge influence on the entire DeFi world. This article will review some history, explain Curve.fi's economic model, and provide some personal analysis. In the visible future, Curve.fi will become a cornerstone of DeFi, like Uniswap, Maker, and AAVE, and is a project that every DeFi player should deeply understand.

(This article is authorized for reprint from Flynngao, original article here)

The Basic Value of Curve.fi

Curve specializes in large-scale low-slippage stablecoin trading from the get-go, targeting the large-scale stablecoin AMM exchange market. Their unique algorithm ensures minimal slippage in the pool most of the time, extensively covered in many articles, and can be referenced from their whitepaper.

Stablecoin trading is the most suitable scenario for liquidity mining in the AMM field. The traditional AMM mechanism's biggest issue for liquidity providers is impermanent loss. Simply put, in AMM, when the prices of two tokens are relatively stable and there is a large trading volume, it is the most suitable scenario for liquidity mining.

A truly decentralized central bank issuing a consensus-strong stablecoin that is sufficiently usable has always been the ideal of all decentralized Crypto heroes. Here, I have no intention of delving into stablecoin-related progress, but the conclusion is that Curve.fi provides an incubation ground for the development of stablecoins. During the long transition phase, various innovative stablecoins can use Curve to anchor their initial value and buy time for the project's scene development. Curve, as a bridge between these stablecoins, will become a long-term DeFi infrastructure, and the trading volume of these stablecoins is the foundation of Curve.fi's value.

The Mechanism of veCRV: Benefits and Drawbacks

Introduction to the veCRV Mechanism

1. Collects 50% of the trading fees from the Curve protocol, with the fee distribution proportionate to the veCRV stake.
2. Vote Power. The voting mechanism of veCRV is straightforward, with voting power directly proportional to the lock-up time. veCRV decays over time, meaning to maintain sufficient voting power, constant refreshing of the lock-up time is necessary.
3. Boost Mechanism. Boost is an acceleration mechanism for liquidity mining. Without boost, the base rate for liquidity mining is only 40%. By holding a sufficient amount of veCRV, users can increase their boost up to 2.5x, a linear mechanism. The specific algorithm can be referenced in the formula below:

Why veCRV Changed Everything

Time -> Consensus -> Value

The veCRV mechanism has finally been discovered through time. All consensus requires accumulation over time. How to accumulate value over time and how Curve.fi's simple method - lock-up and quantifying the value of the lock-up - voting power. In fact, increasing lock-up for voting power is not a new concept, but why did veCRV succeed? It is mainly due to the synergy with the boost mechanism. Users now have a direct reason to compete for CRV: more votes mean more profits. This forms the basis of the veCRV game. This feature almost permanently locks a portion of CRV for project owners to maintain their power on Curve. Additionally, veCRV combats situations where users buy large amounts of CRV for voting at the last minute and then sell in large quantities after voting ends, maintaining price stability.

The Flaws of veCRV

The voting mechanism + boost mechanism is the foundation of the game, but veCRV itself is non-transferable, meaning voting rights belong only to the address that has staked CRV. Boost mechanism exists only within that address. An address providing liquidity needs a significant amount of CRV corresponding to the liquidity provided to maximize profits. Due to the project's pre-mining and early inflation, in the later stages, users need an excessively large amount of CRV to achieve maximum boost, leading to a split between whales holding a large amount of CRV and small liquidity providers. This flaw in the veCRV mechanism has led to the beginning of a war for optimization platforms.

The Multi-Dimensional War of the Curve Universe

The war surrounding Curve has never ceased since its inception. With more participants joining, the war has become more intense and extended to various corners of DeFi. The following sections will explore different dimensions of this war.

The War for Curve.fi Revenue Platforms

As discussed earlier due to the unreasonable system design of veCRV being non-transferable, and initial project operation issues, CRV holders and liquidity providers are stratified. Recognizing this opportunity, Yearn presented its solution. Especially, yveCRV, led by Yearn, dominated for a long time before Convex. They leveraged their significant CRV holdings to accelerate earnings, attracting deposits and reinvesting 10% of mining rewards back into the curve gauge to continuously increase their boost capability. This is the source of the promised excess returns for their users.

