Curve Finance is a decentralized exchange (DEX) for stablecoins that has been deployed on multi-chains, such as Ethereum, Arbitrum, Avalanche, Fantom, Harmony, Polygon, and xDAI.
Just like Uniswap, users can be an LP (liquidity provider) or a trader on the protocol. However, Curve is specially designed to provide exchange services for stablecoins ($USDT, $USDC, $DAI) or tokens with similar values, such as stETH & WETH, renBTC & WBTC, etc.
On Uniswap, the price of a token is determined by the ratio of the two underlying tokens in the pool, thus, the token's price will constantly change while users interact with the pool. In addition, when there is a lack of liquidity in the pool or an imbalance in the ratio of the two tokens, a small-sized transaction can impact the token's price massively, namely high slippage. To solve this, Curve has improved on the traditional AMM algorithm to make it more consistent with the characteristics of stablecoins. Because the price of stablecoins usually fluctuates in a certain price range, for example, the price of USD-anchored coins always fluctuates around $1.
The figure below shows the Bonding Curve of Curve Finance and Uniswap. Compared with Uniswap, although the line of Curve Finance has larger slippage at both ends, the slippage in the middle part is quite low, and it even overlaps with the line with a slope of 1. This is exactly in line with the characteristics of stablecoins because the prices of stablecoins usually fluctuate in a small range around $1.
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Therefore, trading stablecoins on Curve is helpful for users to reduce their slippage losses. By the way, the transaction fee on Curve (0.04%) is also less than that of Uniswap (0.3%). 50% of the Curve transaction fee will be awarded to LP, and the rest will be awarded to $CRV stakers.
There are three main functions of $CRV, namely Staking, Voting, and Boosting.
- Staking
Users stake $CRV will get veCRC as a representation, and receive 50% of transaction fees.
- Voting & Boosting
Users can further lock veCRV to participate in DAO governance, and the voting power is related to users' locking amount and locking period. If the user is a $CRV staker and a liquidity provider at the same time, he/she can earn a boost of up to 2.5x on the liquidity.
Currently, the daily $CRV distribution to LPs is approximately 753,262.53 $CRV. And where these tokens are allocated mainly depends on two factors, one is Liquidity gauge and the other is Weight gauge.
Liquidity gauge refers to the proportion of the token provided by each user in the liquidity pool. Weight gauge is the distribution of $CRV rewards for each pool determined by Curve DAO voting. Such a mechanism determines that users can maximize their benefits only by locking $CRV (more bonus bonuses and greater governance power).
There are currently some DeFi protocols, such as Yearn and Convex, and their yield strategy is based on Curve's liquidity reward mechanism. In other words, they will put the tokens deposited by users on Curve for liquidity mining rewards. And through Curve governance, voting for their liquidity pool and getting more $CRV rewards has also become the common goal of these protocols. This has also led to the continuous increase of $CRV's stake rate.
