What is Curve Finance?
Curve is a decentralized, UniSwap-like exchange for stablecoins. By focusing on stablecoins, it’s able to offer traders extremely low slippage, and liquidity providers enjoy little-to-no impermanent loss.
Curve supports DAI, USDC, USDT, TUSD, BUSD and sUSD, as well as BTC pairs, and it lets you trade between these pairs extremely quickly and efficiently. When stablecoins or stable assets are involved, Curve’s prices are usually the best in the business.
Why not Uniswap?
Uniswap already exists. Do we really need another token swap exchange?
On Uniswap, token-to-token trades are expensive. Tokens only trade directly against ETH so if you want to trade token A for token B, Uniswap will do two trades; Token A for ETH, and then ETH for Token B. This results in double the trading fees.
Uniswap’s algorithm also slips significantly for trades of any size. This is because the algorithm is designed to maximize available liquidity.
With Curve on the other hand, stablecoins trade directly between each other. You only pay one set of trading fees — currently 0.04%. Curve’s algorithm is also designed to minimize slippage. These savings are magnified as the trade gets larger.
How to Use it
Simply choose the coins you want to swap to and from. It’s easy as that.
The main interface on Curve actually uses multiple pools on the back end, choosing the best rate between them.
Is Curve Safe to Use?
My amateur interpretation of the audit report is that the code had test suites and code quality was fairly good and concerns were mostly addressed. I also see Curve proactively addressing vulnerabilities. Because trading on a non-custodial token swap exchange consists of a single transaction, I dont have much issue with using Curve.fi for trading stablecoins.
Do note that while the core contracts are audited, there may still be website phishing attempts, interface errors, or errors in smart contracts created or integrated after the audit. Make sure to check you are at the real curve.fi or beta.curve.fi each time you make a trade — the best way to do this is to bookmark the site rather than typing or following links.
While Curve is, in my opinion, quite safe for trading tokens, supplying liquidity on Curve is higher risk.
Supplying Liquidity on Curve — For Advanced Users Only
Trading tokens on Curve is fairly low risk. Trades consist of a single transaction — a minimal surface area of attack. Supplying liquidity, however, has a much different risk profile.
Just like leaving assets on an exchange, LPs on Curve supply liquidity to Curve’s contracts for an extended period of time. Therefore, LPs need to thoroughly understand the risks involved.
For those who understand and manage their risks well, Curve has benefits for LPs compared to supplying on Uniswap.
Little-to-no Impermanent Loss 📈📉
Curve LPs not only benefit from trading fees, but also integrations with Compound and iEarn to increase yield. Better yet, since Curve only trades stablecoin pools, supplying liquidity on Curve is subject to little-or-no impermanent loss — a major headache for Uniswap LPs.
What is impermanent loss? Uniswap’s design requires LPs to supply at least half of their liquidity in ETH, a volatile asset. If ETH moves away from the price they supplied liquidity at, they lose money compared to holding ETH directly. This has been dubbed “impermanent loss” since the losses disappear if the price moves back to the LP’s entry point. More information about this effect can be found here.
Since Curve only trades stablecoins, however, liquidity providers experience minimal, if any impermanent loss. This makes supplying liquidity on Curve in some respects more attractive than with Uniswap as returns are market-neutral.
However, impermanent loss is not the only risk for LPs.
DeFi Integration Risk ⚔️
DeFi’s greatest strength is that putting different “money lego” projects together allows for new, powerful combinations. However these integrations also increase risk. Users need to not only understand risk of the project they are using, but projects it integrates with.
While these integrations are financially beneficial for LPs on Curve, it means they need to understand and monitor security issues of these other projects as well. yToken providers need to monitor iEarn, cToken providers need to understand and monitor Compound, and sUSD pool providers need to understand and keep up with Synthetix.
Yields on Curve pools fluctuate often. High yield pools attract liquidity over time, and often turn into low or medium yield pools over time.
One strategy to mitigate this is to supply liquidity to all Curve pools. This approach would give you the average yield across all pools. However, it increases gas and slippage fees, and smart contract risk.
Profit after Gas and Fees
One other complexity with supplying liquidity on Curve is calculating profit after paying gas and slippage fees.
Because Curve splits liquidity across multiple pools, and also integrates external projects, supplying liquidity is a relatively high gas affair. Depending on the coins supplied, there also may be significant slippage.
This means yield-hunting — changing pools to chase high yield — doesnt work well for Curve. LPs should be prepared to supply liquidity to pools for a long enough period of time that their returns outweigh the gas fees and slippage they pay to supply liquidity.
For all these reasons, providing on Curve is not for the faint-hearted, and should only be attempted by advanced users who fully understand all the risks they are taking on.
Curve — a Better Uniswap Built for Stablecoins
Curve is a great Uniswap-like automated decentralized exchange designed for stablecoins. Its simple and cool 90’s style interface is easy to use and allows anyone to benefit from low-slippage trades between stablecoins.
For advanced users who understand the risks involved, Curve also has benefits for earning yield compared to Uniswap.
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This article was updated on July 29, 2020 to reflect changes to the Curve UI.
Disclaimer: I have no association with Curve. This is not financial advice.