The Curve Wars Explained

The Curve Wars has been getting the limelight in the DeFi markets recently due to Curve’s dominance in DeFi and the governance benefits the native token offers. Today, we will be taking a look at the Curve Wars and understand this recent phenomenon in detail.

6 min readJan 11, 2022

To fully understand the Curve Wars, we need to first start with the gist of the problems traditional AMM’s face and the importance of Curve Finance in the DeFi ecosystem.

Automated Market Makers

Automated Market Makers (AMM) are a commonly used strategy by Decentralised Exchanges (DEX’s) to trade on. Instead of market makers providing liquidity for trades to occur in the order book like regular exchanges, the AMM’s utilise liquidity provided from users to facilitate trades. A simple version of how AMM’s works are as follows:

User A provides 2 sided liquidity to BTC/USD pair and receives rewards (known as liquidity farming)
Trader/Investor A executes trades BTC/USD based on the liquidity provided by multiple users like User A

Through multiple liquidity pools like the BTC/USD, DEX’s can offer trading for multiple cryptocurrencies. However, while I painted a rosy picture of AMM’s, in reality, multiple problems deter users from actively using them.

Impermanent loss (Liquidity side) — Occurs when the asset investor provides liquidity in reduces in value, thus creating a net loss for liquidity provider
Slippage for large transactions (Trader Side) — Occurs when large trading orders are executed at a price different from the expected price due to volatility or low liquidity

Enter Curve Finance, the DeFi behemoth

Users in DeFi are constantly holding stablecoins to earn yield at different protocols (cause 5% APY seems better than 0.02% the bank gives, correct?). There is a constant need to swap between different stablecoins to find the perfectly profitable yield for locked values — since the rates change for stablecoins keep changing. For example, the yield for USDC and USDT might be 4% and 5%, respectively, but the yield of USDT yield might reduce to 3% next week, requiring re-adjustment.

Curve Finance is a decentralised exchange (DEX) that focuses mainly on providing an exchange for swapping stablecoins such as USDC, DAI, USDT by users and protocols. In simple terms, it is a DEX that uses the AMM model like Uniswap but exclusively focuses on stablecoins swaps. The unique drawing factor for Curve compared to its competitor’s is its ability to do stablecoin swap with low fees and low slippage and, most importantly, to keep stablecoins pegged to the dollar.

Both low fees and slippage are an absolute necessity for DeFi when it comes to stablecoins. For example, Curve charges a fraction of the fees (0.04%) compared to other DEX’s and has low slippage (less than 6 basis points). Additionally, since Curve concentrates on stable assets, there is minimal slippage associated with swaps on the DEX — making the AMM problems largely obsolete.

Curve, as mentioned above, works as an Automated Market Maker allowing users to deposit stable assets to receive yield as trading fees are split evenly between liquidity providers. The yield can be in the native token, CRV. Additionally, pools are also supplied to lending protocols like Compound to generate more yield when locked, in addition to the trading fees incentives.

**Curve Finance TVL (Data Adapted from Defillama)**

The yield provided in liquidity pools and expanding multiple EVM compatible chains has made Curve a behemoth of a protocol today. Total value locked exceeds $24 Billion, and it ranks 1st in terms of the value locked in all of DeFi. Just to give you a context of how big of a deal it is, the TVL of the entire DeFi sector is $240 Billion, and Curve has a 10.07% dominance on it.

The CRV token

The native token of Curve Finance, CRV, is released as an incentive to liquidity providers in liquidity pools. CRV token has 3 main utilities: voting, staking, and boosting. CRV holders can stake their tokens to receive 50% of the curve finance fees — but the most exciting part of the utility that concerns the curve wars is its voting power.

CRV holders may vote lock their CRV into the Curve DAO to get Voting Escrow CRV (veCRV). The longer the CRV is locked for, the more veCRV a user gets, as shown below. The minimum time to lock CRV is 2 weeks, while the maximum time is 4 years.

veCRV allows investors to vote in governance matters, the most important of which is the power to dictate which pools the CRV incentives is going to every 10 days.

Liquidity is like gold for most protocols in the DeFi space — extremely important and rare to come by. Protocols have 2 options to improve liquidity in the curve pools. Either to provide liquidity incentives via their own native tokens, or the more intelligent way is to win votes of veCRV holders to allow for CRV rewards. The drawback of a protocol incentivising its own liquidity pools is the inflation of its native tokens, which is not a great outlook for protocols.

Difference between high CRV inventive pool with Curve Incentive vs low incentive pool

In summary, having liquidity incentives being channelled through curve rewards has the following benefits for the protocols to win veCRV votes:

Having curve incentives means no requirement for protocols to incentivise using own tokens, drastically reducing the inflation of native tokens and the eventual sell pressure
Higher Curve APR rewards equal more value locked in the liquidity pool
More value locked increases the TVL of the protocol for DeFi protocols, the most important metric investors consider

The War

The curve incentives are in large part irresistible for protocols as they bring so much benefits to their projects. In order to win the voting rounds, protocols have tried their best to own as much CRV as possible. Additionally, protocols decided to bribe veCRV token holders to vote for their respective protocols, giving them rewards for native tokens in some cases.

Then came Convex Finance, a platform that aimed to take advantage of this situation by incentivising CRV holders to stake their CRV tokens to get more CRV rewards and Convex’s native token, CVX — indirectly obtaining more veCRV. This allowed Convex Finance to attain massive amounts of CRV tokens from its stakers, more than 50% of the circulating CRV token, making them powerful in terms of veCRV and governance rights.

Due to Convex’s power with 50% of the curve supply and governance, stablecoin and DeFi protocols have started to accumulate more CVX instead. Convex has since become the number 2 DeFi protocol in ranking and has obtained billion in TVL locked of $18 Billion.

The convex token, CVX has been up over 775% over the past 8 months and other Curve ecosystems projects have done equally well due to this narrative.

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