Ethereum gave birth to the DeFi world, and decentralized exchanges (DEX) are the main concern in this booming sector. Uniswap's DEX Automated Market Makers (AMMs) have a huge effect on the DeFi landscape. Uniswap's AMM model was followed by various DeFi protocols of decentralized exchanges (DEX) on Ethereum and they are still followed by recently launched DeFi projects. One of them is Curve Finance , an exchange similar to UniSwap for stablecoins.
These AMM DEX protocols are often compared for significant competition with centralized exchanges (CEX). But there is one segment where DEXs are already showing great potential and that is stablecoin trading. Curve Finance is at the forefront of this space. By focusing on stablecoins, you can offer traders extremely low slippage, and liquidity providers enjoy little to no temporary loss. Let's take a look at Curve Finance.
What is Curve Finance?
Curve Finance , launched in January 2020, is an automated market maker (AMM) protocol designed to trade stablecoins with low fees and slippage. Curve can call Uniswap for stablecoin trading. Due to the way the pricing formula works in Curve, it can also be extremely useful for trading between tokens that remain in a relatively similar price range.
Curve is not only a great platform for trading stablecoins, but also different tokenized versions of a coin. For example, Curve is one of the best DeFi protocols for exchanging between different tokenized versions of Bitcoin, such as WBTC, renBTC, and sBTC. Curve supports DAI, USDC, USDT, TUSD, BUSD, and sUSD, as well as BTC pairs , and allows users to trade between these pairs extremely quickly and efficiently.
Curve Finance was introduced by Russian physicist Michael Egorov, chief technology officer for a network and information security company called NuCypher. The protocol documentation describes Curve Finance as an exchange liquidity pool on Ethereum. Compared to other DeFi protocols, where Uniswap focuses on maximizing available liquidity, Curve's algorithm places more emphasis on minimizing slippage. Therefore, with Curve, traders save more.
The Curve Finance protocol is currently ranked number five in terms of total locked value (TVL). According to DeFi Pulse, $ 5.61 billion is locked into Curve's liquidity pools, making it the second largest Ethereum DEX after Uniswap. According to sources, each trade on the platform incurs a 0.04% trading fee that goes directly to liquidity providers.
So let's see its main components.
Curve StableSwap Exchange
StableSwap was the previous name for Curve, as its white paper explains StableSwap. So the StableSwap exchange is the core of the Curve Finance ecosystem. StableSwap is a decentralized exchange contract and performs the main functionality of the protocol.
The white paper describes StableSwap as:
“StableSwap provides a mechanism to create cross markets for stablecoins [1] in a way that could be called“ Uniswap with leverage ”. It is a fully autonomous market maker for stablecoins with minimal price slippage, as well as an efficient 'fiat savings account' for liquidity providers on the other side. '
According to the whitepaper, the constant product pricing algorithm used by Uniswap or a generalized constant product invariant used by Balancer to support more than two currencies in a pool, is suitable for assets such as ETH and tokens, it does not work well for something that it is meant to be stable.
So Curve Finance has its middle term invariant called StableSwap invariant which is used to stabilize the amount of tokens in a pool. Curve achieves extremely efficient stablecoin exchanges by implementing the StableSwap invariant, which has significantly less slippage for stablecoin exchanges than many other prominent invariants (e.g. constant product).
Curve Pools
Since Curve Finance is an AMM protocol, it uses liquidity pools instead of order books to facilitate operations. A Curve pool is essentially a smart contract that implements the StableSwap invariant and therefore contains the logic for exchanging stable tokens. While all Curve groups implement the StableSwap invariant, they can have different shades.
There are three types of pools in Curve: Plain pools, Lending pools, and Meta pools.
Plain pools
The simplest Curve pool is a simple Plain Pool, which is an implementation of the invariant StableSwap for two or more tokens. The key feature of a common fund is that the fund contract contains all the assets on deposit at all times.
Liquidity providers can provide liquidity in one, two, or more than two tokens.
