Curve Finance Review

What is Curve Finance?

Curve Finance is a decentralized exchange and automated market maker that initially was tailored exclusively for swaps between stablecoins and some similarly pegged assets. 

The project started with a whitepaper on stableswaps published by Michael Egorov in 2019. The protocol was launched on Ethereum in January 2020. Since then, Curve Finance expanded on other chains and L2 solutions, however, Ethereum remains the priority network in terms of further development of the protocol, according to its founder.

Since August 2020, Curve Finance operates in a decentralized manner and is governed by Curve DAO launched alongside its native token CRV which is used for governance and incentives. 

Curve Finance is backed by TrueWay Capital and Codex Venture Partners. 

How does Curve Finance work?

Curve Finance is a non-custodial exchange liquidity protocol built on Ethereum. Curve Finance is tailored to suit the needs of traders who require low-cost and low-slippage swaps between stablecoins or other pegged assets of similar value. With complicated math at its core, Curve Finance implements its market-making algorithm focused mainly on liquidity depth. Curve allows the protocol to automatically concentrate all liquidity from its LPs around current prices, reducing slippage so that even large amounts can be exchanged with no major changes to the price of an asset.

The idea behind Curve Finance comes directly from impermanent loss concerns which are common for DeFi due to the high volatility of most digital assets. To provide its users with a high volume of liquidity, Curve Finance, like many other AMMs, rewards liquidity providers with trading fees, which are split evenly among all liquidity providers and depend on the trading volume of the protocol. On Curve Finance, liquidity providers are also incentivized by the distribution of the protocol’s native token CRV.  The amount of the CRV token allocated to the liquidity providers is set by the Curve Finance DAO.

The pools offered by the protocol are non-upgradable, which means that their logic cannot be changed or, as the name states, upgraded. Curve pools can be created permissionlessly through a specially assigned protocol called Curve Factory.

There are four types of pools available in the Curve Finance app. First, there are Plain pools. Those pools have two or more stablecoins paired against each other. Plain pools are considered the simplest implementation of the protocol and can contain only ERC-20 tokens. Besides smart-contract issues, Curve Finance itself can experience the risks associated with this kind of pool being connected to the stablecoins of the specific pool, such as systemic issues or coin getting depegged.

The second and more complicated type of pool is the Lending pool. There, two or more wrapped tokens, like DAI, are paired against each other, while the underlying token is lent out on one of the lending protocols. For that, Curve Finance partners with such protocols as Compound, Yearn Finance, and Aave. These pools are usually more expensive to interact with and can be associated with such risks as smart-contract issues with one of the underlying lending protocols, as it is important to understand that a pool like that doesn’t contain the token itself but a wrapped representation of it, like cTokens (Compound) or yTokens (Yearn Finance). However, it is worth mentioning that Lending pool liquidity providers are additionally rewarded with interest from lending protocols.

Metapools pair stablecoins with LP tokens from other pools. Using them, one can also trade one token from that pool with another underlying base pool. 

With the launch of V2 in June 2021, Curve Finance also deployed a new type of pool called Crypto Pool, which trades assets with different prices, like ETH, on Curve Finance. The first pool of such kind was TriCrypto containing  USDT/WBTC/WETH coins.

Curve Finance fees are variable and may differ from pool to pool. Swap fees on Curve Finance are 0.04%, while deposit and withdrawal fees vary between 0% and 0.02%. Users are not charged any fees as long as their deposits or withdrawals do not imbalance the pool in question.

How to use Curve Finance?

To start using Curve Finance, you need to connect a wallet and have some coins native to the chain on which you plan to use the protocol to pay for the network fees. Curve Finance wallet support is diverse and includes such wallets as MetaMask, Frame, Gnosis Safe, Trezor, Ledger, Wallet Connect, Coinbase Wallet, and more.

When depositing into Curve Finance pools, it’s important to understand that whether a user deposits one or several coins, they get exposed to all of the coins in the pool and their lending rates, in case they’ve chosen one of the Lending pools.

When users decide to deposit a token, they should choose a pool and then click ‘Deposit’ in the upper part of the screen. Then they will be able to check the information box in the lower part of the screen that contains all the necessary information about that pool, including price oracle data, CRV APY, and fees. 

It is also worth noting that Curve Finance rewards users whose deposits do not imbalance the prices of the tokens in the pool of their choice. The user can check the slippage indexes after they enter the amount(s) of the token(s) they wish to deposit. If the coin they want to deposit has a low balance in this pool, the liquidity provider will get a small deposit bonus. 

The deposit is completed in several transactions, and the user needs to approve the transaction for each coin they’re depositing.