Subsequently, Curve.fi core member Julien Bouteloup proposed his solution: StakeDAO. The competition officially began, and through a vote by the Curve DAO, StakeDAO became the second project after Yearn to receive Curve governance whitelist, the SmartWalletWhitelist CRV custody protocol.

Expanding on Curve's SmartWalletWhitelist, it is a special mechanism to prevent abuse of transferability of veCRV. The whitelist is currently limited to Yearn, Stake DAO, and Convex. The authority to add to the whitelist remains firmly in the hands of the core CRV whales.

Following these events is the current ruler: Convex. Convex's mechanism is a focal point worth examining. Convex utilizes the cvxCRV solution to tokenize and securitize the non-transferable voting rights of veCRV. By permanently converting CRV into cvxCRV, locked by the Convex platform, and using the newly issued CVX token to proxy vote these CRV voting rights, Convex established a cvxCRV to CRV liquidity pool close to 1:1, providing an exit strategy. This setup incentivizes CRV holders to put their CRV into Convex, leading Convex to attract the majority of CRV users, securing over 50% of veCrv to win the optimization platform endgame.

Convex's mechanism rectified the economic model of Curve.fi. Although not perfect from the author's standpoint, it is an excellent solution. The author believes that CRV and CVX should ideally have a more integrated approach. However, this perspective will be left for history to prove. In the following section on liquidity wars, the far-reaching impact of Convex will be discussed.

The Liquidity Rental War Between Algorithmic Stablecoins

Uniswap V3 recently introduced a 0.01% fee structure, directly targeting Curve.fi's stablecoin stronghold. While the overall TVL still doesn't match the 3CRV pool, the lower fee structure has posed a significant threat to transactions below a million dollars.

The essence of the battle for DEX dominance lies in the share of trades involving major tokens: BTC, ETH, and the 3 major stablecoins in 3CRV. In response to being unable to compete with Uniswap in the long tail effect, Curve chose the most rational strategy: a low-slippage AMM solution for mainstream tokens, introducing their algorithm for the ETH/BTC/USDT Tricrypto Pool. Is the Tricrypto Pool a superior AMM solution? It remains to be seen. As a defensive strategy, Tricrypto V2's current TVL and daily trading volume have exceeded expectations, signaling potential for better performance.

The War Between Algorithmic Stablecoins: Ohm/Redacted

Ohm, an unconventional algorithmic stablecoin, cannot currently establish liquidity on Curve due to its unique structure. However, Ohm's close relationship with Frax is widely known. The Ohm community recognized the importance of Curve and Convex early on, as seen in OIP-43, proposing the addition of CVX bonds. This strategic move prepares to confront future competition.

Redacted BTRFLY, backed by Ohm, entered the battle as an optimization strategy above Convex. By leveraging Ohm's mechanism to issue bonds, they attracted a significant amount of CRV and CVX, helping users optimize their CRV and CVX earnings. They refer to themselves as L3, with Curve as L1 and Convex as L2. They successfully attracted a large amount of CRV and CVX, securing a foothold in the voting competition, effectively occupying a seat. The future actions of BTRFLY will likely bring more surprises, yet to be revealed.

The participating forces in the war also include Tokemak, Fei/Tribe, Originprotocol, and Dopex, among many other key players. Due to space constraints, a detailed description of the participating forces in the liquidity war is beyond the scope of this article, but individual power analyses may be explored in the future.

Conclusion

The eternal theme in DeFi is the evolution of capital efficiency. Every member within the Curve ecosystem, including the platform itself, is a leading player in advancing capital efficiency. This underscores the importance of this ecosystem. I hope this article maximizes the understanding of Curverse's form for DeFi players. Further discussions on the possibilities of Curve can be conducted by direct messaging the author on Twitter FlynnGao.