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Last updated: Jan 05, 2024
Curve Finance is a decentralized finance (DeFi) protocol launched in January 2020, primarily focused on the trading of stablecoins, known for its low fees and minimal slippage. Originally launched on the Ethereum blockchain, Curve was founded by Michael Egorov, a physicist turned blockchain entrepreneur. The platform aims to provide a cost-effective and secure solution for stablecoin exchanges. At its core, it employs an automated market maker (AMM) model to facilitate liquidity and trade execution. This unique focus on stablecoins and efficient trading mechanics, propelled by Egorov's vision to streamline stablecoin trading, has established Curve Finance as a significant player in the DeFi space, as the project expanded throughout the years to now be launched on multiple blockchains - Arbitrum, Polygon, Optimism, BNB Smart Chain, Gnosis, Phantom, Avalanche, Kava, Celo, Moonbeam, Aurora, and Base.
Curve Finance's journey through various updates and developments in the DeFi space has been marked by several key events:
Convex Finance significantly influenced Curve Finance's growth. It helped manage the high inflation rate of Curve Finance's native token by providing a mechanism for stakers to deposit CRV and receive cvxCRV tokens. This system has been crucial in maintaining a high percentage of CRV tokens locked up and staked, thereby enhancing the earnings of Curve Finance liquidity providers.
Curve Finance experienced intense competition within the DeFi space, notably illustrated by the "Curve Finance Wars". This involved various DeFi protocols, including Yearn Finance, Convex Finance, and StakeDAO, competing to influence Curve Finance’s governance and attract liquidity to their respective stablecoin pairs. One notable incident involved Mochi Inu, which attempted to dominate the rewards system on Curve Finance, leading to intervention by Curve Finance's EmergencyDAO to maintain the protocol's integrity and security.
Curve Finance introduced its own decentralized stablecoin, CrvUSD, a collateralized-debt-position (CDP) stablecoin based on the Lending-Liquidating AMM Algorithm (LLAMMA). This development was aimed at attracting more liquidity providers and creating a new revenue stream for the protocol.
At the heart of Curve Finance is its AMM system. Unlike traditional exchanges that use order books to match buyers and sellers, AMMs use mathematical formulas to automatically set prices and execute trades based on the liquidity available in their pools. In Curve Finance's case, the AMM is optimized for stablecoin trades, which typically experience less price volatility compared to other cryptocurrencies. This optimization allows for efficient trades with minimal slippage – the difference between the expected price of a trade and the executed price.
Users, referred to as liquidity providers (LPs), supply assets to Curve Finance's liquidity pools. In return, they earn a portion of the trading fees generated from the swaps taking place in these pools. Additionally, LPs receive rewards in the form of CRV tokens, Curve Finance's native governance token. This incentivization encourages users to add liquidity to the platform, ensuring there's always enough supply for trades.
Curve Finance's StableSwap exchange is built on a sophisticated smart contract architecture designed to optimize the trading of stable assets.
Each Curve Finance pool is a smart contract that implements the StableSwap invariant. This invariant contains the logic for exchanging stable tokens like USD-pegged stablecoins (e.g., DAI and USDC), as well as other assets like ETH and wrapped BTC which are stable in relation to each other. This design aims to allow for highly efficient stablecoin trades with significantly lower slippage.
Curve Finance pools implementing the StableSwap invariant come in different flavors. The simplest form is a plain pool with two or more tokens. More complex variants include lending pools, which hold wrapped representations of the underlying tokens that are lent out on other protocols (like Compound or Yearn), and metapools, allowing for the exchange of one or more tokens with the tokens of one or more underlying base pools.
In lending pools, the main difference compared to plain pools is that they do not hold the underlying token itself but a wrapped representation of it. These pools allow liquidity providers to receive interest generated on other platforms in addition to fees from token swaps in the pool.