Liquidity providers on Curve Finance can also profit from using Curve gauges, which measure the assets deposited by the user in dollar terms. Every Curve pool has its liquidity gauge and encourages the liquidity provider to stake their LP tokens to earn CRV tokens. CRV inflation distributed among gauges of Curve pools is controlled by the Curve Finance DAO. There is also a way to boost CRV rewards to earn up to 2.5x on the liquidity provided on Curve Finance, described here.

Pools marked with the word ‘Factory' are created by Curve Finance users and are considered riskier. It is important to understand that even though such pools have certain requirements in terms of volume, the market capitalization of tokens, and contract audit reports, Curve is not responsible for the assets within these pools, and it is recommended to do own research, including checking the token address, before exposing funds to the risks associated with the tokens of such pools. The initial liquidity in such pools is contributed by their creators.

The CRV token

Curve DAO Token, CRV, is a native token on the protocol ecosystem. The token serves as an incentive for liquidity providers, as well as the means of governing the protocol. For both those purposes, it is required to lock CRV and obtain the ​​veCRV token (vote-escrowed CRV) that users receive after locking their CRV tokens. The longer they lock their CRV tokens, the more veCRV they can get.

The max supply of CRV is set to 3.03 billion tokens. Per the distribution plan, 62% of it is intended for the community and liquidity providers, 30% for the team and investors (with 2-4 years of vesting period), 3% for employees with two-year vesting, and 5% to the community reserve.

CRV token staking is also available to liquidity providers of the protocol who wish to receive trading fees, on which there’s a 50% admin fee. The admin fees are used by the protocol to buy the LP token for the TriPool, called 3CRV, and distributed to veCRV holders.

The current circulating supply, the number of CRV tokens locked, as well as the release schedule for the next months can be found here.

Is Curve Finance safe?

Russian physicist and mathematician Michael Egorov is the founder and the CEO of Curve Finance. He graduated from the Moscow Institute of Physics and Technology and received a Ph.D. in Physics in Australia. Before Curve Finance, besides his works in the academic field, he worked at LinkedIn, and has later founded NuCypher, a cryptographic infrastructure tool. Michael Egorov is also known as the founder of decentralized bank and loans network LoanCoin.

Curve Finance is reportedly headquartered in Switzerland, due to the soft stance on DEX regulations from the country’s watchdog, according to Egorov. The Curve Finance team still operates the project and receives tokens in line with a two-year vesting schedule mentioned in the CRV Token section of this review.

At the dawn of the CRV token and its government incarnation, veCRV, the decentralization of the project was called into question. On August 24, 2020, six days into the token's launch, Curve Finance founder Michael Egorov locked 621,860 CRV tokens on a single address, allowing him to own 618,568 veCRVs or 71% voting power at the time. He explained his decision by the fact that users were in no hurry to participate in the management of the platform, and only 6.7% of the CRV tokens in circulation were locked to participate in the DAO, which made it possible for the address owned by the aggregating platform Yearn.finance to acquire 58% of the voting power. Egorov later apologized and called his action an overreaction.

While still holding risks associated with liquidity provision, Curve Finance is regarded as safer, as its pools mainly contain stablecoins. You can find the description of risks associated with each type of Curve Finance pools in the ‘How does Curve Finance’ work section of this article.

There is also a Community Council on Curve DAO, whose members are listed here.

Partners 

Despite Ethereum being the main destination for all future developments, Curve has been deployed on Arbitrum, Avalanche, Fantom, Harmony, Gnosis Chain, Polygon, Optimism, and Polkadot’s parachain - Moonbeam.

Curve Finance has the talent to turn competitors into teammates and this has added a lot to the protocol’s success. The protocol is known to collaborate with both DEXes and centralized exchanges. The most notable cases are partnerships with Compound, Yearn.Finance, Aave, and Synthetix. Curve has special pools for all of them that generate additional yield for users. 1inch DEX aggregator also was among the first protocols to join Curve Finance. Among other smart contracts that use Curve to supplement their need in liquidity, are Paxos, Paraswap, Totle, and Dex.ag. Curve Finance also was among the first members of Ren Alliance which is a consortium of DeFi projects utilizing RenVM.

As Curve Finance operates on different chains its users need to rely on bridges to move assets from one chain to another. Although the protocol does not provide any support for using bridges, it lists some of the important bridges on its docs page. 

What's next?

There’s no time-stamped roadmap for the development plan of the Curve Finance protocol and its future is determined by the DAO, which makes decisions regarding proposals made by veCRV holders.

Links

http://dao.curve.fi/

https://curve.readthedocs.io