Curve Use Case
Curve DAO is a truly decentralized trading platform. Forgoing market speculation and volatility in favor of stability and liquidity, Curve has become a strong contender in the Ethereum trading landscape.
What is the Curve DAO and how is its native token, CRV, used?
What is Curve (CRV)?
Curve DAO is an Automated Market Maker built on top of the Ethereum blockchain. It allows for the trading of stable or similarly behaving digital assets on its platform without an intermediary. The platform is interoperable with other Decentralized Finance (DeFi) protocols within the Ethereum ecosystem such as Yearn, Convex, and Compound. This allows users to generate income and participate in a range of DeFi options.
Curve is similar to other AMMs like Uniswap or Raydium, however, its unique difference is the type of assets it provides liquidity to for trading. Curve only facilitates trading between two assets that behave similarly like stablecoins or wrapped tokens (for example wBTC and renBTC). This allows Curve to provide low fees, stable liquidity and efficient trading and prevents significant slippage.
The native ERC-20 token, CRV, is used as a governance token within the Curve Decentralized Autonomous Organization (DAO). This token can be bought or earned through providing liquidity.
The Curve Finance protocol was launched by Michael Egorov (founder of NuCyhper) and the Curve team in January 2020. During the initial phase, the platform was managed by the Curve team but on August 13, 2020 they launched the CRV token and changed to a fully decentralized governance system called the Curve DAO (Decentralized Autonomous Organization). All CRV token holders can participate in deciding the roadmap of Curve going forward.
Curve Use Case: Automated Market Maker
Automated Market Makers are a vital component of Decentralized Exchanges. A decentralized exchange allows the trading of digital assets or tokens automatically without an intermediary.
In centralized exchanges, buyers and sellers set prices they will buy and sell assets for and the exchange manages these transactions as a trusted third party. They also facilitate the trading of tokens at market price which is done using centralized reserves that the exchange manages.
To use a centralized exchange, token holders must use a custodial wallet. Users can have their access disrupted or withheld by the exchange. Many users wish to avoid this and in a DEX, tokens are traded automatically between users using their own wallets.
Centralized exchanges have also been targeted by hackers. The popular exchange platform, MtGox, was hacked in 2011 and Bitcoin to the value of $8.75 million was stolen from users. Decentralized exchanges are secured by a large number of servers spread globally.
An AMM like Curve lets users trade tokens automatically without an intermediary by using decentralized reserves of tokens called liquidity pools. Prices are set automatically based on supply and liquidity using a mathematical equation that removes the need for a third party to match buyers and sellers.
Curve Use Case: Providing Stable Liquidity
As an Automated Market Maker, Curve maintains large, decentralized, liquid reserves or “pools” of tokens. These liquidity pools allow trade between cryptocurrencies without an intermediary. In most AMMs, pools are usually created by pairing two tokens together in a 1:1 ratio. Liquidity providers lend these tokens in pairs to the Curve platform in return for CRV tokens and a portion of the trading fee and users can trade against these pools for a small fee.
A liquidity pool is designed to maintain the balance of the two tokens and allow the buying and selling of tokens. So say you want to sell DAI tokens on Curve, in a pool of DAI-USDC, this would add DAI to the pool and cause an imbalance in the pool’s ratio. The Curve liquidity pool will then sell DAI at a slightly lower token price in the pool to incentivize the selling of USDC for DAI which leads to an increase of USDC in the pool. As a result the ratio of tokens becomes balanced again and the prices stabilize.
Curve Pools and CRV Token Rewards
Every Curve pool is created out of tokens or assets that behave similarly. As these assets are stable to each other in price, trading with these pools causes little price volatility compared to pools with tokens of different values (such as a pool of Ethereum and Bitcoin).
This means, even with high trading volumes, the prices of the tokens in relation to each other will not vary hugely. This will avoid large spillage (when the token value at the time of an order differs from when the order is executed), impermanent loss and other risks associated with liquidity pools.
As a result, Curve pools can be made of 3 or even 4 tokens paired together. They can be created by coins that are pegged to the value of a fiat currency (stablecoins) like USDT, USDC and DAI. Wrapped tokens like RenBTC and wBTC (pegged to the value of Bitcoin) can also be used to create Curve pools.
Liquidity providers who lend their tokens to the Curve network earn rewards in the form of CRV tokens as well as a small trading fee of 0.04%. Curve is designed to incentivize long-term participation in the liquidity system.
As a result, CRV tokens are given as rewards based on how much liquidity a user provides and how long they provide liquidity for. When the launch of the CRV token was announced, liquidity providers were given rewards retroactively based on the liquidity they had provided earlier that year.
Curve Use Case: Governance
The CRV token plays a vital role in the governance of the Curve platform. Originally Curve followed a centralized governance model. Although users could make suggestions on forums, changes and upgrades were developed by the Curve team. However, in August 2020, Curve launched the CRV governance token and moved to a decentralized governance system.
Governance in Curve is carried out by the Curve DAO (Decentralized Autonomous Organization). A DAO is a protocol or organization that is represented by rules encoded in code as smart contracts and controlled by the members. There is no hierarchy or management team in a DAO and decisions are made using a voting system that involves all members.
How Governance on Curve Dao Works
Any CRV token holder can lock their CRV tokens to participate and make proposals. CRV holders may “stake” their tokens on the platform and lock them in fixed periods of between one week and four years to decide their voting weight.
CRV token holders are given a voting token called veCRV (vote-escrowed CRV) based on the amount of CRV tokens staked and the length of time they are staked for. Voting power is based on the amount of veCRV held.
Updates that can be voted on include trading fees, rewards schedules, the creation of new liquidity pools. Once voting is complete changes are carried out automatically by the smart contracts behind the Curve DAO.
As a truly decentralized protocol, CRV token holders can have a meaningful say in the future of the Curve DAO. A lack of a CEO or central organization means the Curve platform is less susceptible to rug-pulling and the community must come to a consensus for changes to occur to the network. This avoids hard forks occurring like has been seen in Ethereum when it split into Ethereum and Ethereum Classic after a hack or in the creation of Bitcoin Cash.
CRV Going Forward
Curve DAO has become one of the most popular DeFi protocols in the Ethereum ecosystem because it provides a stable form of liquidity and trading rather than being susceptible to market volatility. Its interoperability with other DeFi services like Compound and Yearn have made it an important element of the DeFi landscape.
The launch of the CRV token helped catapult the Curve protocol to one of the most successful DeFi apps on Ethereum. The CRV token is distributed as a reward to liquidity providers and can be used to take part in the decentralized governance system of the Curve DAO. As a truly decentralized and successful DeFi application, Curve looks set to maintain its position in the cryptocurrency market.