A metapool is a special type of pool where a stablecoin is paired against the LP token from another pool, known as the base pool. This setup provides an opportunity for base pool liquidity providers to earn additional trading fees and potential CRV rewards by staking their LP tokens in the metapool’s liquidity gauge.
The CryptoSwap Exchange, on the other hand, caters to more volatile assets known for their price fluctuations and require a different approach to trading.
Curve Finance’s CryptoSwap uses an algorithm that's adapted to handle the price volatility inherent in these assets. This includes mechanisms to manage liquidity effectively even with significant price movements.
To handle the volatility and ensure efficient trades, the CryptoSwap concentrates liquidity around the current prices of the assets. This means that as trades occur and prices shift, the pool adjusts its internal price to maintain liquidity where it's most needed, without creating losses for the pool.
Curve Finance's CryptoSwap Exchange uses a dynamic fee structure, where fees adjust based on pool balance. The minimum fee parameter applies in a balanced pool, while the maximum fee is charged in imbalanced conditions, with another parameter determining how quickly fees increase. These fees are set through the protocol's governance process, involving CRV token holders who propose and vote on changes, including fee adjustments. For instance, trading Ethereum for USDC in a balanced pool incurs the minimum fee, which rises if the pool leans heavily towards Ethereum.
Curve Finance's Registry, specifically the MetaRegistry, plays a crucial role in streamlining third-party integrations. It functions as a Curve Finance Pool Registry Aggregator, offering an on-chain API for various properties of Curve pools. This is achieved by consolidating different registries into a single contract, integrating multiple ChildRegistries with RegistryHandlers. Each RegistryHandler acts as a wrapper to ensure compatibility with the MetaRegistry's ABI standards.
The MetaRegistry provides an array of functionalities useful for integrators. Key features include:
For example, if a third party wanted to know the number of coins in a specific pool, they could use the get_n_coins method. Similarly, if they needed to understand the fee structure of a particular CryptoSwap pool, they could use the get_fees method, which would return parameters like fee, admin_fee, mid_fee, and out_fee.
The MetaRegistry is designed to simplify the incorporation of Curve's protocol into decentralized applications (dApps), especially when multiple on-chain registries are involved. By providing a unified API, it significantly eases the process of gathering relevant details about Curve pools for on-chain integrators.
Curve Finance's Pool Factory is a feature that enables the permissionless deployment of liquidity pools and gauges. This functionality aims to enhance the flexibility and accessibility of Curve's ecosystem.
The Pool Factory allows any user to deploy a Curve pool without needing special permissions or intervention. Users can deploy a wide range of pools, including:
Alongside pools, users can also deploy so-called gauges. Gauges are mechanisms through which liquidity providers in Curve pools can stake their liquidity provider (LP) tokens to earn rewards, usually in the form of CRV tokens.
Curve's factory contracts come with built-in functions that feed information about the created pools to the MetaRegistry. This integration ensures that data about new pools is readily available for on-chain use and third-party integrations.
Imagine a user wants to create a liquidity pool for a new stablecoin. Using Curve's Pool Factory, they can deploy a metapool pairing their stablecoin with an existing pool of stablecoins. They can also set up a gauge for this pool, allowing liquidity providers to earn rewards.
Curve Finance's Liquidity Gauges are a fundamental component of the platform’s ecosystem, primarily serving two purposes: minting CRV tokens and managing liquidity within the protocol.
Liquidity Gauges are smart contracts in Curve's DeFi platform used to measure and incentivize liquidity provision within the protocol. They play a key role in distributing Curve's governance token, CRV, to liquidity providers. The amount of CRV minted and distributed is proportional to the amount of liquidity a user provides and the duration for which it's provided.
Curve has various types of gauges, each catering to different liquidity pools and strategies. This includes simple gauges for stablecoin pools, more complex ones for pools with volatile assets, and others designed for specific integrations or functionalities.