Lending Pools
These pools contain the borrowing functionality, so the underlying tokens are lent in other protocols such as Compound or Yearn . The main difference to Plain Pool is that a loan pool does not contain the underlying token itself, but rather a wrapped representation of it. Currently, loan pool assets are lent in four DeFi protocols: Compound, Aave, Yearn Finance, and Cream.
This means that LPs on Curve win in two ways. Every time someone places a trade on Curve, liquidity providers get a small fee divided evenly among all providers. The LPs that provide liquidity to the loan pools also receive interest generated on the loans in addition to the fees from the token exchanges in the pool.
Metapools
According to the documentation, "a metapool is a pool in which a stablecoin is paired with the LP token of another pool, a home pool . " When a user provides liquidity to a group, they receive LP tokens from 3CRV. These LP tokens can be deposited in a metapool, which always contains a stablecoin and an LP token.
Upon depositing the LP token into a metapool, they receive an LP token from the metapool that can be wagered on the metapool's liquidity gauge to earn CRV rewards. The new CVR tokens are minted in a currency contract that generates a new CVR according to the liquidity indicators.
In this way, metapools provide an opportunity for base group liquidity providers to earn additional trading fees by depositing their LP tokens in the metapool.
Curve DAO Token (CRV)
CRV is the native governance token of CurveDAO, a decentralized autonomous organization (DAO) launched in August 2020. The main goals of the Curve DAO token are to incentivize liquidity providers on the Curve Finance platform, as well as engage as many users as possible in the governance of the protocol.
According to the documentation, CRV has three main uses: voting, betting, and pushing. Those three things require users to vote, lock their CRV, and purchase veCRV. veCRV means CRV with escrow vote.
The CRV token can be wagered (locked) on Curve Finance to receive trading fees from the Curve protocol. One of the main incentives for CRV is the ability to increase user rewards on the liquidity provided to them. The vote lock CRV allows users to acquire voting power to participate in the DAO and get a boost of up to 2.5 times the liquidity it is providing in Curve. Once CRV holders vote and lock their veCRV, they can start voting on various DAO proposals and group parameters.
A total of 3.03 billion CRV tokens will be minted. According to CoinMarketCap , there are almost 1.4 million CVR tokens in circulation.
Cross asset swaps
Cross asset swaps are a new type of swap at Curve that uses Synthetix as a bridge. Curve Finance launched cross asset exchanges in January 2018 to provide exchange services to whales.
Cross-Asset Swap allows you to exchange a large amount of BTC or ETH for stablecoins, with little or no slippage. If someone is trading millions, it is impossible to have minimal or no slippage on Uniswap or centralized exchanges like Binance. Curve Cross Asset Exchange can provide exchange services involving millions with very low slippage and low fees
Curve integrates with Synthetix to enable large-scale exchanges between different asset classes with minimal slippage. The Curve protocol can perform cross-chain asset exchanges at scale with a fee of 0.38%.
For example, if a user wants to exchange A for D, then A and D: (i) must be from different asset classes, (ii) must be exchangeable for a synthetic asset within one of the Curve Pools.
According to the documentation, changing A to D will be a four-step process:
1. A will be changed to B in Curve, a synth of the same asset class as asset A.
2. B will then become C, a synthesizer from the same asset class as D.
3. A settlement period passes to account for sudden price movements between B and C.
4. Once the settlement period has passed, C is exchanged in Curve for the desired asset D.
Each unsettled swap is represented by a non-fungible token (NFT) ERC721. Each NFT has a unique token ID. Token IDs are never reused. The NFT is minted at the start of the exchange and burned when the exchange is complete.
Important links
Website: https://curve.fi/
Whitepaper: https://curve.fi/files/stableswap-paper.pdf
Technical documentation: https://curve.readthedocs.io/index.html
Non-technical documentation: https://resources.curve.fi/
Twitter: https://twitter.com/CurveFinance