In the early days of cryptocurrency, centralized exchanges (CEXs) were able to lower the entry barrier for starting investors. They provided user-friendly solutions that made buying, selling and storing cryptocurrencies accessible. However, this does create a dilemma as cryptocurrencies were meant to get users back in control of their own funds through self-custody. These centralized exchanges, however, function in the same way as a bank, removing self-custody and re-introducing a single point of failure.
In their search for an alternative to a CEX, users created the first “Decentralized Exchange” (DEX) with smart contracts. This enables users to maintain self-custody over their funds while buying and selling cryptocurrency. The downside of these exchanges are the high slippage costs, the difference between the expected and the eventual price, caused by the underlying smart contract mechanism.
Curve Finance aims to solve this problem with its decentralized exchange that is optimized for low slippage trades against pegged assets such as dollar-pegged stablecoins. Curve achieves this via its unique Automated Market Maker (AMM), a protocol that uses a special formula to price assets. This AMM provides users with low slippage trades and liquidity providers a steady income coming from conversion fees.
The technology implemented in Curve Finance is best illustrated in the inner workings of the AMM. The AMM provides low slippage trades against pegged assets such as dollar-pegged stablecoins for its users; this is achieved through a uniquely designed formula. The formula is a combination of two known AMMs: Constant Price (X + Y = K) and Constant Product X * Y = K).
These formulas represent ways on how to group two assets in a liquidity pool. In both formulas, X and Y represent the pooled assets present inside of the liquidity pool. The K represents the element that is meant to stay constant as people trade in-and-out of a liquidity pool.
The downside of the Constant Price formula is that it would allow, from its design, for the liquidity pool to be fully drained as the price of an asset will always remain the same regardless of the existing balance in the pools. The Constant Product has gained a lot of popularity as the algorithm auto-adjusts the price, ensuring that there is always liquidity at any price. The disadvantage of this model is that it requires enormous liquidity for slippage not to get unnoticed – the price goes up exponentially as we travel away from equilibrium.
By combining both concepts, Curve Finance merges both: the Constant Price formula allows users to have no slippage, but it is not ideal because the liquidity pool can run out of tokens. The Constant Product is self-regulating; however, the user gets a lot of slippage. The combination of the two formulas creates a self-regulating AMM with little to no slippage on the Curve Finance platform.
Due to the specifically designed AMM, the use-cases are limited. The main use-case of the protocol is providing traders with low slippage trades and steady income for liquidity providers. Curve can offer these low slippage trades by accommodating liquidity pools of similarly behaving assets. One of these liquidity pools is the 3pool, the pool consists of three stablecoins, cryptocurrencies pegged to be 1 dollar. Because the pool is composed of stablecoins which experience a similar volatility, the slippage is lowered to a minimum. There is a combined $1.3B worth of assets in the pool and a daily volume of $443.1M.
A liquidity pool cannot exist without the corresponding liquidity. To encourage liquidity providers, the protocol integrates with other DeFi platforms to reward and incentivize liquidity providers to join the Curve platform. These additional income streams compensate for the earnings from the low slippage trades, allowing the liquidity provider to earn a yield of 3-7% on their dollar denominated stablecoins. This provides a compelling argument to get some exposure as a liquidity provider on Curve.
Since the launch of the protocol in 2020, Curve has gained much popularity among cryptocurrency traders and organizations. Various cryptocurrency protocols such as decentralized exchanges, yield aggregators and decentralized autonomous organizations have integrated with Curve Finance due to its low slippage costs and steady earnings. The protocol continues to attract more users as they maintain their current pace of innovation such as trying to solve impermanent loss.
Curve has grown into one of the biggest and most popular DEXs in the market. The exchange has gained a massive following on various communication channels, with 290K followers on Twitter. Investors are also intrigued by Curve as it functions as a DAO, which enables users to vote on the protocols future.
During the month of May, Curve Finance announced that they have integrated with Near protocol’s Aurora network. Aurora has approximately $300M Total Value Locked (TVL) and there are 116+ projects built on the network. The integration with Curve will give the Aurora DeFi ecosystem a layer of DeFi composability and liquidity, while also improving the positioning of Aurora in an increasingly multi-chain future. Curve Finance has been integrated with ten different networks including well-known protocols such as Avalanche, Polygon and Optimism.
Curve Finance offers various liquidity pools and users can provide assets to these pools in order to get rewards in the form of trading fees and the CRV token. Certain pools get more CRV tokens than others; which is decided via the gauge weights. The gauge weight on its part is decided by voting rounds of the protocol. Recently, the stablecoin UST de-pegged and the cryptocurrency is now trading below 5 cents.
After the debacle, the protocol published a proposal to stop all emissions to UST-related gauges. The vote passed with 100% of the voters agreeing to the proposal. This completely eliminates all incentives for anyone to contribute their UST to Curve as no emissions are disbursed to UST-related pools.
Due to its relatively high inflationary supply, yet useful token utility, the market is yet to find a stable price for the $CRV token. Since its inception, the token quickly decreased in price from $4.5 to $0.50 and returned to this high 15 months later in the beginning of January 2022.
There is relatively little history for the $CRV token price as the token only has had one golden cross occur on the daily timeframe, where the 50MA crosses the 200MA from below. In February 2022, there was a death cross that occurred which resulted in a strong downtrend, following the rest of the market.
From the existing price action, a longer-term range has formed with the low at $0.5, median at $2.6 and top at $4.6. Current levels present a good price to start to scale in, yet another 30% could easily occur down to the bottom of the range at fifty cents.
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