Liquidity providers stake their liquidity provider (LP) tokens in these gauges. The staked LP tokens represent the liquidity provided in Curve's pools. Over time, these gauges calculate the amount of liquidity provided and accordingly distribute CRV tokens as rewards.
CRV token holders can vote to allocate "weights" to different gauges, influencing the rate at which CRV rewards are distributed across various pools.
Imagine you're providing liquidity in a Curve stablecoin pool. By depositing your assets into the pool, you receive LP tokens. You then stake these LP tokens in the corresponding liquidity gauge. Depending on the gauge's weight (determined by governance votes) and the amount of liquidity you provide, you periodically receive CRV tokens as a reward.
By offering CRV rewards, Curve’s liquidity gauges aim to encourage users to provide liquidity, which is vital for the efficiency and stability of Curve’s trading pools.
The CRV token is Curve Finance's native governance token, playing a pivotal role in the decentralized governance and incentive structures of the platform. It is used for voting on governance proposals and for various incentive mechanisms.
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 tokens are distributed to liquidity providers through Curve's Liquidity Gauges. This distribution serves as a reward for providing liquidity to the different pools on the platform.
By staking their liquidity provider tokens in Curve's liquidity gauges, users can earn CRV tokens as rewards, thus incentivizing the provision of liquidity. CRV holders can lock their CRV tokens for a certain period, enhancing their voting power and earning potential within the platform. The longer the locking period, the greater the influence in governance decisions and potential rewards.
Token holders have the right to propose and vote on changes to the Curve protocol. This includes decisions on fee structures, liquidity pool parameters, and the development direction of the platform. The voting power of a CRV holder is proportional to the amount of CRV they hold.
As with most cryptocurrencies, CRV tokens can be traded on various exchanges. They also serve specific utilities within the Curve ecosystem, such as boosting rewards when locked.
Suppose you are a liquidity provider in one of Curve’s stablecoin pools. You will receive LP tokens for your contribution. By staking these LP tokens in a liquidity gauge, you start earning CRV tokens as rewards. If you choose to lock these CRV tokens, your influence in Curve's governance increases, and you may receive higher rewards.
Curve's crvUSD is a novel stablecoin utilizing the LLAMMA (Lending-Liquidating Automated Market Maker Algorithm) mechanism. crvUSD is a collateralized-debt-position (CDP) stablecoin. This means users can mint crvUSD by depositing collateral into the system. The value of crvUSD is pegged to the US Dollar, maintaining a 1:1 ratio.
Users can post various crypto assets as collateral to mint crvUSD. The type of assets accepted as collateral is determined and approved by Curve's decentralized governance processes.
The pegging mechanism of crvUSD aims to ensure stability, making it suitable for users seeking to avoid the volatility typical in the cryptocurrency market. By using a range of crypto collaterals and the LLAMMA mechanism, crvUSD is designed to provide a more capital-efficient stablecoin mechanism.
The operation and parameters of crvUSD, including the collateral types and liquidation thresholds, are governed by Curve's decentralized governance framework.
The LLAMMA mechanism is an innovation in the stablecoin domain. It integrates an automated market maker into the stablecoin system to manage the process of liquidation and collateral. Instead of abrupt liquidation processes typical in other systems, LLAMMA employs a soft-liquidation mode. If the price of the collateral decreases and the loan enters a risky zone, some of the collateral is automatically converted into crvUSD to reduce the loan's risk. Conversely, if the collateral's value rises, the system can reclaim some of the collateral, benefiting the user.
The Curve DAO represents the decentralized governance model of Curve Finance. It allows CRV token holders to propose and vote on changes to the protocol. This encompasses decisions on fee structures, the addition of new pools, changes in liquidity incentives, and other protocol upgrades.
Participation in the Curve DAO is open to all CRV token holders. However, the influence in governance decisions is proportional to the amount of CRV a participant holds and stakes in the DAO.
