TLDR:

• Stable coins have become an inherent part of cryptocurrency for a long time but they now come in many different flavors (DAI, TUSD, sUSD, BUSD, USDC and so on) which means there is a much bigger need for crypto users to move from one stable coin to another.
• Centralised exchanges tend to have high fees which are problematic for those trying to move from a stable coin to another. As a result, Curve.fi has become the best place to exchange stable coins because of its low fees and low slippage.
• The main purposes of the Curve DAO token (CRV) are to incentivize liquidity providers on the Curve Finance platform as well as to get as many users involved as possible in the governance of the protocol.
• Currently CRV has three main uses: voting, staking, and boosting. Those three things will require you to vote-lock your CRV and acquire veCRV. This article delves into the basics of Curve Finance and veCRV tokenomics.

Understanding Curve Finance

Summer 2020 saw an exponential rise of DeFi 1.0. We’ve seen a staggering amount of capital flowing into new protocols, as well as the explosion of decentralized exchanges (DEXs). Curve Finance launched in August 2020 to allow users and decentralized protocols to exchange stablecoins (e.g: DAI to USDC) through low fees and slippage. Curve Finance is now the largest DeFi protocol by total value locked (TVL) of $23.66b at the time of writing.

While Ethereum represents the largest TVL amount on Curve, Curve Finance currently operates on six other chains (Avalanche, Harmony, xDai, Polygon, Arbitrium, and Fantom). We’ve seen the rise of Avalanche, plotting themselves with the second largest TVL amount on Curve, despite having launched recently on October 5th, 2021. While the majority of governance activities for Curve still take place on Ethereum, we can foresee more liquidity provided across different chains, growing the number of Curve pools as a whole.

Curve’s DAO token, CRV, is essentially used to incentivize liquidity providers in the Curve ecosystem and to get members involved in the governance process of the protocol.

Why use Curve?

1. To swap similar assets (stablecoins/ diff wrapped Bitcoins)
2. Earn fees for supplying liquidity
3. Swap or provide liquidity with wrapped tokens

Alternatives to using Curve?

Uniswap v3 is probably the closest alternative to Curve Finance. For swapping stablecoins, your choice depends on trade size (slippage) as Curve is more cost-efficient for fees (0.03% vs. Uniswap v3’s 0.05%). However, Uniswap is permissionless so anyone can open up a new pool that has fewer fees than Curve does today, rendering it more of a competitor. This will be a strong development to keep track of in the future - is concentrated liquidity a better solution than Curve and what will facilitate the most volumes of stablecoin trading moving forward?

How does Curve differentiate from its competitors?

With most AMM based DEXs adopting a constant product formula x*y=k, where x and y are the reserves of two tokens, A and B. In order to withdraw some amount of token A, one must deposit a proportional amount of token B to maintain the constant k before fees. Curve, however, combined a constant sum algorithm when the exchange rate was close to a theoretical peg with a constant product algorithm if the asset price deviated from the peg. With this, there is a better use of capital when providing liquidity to pools of similar assets, resulting in better liquidity.

CRV Tokenomics

CRV is an ERC-20 governance token for Curve Finance DAO. The initial supply of CRV is 1.273b tokens, which is 42% of the total supply of ≈3.03 billion tokens.

Total supply: 62% to community liquidity providers 30% to shareholders (team and investors) with 2-4 years vesting 3% to employees with 2 years vesting 5% to the community reserve

Initial supply:

5% to pre-CRV liquidity providers with 1 year vesting 30% to shareholders (team and investors) with 2-4 years vesting 3% to employees with 2 years vesting 5% to the community reserve

Vote locked CRV (veCRV)

veCRV is short for voting escrow CRV. One thing to note is that veCRV is non-transferrable, hence, it is not a standard ERC-20 token - users cannot transfer or trade veCRV.

CRV holders can choose to lock their CRV for up to 4 years (e.g: vote-locking 1 CRV for a year would result in a balance of 0.25 veCRV; while vote-locking 1 CRV for four years would result in an initial balance of 1 veCRV). The longer a CRV is locked, the more veCRV you receive initially, but your veCRV balance is constantly decreasing unless you choose to lock more CRV or extend the lock period.

