Stablecoins and curve wars
Stablecoins exploded in 2021, surpassing $150B in combined market capitalization. This surge is a testament to outstanding product-market fit as one of crypto’s “killer apps,” with assets like USDC and USDT becoming almost universal across the entire crypto ecosystem. What is a stablecoin, you ask?. Stablecoins are a class of cryptocurrencies that attempt to offer price stability and are backed by a reserve asset. I firmly believe this trend will continue on the back of a few influential catalysts that have paved their success thus far:
- Investors and traders can effortlessly pair back risk exposure during risk-off periods with elevated volatility. Stablecoins have become prevalent trading pairs across both CeFi and DeFi.
- Stablecoins in DeFi offers high yield opportunities without the risk of a volatile underlying asset.
- Transact permissionlessly with anyone in the world at any time, with near-instant settlement and none of the usual friction associated with the current financial system.
The Curve war can be defined as the race between different protocols that are continuously trying to ensure that their preferred pools are offering the highest $CRV rewards (‘bribes’). The Curve war is leading to increased buying pressure for $CRV.
Crypto is a giant game of incentive design with billions of dollars on the line. Projects who design their incentives intelligently wins massive power and wealth. Projects with poorly designed incentives see their tokens go to zero.
Most incentive design in DeFi is focused on solving two problems:
- Discouraging people from selling your tokens
- Encouraging people to make your token more liquid
Historically that type of reward structure has been direct: I pay you a steady stream of tokens for the liquidity you’ve created for my token. But now we’re seeing marketplaces for liquidity, where leading protocols can aggregate various opportunities for investors to earn yield income by providing liquidity. And where protocols can pay investors to help them increase the liquidity of their tokens.
This aggregation, and the competition for liquidity that comes with it, are playing out across various platforms, but the battle is hottest on Curve Finance. Thus the competition for liquidity is affectionately known as “The Curve Wars.”
But as we’ll see, Curve is just the beginning. The Liquidity Wars will likely mold the future of DeFi, and define many of the future investment opportunities.
Narratives to watch
A regulatory crackdown on stablecoins could force marginal users and builders to use decentralized alternatives.
Curve (CRV) As Critical Infrastructure: It’s challenging to talk about stablecoins, especially decentralized ones, without mentioning the “kingmaker” of stablecoins — Curve. Curve governance can direct CRV issuance to pools, directly resulting in higher liquidity mining rewards and thus increased TVL. Since liquidity for stablecoins is crucial, Curve is the most essential piece of infrastructure for stablecoins. Convex, Convex controls approximately half of all Curve governance, allowing it to vote in or be bribed to create the most liquid stablecoin pools in all of DeFi. Convex enables users to access liquidity and earn fees from Ethereum-based stablecoin exchange Curve Finance,
It’s important to note that Uniswap has recently been taking market share for stables trading from Curve. Average fees for stable swaps are often 1.5–2x greater than similar trades on Uniswap, adding to the appeal of the latter at times.
Convex’s (CVX) Governance Black Hole: Major stablecoin projects have realized Curve’s weekly gauge weight allocation is critical to keeping their liquidity high. Losing that vote means LPs’ yields drop, and capital may move elsewhere. Now, a so-called “war” has ensued, with various protocols openly bribing votes and rewarding veCRV holders with their native tokens. In April 2021, Convex pioneered this bribing game with a 1% airdrop in exchange for support from veCRV holders. Now, it has grown to have great sway on Curve’s valuable governance vote: 85% of Curve TVL is directly routed and staked via Convex. And nearly half of all veCRV supply is owned by Convex. In short, Convex is a new model for protocol-controlled value (PCV), trailblazing the accumulation of power through governance.
Curve + Convex Symbiosis:
Curve and Convex have a symbiotic relationship that has launched Curve to the number one application by TVL, sitting at $23B (current TVL is closer to $19B at the time of publish). This relationship has helped both outperform many other DeFi “blue chips” in terms of performance in 2021.
“Convex’s tokenomics is one of the most unique things that has happened for DAO meta governance as well as rethinking incentive alignment in 2021, in my opinion. I also think that increased protocols shifting to a vote escrow token model will serve as a strong tailwind for Convex.
Put your stablecoin savings to good use and earn some interest. Like everything in crypto, the predicted Annual Percentage Yields (APY) can change day-to-day depending on real-time supply/demand.
Are stablecoins a good investment?
Stablecoins are considered to be a very safe long term source of investment. Stablecoins offer great protection of assets during volatile and bad market conditions.
Hope you had a fantastic reading
UNI Market Share Shines, Stablecoin Wars, & Fresh Farms …. https://members.delphidigital.io/reports/uni-market-share-shines-stablecoins-wars-fresh-farms/
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