CRV holders can submit proposals for changes or upgrades to the Curve protocol. These proposals might include technical changes, strategic decisions, or community initiatives. Votes are cast by CRV holders, with the weight of each vote being determined by the number of tokens a user has locked in the DAO. The longer the lock period of CRV tokens, the greater the voting power. Once a proposal is approved through the DAO voting process, the changes are implemented in the Curve protocol.
A portion of the trading fees generated within the Curve platform can be distributed to CRV holders, particularly those who actively participate in the DAO. Thus Curve DAO creates economic incentives for CRV holders to engage in governance, contributing to the protocol's health and longevity.
Curve Finance is accessible on various blockchain networks. To begin, ensure you have a compatible blockchain wallet like MetaMask, Trust Wallet, or any other wallet compatible with your chosen blockchain.
Swapping Stablecoins
Curve Finance specializes in stablecoin swaps with minimal slippage. To swap stablecoins:
Providing Liquidity
Curve Finance allows users to provide liquidity to its pools and earn fees and CRV rewards. To provide liquidity:
Managing Liquidity
Once you've provided liquidity, you can manage your position by adding more liquidity, withdrawing, or claiming earned fees:
Gauge Voting
Curve Finance has gauges for voting on CRV rewards allocation:
CRV Token Staking
Staking CRV tokens allows participation in governance and earning rewards:
Dashboard and Analytics
Curve Finance offers a dashboard for tracking your liquidity, earnings, and other statistics:
Curve Finance, like many DeFi platforms, operates in a decentralized and permissionless environment, which comes with inherent risks. However, Curve Finance has implemented several practices to enhance safety and security.
Curve Finance has undergone multiple security audits by reputable blockchain security firms. The team also continually updates and improves the codebase to address any identified issues promptly.
The platform's decentralized nature reduces the risk of a single point of failure. It operates without a central authority, allowing users to interact directly with smart contracts and control their assets without relying on intermediaries.
The Curve DAO (Decentralized Autonomous Organization) empowers the community, including CRV token holders, to participate in governance decisions, since Curve Finance offers a variety of liquidity pools, each with different assets and risk profiles.
Some liquidity providers on Curve Finance may choose to use insurance services like Nexus Mutual to protect against potential losses due to smart contract vulnerabilities or hacks. Additionally, the platform has introduced mechanisms like the LLAMMA liquidation system to manage risk.
Despite these safety measures, it's important to note that no DeFi platform is entirely risk-free, and incidents have occurred in the past.
Curve Finance, like many decentralized finance (DeFi) platforms, has faced security incidents in the past.
In November 2020, a security incident occurred involving Curve Finance and Yearn Finance. An attacker identified and exploited a vulnerability within the Curve yDAI/yUSDC/yUSDT/yTUSD pool, a pool integrated with Yearn Finance. This exploitation resulted in a substantial loss of funds from the pool.
The attack is said to have led to a significant financial loss, however, the specific number is not publicly disclosed.
Curve Finance collaborated closely with Yearn Finance to address the security breach. The immediate response involved the suspension of affected services, an investigation into the root cause of the exploit, and the development of solutions to mitigate further damage. Additionally, funds that could be recovered were returned to affected users.
In February 2021, Curve Finance encountered another security incident when an attacker successfully exploited a vulnerability within the Curve sUSD pool. The exploit resulted in a loss of approximately $3 million in user funds from the sUSD pool. Curve Finance took swift action to minimize the impact of the exploit - the affected pool was immediately paused to prevent further losses. The platform initiated a comprehensive investigation into the vulnerability, identified the specific issue, and deployed a fix to address the security flaw. Importantly, the Curve DAO, which represents the platform's decentralized governance, made decisions regarding compensation for users affected by the exploit. Users who suffered losses received compensation based on the decisions made through the DAO's governance process.
Curve Finance doesn’t have a distinct roadmap, as the project is fully decentralized and operates through a DAO allowing any token holder to submit development or integrational proposals for the community to vote on in a fully transparent on-chain matter.
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