Later, we will delve further into the incentives of vote locking and why CRV holders would want to be involved in such processes.

The Power of Vote Locking

CRV holders can lock their CRV into CurveDAO in exchange for veCRV. The longer CRV is locked for, the more veCRV a user receives. veCRV allows a user to vote in governance, boost CRV rewards and receive trading fees.

For Curve, its vote locking mechanism causes CRV tokens to be taken out of the circulating supply for a period of time. This results in an increase in scarcity of CRV tokens in the open market, increasing its price on the margin. Furthermore, through its veCRV incentive, holders are incentivized to lock their CRV tokens for 1-4 years and will have to commit to the position for the duration of the lock.

To break it down even further, the process of converting CRV into veCRV is irreversible. The majority of CRV that is currently locked is untouchable for around 4 years. Currently, more than 404.369mm CRV are currently locked up with an average lock time of 3.64 years. The vote locking mechanism allows users to set a bullish outlook on the protocol. As the supply of CRV becomes more illiquid, price goes up and yield aggregating platforms like YFI see their APY’s increase. Hence, fees generated and returned to token holders of yield aggregators increase, which results in an increase in the price of the aggregator's native tokens - a win-win scenario. To put this simply, vote locking mechanisms are intended to limit liquid supply and foster long-term price appreciation.

So, what are the use cases of locking up CRV tokens? Why would anyone choose to lock their tokens for up to 4 years?

Additional Trading Fees

Holders of veCRV also earn a portion of the protocol’s revenue via swap fees.

According to Curve’s documents, “A community-led proposal introduced a 50% admin fee on all trading fees” where fees are collected and used to buy 3CRV, the LP token for the TriPool (DAI, USDC, and UST), which will then be distributed across to veCRV holders.

Voting Power

To gain voting power, CRV holders will have to time-lock their tokens.

As a recap:

• CRV holders must time-lock tokens for 1-4 years, and will receive a non-transferrable veCRV token
• Once you receive veCRV, you can vote on proposals to help enrich the Curve protocol
• Proposals can help with Curve expansion to other, notable chains or to support new asset pools, but ultimately, they can dictate rewards distributed to existing pools

Liquidity gauges define how much of CRV rewards a liquidity provider can earn when providing liquidity to the Curve pool. The higher the gauge, the more CRV can be earned. Holders of veCRV can vote how much CRV emission each pool gets. CRV emission (and TVL) determines APY of such pools. Pools with high APY attract liquidity and attention.

Many stablecoin projects want to be on Curve with high liquidity, gauging interest in veCRV voting power. Currently, the $MIM pool, an algorithmic stablecoin pegged to the dollar, has the largest gauge weight of 24.66% of CRV’s daily inflation. $MIM is a popular stablecoin from the Abracadabra lending DeFi protocol. This high gauge can allow users to earn additional APY paid out in CRV tokens.

To help us understand the demand for voting power, Andre Cronje, the founder of Yearn, launched a vote-bribing platform that allows token holders to be compensated for supporting particular gauge weights and the CRV token has been the beneficiary. As veCRV holders get to control liquidity direction, they get to direct which pools get how much of the future CRV emission. This has led to an ongoing battle for the control of utility that is fueled by protocol treasuries and whales.

Reward boosts

Besides additional trading fees and voting power, veCRV grants a boost of up to 2.5x on the pool where users provide liquidity. This benefit for veCRV holders can help generate a positive feedback loop where CRV holders are incentivized to hold more veCRV to receive more CRV in the future.

The formula can be calculated below, where the boost mechanism will calculate your earning weight. The first value is the amount of liquidity you are providing and the amount being your maximum earning weight.

Key Players in the Curve Ecosystem

This section covers a short description of the key players behind the Curve ecosystem.

(Hint: we will be doing a Part 2 which will delve deeper into Curve Wars and a deep dive into the key players’ purpose and tokenomics)

Convex is a DeFi protocol built on top of the stablecoin exchange Curve Finance. Convex is designed to create a collaborative relationship between Curve LPs and yield-focused CRV investors. Convex Finance works by rewarding Curve liquidity providers and CRV stakers with additional DeFi yields.

