Curve & CRV: Time To Go All In
Introduction
Stablecoins have seen an incredible growth this year and continue to provide utility to the whole ecosystem thanks to their non speculative nature.
Stablecoins and DeFi are closely tied to each other. Without stablecoins there would be no DeFi. The rise of stablecoins drive the growth of DeFi protocols.
One year ago, the total market value of all stablecoins in the market was already $5B USD. Recently, they crossed $22B of total market capitalisation according to Messari.
We continue to see Curve and the CRV token as a unique opportunity to benefit from that incredible growth.
Here is why.
Why do we like Curve the product?
If Uniswap has invented the concept of liquidity pools and applied it to a general DEX, Curve has innovated in a niche market at a time where nobody saw the potential of stablecoins.
So why do we like it so much?
The team has developed an innovative platform where liquidity is king and so are fees paid to liquidity providers.
Do you know the chicken and egg story? We don’t know who came first.
For Curve it is the same story, we don’t know which one came first, the trader or the liquidity provider?
Let us explain. Traders come to Curve to buy stablecoins at the best rate because they know there is the best liquidity available in the market and liquidity providers come to Curve because they know all serious traders use Curve so fees will be high.
It is a virtuous cycle and it will be extremely difficult or almost impossible to build a similar platform and attract the liquidity providers. Swerve tried to do it but has so far massively failed.
Their IP is protected so you cannot simply copy paste their code and go away with it.
They started with stablecoins and have also expanded into synthetic BTCs, another huge market potential where liquidity is absolutely primordial. Synthetic BTCs tokenised on Ethereum have recently reached 153,000. If you need to exchange one renBTC for one WBTC, chances are you are headed to Curve to do it.
Trading volume and liquidity on Curve continue to experience growth.
Total deposits
Total deposits have bounce back above $1B USD despite the wild speculation going on with Bitcoin and Ethereum in recent weeks, which bodes well for the future of Curve.
Trading fees
Daily trading fees do not tell the whole picture as they can vary greatly days over days. In the below chart, we show the daily, weekly and monthly trading fees originated from Curve platform. The monthly line is not cumulative. As you can see monthly trading fees have continued to increase months over months. Of course, the Harvest flash loan attack has helped and greatly increased Curve fees in October.
As speculation has rejoiced in the last few weeks, we do expect to see a drop in the next monthly trading fees compared to October.
However, the future continues to look bright for Curve as the total market capitalisation of stablecoins continue to reach new highs. The same story applies to synthetic bitcoins on Ethereum, which have seen an unbelievable growth in the last few months.
Both stablecoins and synthetic bitcoins will continue to drive trading volume and fees going forward and we do expect to see new highs in terms of fees before end of 1Q 2021.
To put things in perspective, Curve was only launched in January of this year.
The CRV DAO token
While the Curve platform has clearly succeeded in terms of trading volume, liquidity, goal to bring stablecoins closer to their peg. Curve team has missed the point with their CRV launch in August.
It has been a failure as people did not look at both market cap and fully diluted market cap. And maybe CRV team failed to explain clearly what was going on with vesting and inflation.
Then, when CRV climbed to more than $50, it had a fully diluted market cap bigger than Bitcoin. It did not make any sense to buy at these absurds levels as more CRV tokens were unlocked and dumped every day on naive speculators in for another moon.
As a result, people started to complain about Curve. There was a lot of frustration in the DeFi community and we can understand.
Imagine you buy CRV at $10M market cap when price was at, say $20, thinking you are a genius, Curve is legit and so undervalued. Later to find out that market cap is massively inflated everyday due to vested tokens coming in the market.
Face palm 🤦♂️
A lot of people who simply bought CRV, learnt their lessons: don’t buy something you don’t understand.
Now let’s take a look at CRV supplies.
CRV initial supply is 1.32B
CRV total supply is 3.3B.
Current circulating supply is 72M.
Circulating supply is inflated with daily CRV which are vested from founders, investors, etc. Around 2M CRV are added to supply every day, of whom 776k are pure inflation received by liquidity providers on Curve.
But circulating supply is also reduced when holders of CRV, lock them into veCRV to start earning trading fees from Curve, paid in CRV. veCRV holders receive 50% of all Curve trading fees.
Total value locked is $860M USD.
CRV Valuation
The big question is how much should be worth CRV.
Assumptions
Our assumptions are the following:
- CRV are locked for 4 years in veCRV.
- 40% of CRV circulating supply will be locked in veCRV in one year, currently ~26%).
- Circulating Supply in one year will be ~790M minus 40% locked veCRV, 474M.
- Total stablecoin market cap will be $40B (up $20B from now).
Valuation
Over the last couple of weeks, the platform has generated weekly fees between $181K and $1320K (due to Harvest flash loan attack).
To value the CRV token, we derive three scenarios based on the below assumptions
To start, we have estimated a weekly trading fees of $300K and then we estimate Curve trading fees to increase 0.5%/1%/2% every week for one yea as we do expect to see significant stablecoins usage and growth.
- Scenario 1: $17.76M annualised trading fees expected.
- Scenario 2: $20.33M.
- Scenario 3: $27.01M.
Taking into account our above assumptions, we get a price target of $1.9 USD and a forward APY of 7% *if 40% of CRV are locked as veCRV*.
Current CRV price is $0.6.
Our Analysis
Why this opportunity exists?
DeFi is a very competitive market, both on the product and the associated token. If all interests are not aligned with the same goal, innovative projects with bad tokenomics can quickly become a mess, like any other bad projects.
Curve is exactly that: a cutting edge product with a tokenomic failure on how it was released to the market and explains why this opportunity exists in the market.
Curve team had a genius idea to build a DEX and focus on stablecoins but failed to deliver compelling tokenomics to support the CRV DAO token. In our own opinion, initial circulating supply was way too low and led to this short market frenzy when CRV went to $50 only to get dumped afterwards. To us they failed to explain clearly the tokenomics to the community and had to release the CRV locker earlier as well.
On the opportunity itself
If you lock your CRV in the locker for 4 years, you will receive the same quantity of veCRV and get trading fees from the protocol. Attention you cannot unlock your veCRV once locked.
At today market price, the APY is around 20% but it can vary greatly depending on trading fees and percentage of veCRV locked.
APY will go up if trading fees go up and will go down once more veCRV are locked up.
Obviously we don’t know where DeFi and Curve will be in 4 years.
4 years is a long long time in crypto but chances are Curve stays the leader in stablecoins DEX and if it does it will be worth a lot more. Then it is free money and dividends for your whole life.
Risks
CRV locked in Curve comes with significant risks.
If you lock your CRV in Curve and the protocol gets hacked, there is a risk you will lose a significant part of the value of your tokens and could do nothing about because they will locked. Your funds are tight to the success of Curve regarding trading volume, fees and its ability to keep its market leading position in DeFi stablecoins trading.
Swerve tried to dethrone it but has so far failed. Other projects could try as well. DeFi is very competitive.
If one of the stablecoins available in Curve does not go back to its peg it could have meaningful impact on Curve and CRV token.
CRV has a lot of connections with other DeFi protocols and could be also impacted in case something goes bad in one of them.
The protocol has been audited multiple times but a bug is always possible resulting in loss of funds.
Conclusion
Our title is an hyperbole, we do not mean to go all in in any crypto project.
Curve the product is a steamroller and loved by everyone in DeFi thanks to its usability.
CRV, the token is unloved by a lot of people due to a failed launch.
But soon people will realise its true potential, in our own humble opinion.
CRV is significantly undervalued.
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Thanks for reading
Secret Salsa
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