avatarGianmarco Guazzo

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Guide to Curve Finance

Curve Finance is one of the most popular and widely used decentralized exchanges (or DEX) above the Ethereum Blockchain.

Launched in January 2020 Curve has quickly become one of the central protocols within the dynamics of DeFi, offering users the ability to earn excellent returns on cryptocurrencies held. Defined as a Liquidity Aggregator, Curve is actually a DEX designed to trade Stable Coins efficiently through an AMM (Automated Marker Maker) algorithm. Its main goal is to allow users and other decentralized protocols to trade their Stable Coins through it with low fees and low slippage (or arbitrage). The main Stable Coins traded on Curve Finance are those pegged to the dollar, such as USDC USDT or DAI, while for tokens we find WBTC (or WrappedBTC) or the decentralized alternative renBTC. But how exactly does this protocol work?

The history of the protocol and the peg problem

Curve Finance is the brainchild of Michael Egorov, founder of NuCypher and PhD in physics, who towards the end of 2019 noticed a big problem in the world of DeFi. Stable coins, a fundamental part of the whole ecosystem, are based on the concept of price stability and anchoring to a particular currency, very often the dollar. In many protocols the price anchor, also called peg, was anything but stable and, indeed, prices fluctuated so abruptly that many open positions were liquidated. The whole world of DeFi is based on the concept of:

  • peg stability,
  • oracle data security,
  • scalability of the Ethereum Blockchain.

Lacking the central one, an AMM algorithm was developed for arbitrage in the various Stable coins trying to stabilize the Peg as much as possible.

Curves and liquidity pools

The liquidity pools are Smart Contracts that manage a pair of tokens, such as DAI-USDC allowing users to exchange one token over another. If for example, we were to create a pool of DAI and USDC where 1 DAI = 1 USDC we would have to add the same amount of tokens, say 10000 each in the pool (10000 DAI and 10000 USDC). Through these Smart Contracts you can then do two things: or add liquidity, adding tokens in the pool, or trading one token against another. The algorithm at the base of Curve has the objective of maximizing liquidity within the pool by providing a much lower price slippage than competitors such as Uniswap or Balancer.

Every time someone makes a trade on Curve Finance, the Liquidity Providers receive a small commission divided equally between all participants. In addition to receiving a commission for each trade or swap, similar to Uniswap, some of the liquidity is provided to lending protocols as a Compound in the background, thus earning extra interest in addition to trading commissions. It should be noted that since commissions are very dependent on daily volumes, APIs can vary greatly. The main advantage, therefore, of becoming a Liquidity Provider on Curve is to receive in addition to trading commissions also interest from the protocols to which liquidity is provided.

The yEarn algorithm and yPools

The algorithm that provides liquidity to other protocols is called yEarn and is essentially an aggregator of liquidity and performance. The yPools are Curve Finance’s liquidity pools that use this algorithm to automatically balance Stable Coins with the best rates within the DeFi ecosystem. The protocols used are e.g. Compound and Aave, and although the returns are high the yPools are considered the riskiest as they rely on platforms that are equally exposed to risk.

As explained above, liquidity pools are excellent tools to maintain a stable anchorage of Stable Coins. Within Curve we find different pools in which there can be more or less stable pegs. For this reason there are pools of liquidity in which in addition to receiving commissions and interest you also receive tokens from protocols such as Synthetix, or SNX. In this way users are incentivized to add liquidity to the pool allowing the pair to stabilize trying as much as possible to anchor the peg.

CRV token

Curve Finance also has a governance token called CRV, or Curve DAO Token, to make the protocol as decentralized as possible. In addition to the CRV token we also find the Vesting token, or veCRV, which implements a complex time-based token staking system to claim the cash flows generated by the protocol. Currently, the CRV token has a market capitalization of around $650 million entering the top 100 of all available cryptocurrencies and tokens.

Curve Finance is undoubtedly one of the most important DEXs in the DeFi ecosystem both in terms of how it works and the innovations introduced since its mainnet launch. At the time of writing this article it ranks fourth on DeFi Pulse for funds locked in Smart Contracts with nearly $4.3 billion. The protocol has passed several security audits but we are still talking about a very young project. For both users and investors it remains an excellent platform to invest part of their cryptocurrencies stuck in wallets.

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