Currently, Convex protocol holds the largest share of veCRV, holding 46.78% of the total veCRV distribution. Most people do not attain enough CRV tokens to lock up in order to achieve optimal benefits, nor are they willing to lock it up for 1-4 years to enjoy maximum rewards. With Convex, CRV holders can stake their tokens for cvxCRV. In exchange for staking, cvxCRV holders can earn proportional trading fees and CRV rewards. (Note that CRV staked for cvxCRV cannot be withdrawn but can be traded).

TLDR:

• Lock CRV to cvxCRV to earn rewards and trading fees
• Tradeable in the cvxCRV/ CRV pool
• 3CRV rewards distributed to cvxCRV holders
• Can receive veCRV rewards

Yearn is a yield aggregator that is dependent on Curve’s CRV boosts to sustain yields for depositors.

To understand the relationship between Yearn Finance and Curve, it is important to note that Yearn vaults provide liquidity into Curve pools and as a result, earn CRV rewards. Yearn takes a portion of these rewards earned and deposits it into their yveCRV vault, which boosts rewards for any Yearn vault using the Curve protocol. Then, Yearn takes this liquidity and locks it in CurveDAO voting escrow. This means that users can receive more yield from the yveCRV vault than staking it through the native protocol.

Native veCRV is not transferable and can only be obtained by staking CRV. Users can make use of the yveCRV vaults in Yearn Finance and receive yTokens in return, which users can then trade in the open market.

TLDR:

• Make use of the yveCRV vault in Yearn to lock CRV tokens to gain yveCRV
• Buy yveCRV directly on SushiSwap and provide liquidity to the yveCRV-ETH pool to earn rewards
• Use Pickle Finance to harvest and compound LP rewards, further boosting yield
• Yearn redirected funds from yveCRV into the yvBOOST vault, which uses 3CRV rewards to purchase more CRV
• 3CRV rewards reinvested into the pool
• Users cannot receive veCRV airdrops

StakeDAO is using a similar strategy to Yearn Finance on luring CRV holders by offering attractive returns via staking. The protocols then deposit the CRV received into Curve Finance and collect vote-locked CRV, which will then be used to strengthen the protocol’s voting power.

Redacted Cartel is an Olympus DAO fork structure using POL mechanics to accumulate as much liquidity from the Curve Ecosystem.

Redacted aims to calibrate the veCRV vote share by accumulating CRV/CVX into its treasury to bring greater capital efficiency to the voting/ bribing process.

Vote-escrowed (ve) model and its mass adoption in DeFi

As we’ve discussed, valuable protocols are revamping their tokenomics with the vote-escrowed model.

*= speculations/ launching soon

Upside/ Downside to veCRV Tokenomics

Aligned community motives: Curve has one of the longest lockup periods of up to 4 years, therefore CRV holders and LPs have a vested interest in seeing Curve succeed in the long-term with aligned community motives. Furthermore, this helps reduce sell pressure by reducing the amount of tokens speculators can dump at any given time. On average, CRV is vote locked for 3.65 years, which means that protocols and users that control Convex/ Curve are locked in and incentivized to support the protocol directly through CRV and indirectly via CVX and bribes.

Network effect: The existence of Curve’s stable and secure liquidity pools has allowed an entire system of DeFi projects and services to be built off of Curve’s ecosystem. Curve is the backbone for many protocols that are farming CRV. (E.g: Yearn is an important part of the Curve ecosystem because a lot of the vaults are farming CRV). There is a reflexive loop where the higher the price goes, the higher the yield, and thus more capital to be deposited by users.

High inflation rates: The circulating supply is 0 at launch and the initial release rate is around 2m CRV per day. The circulating supply at the end of year one is around 750m CRV. The high rate of inflation is there to help put the DAO’s control in the hands of LPs on the Curve Finance protocol. Relatively high inflation rates in Curve tokenomics would mean that more market buying is required to offset the new daily issuance of tokens.

Incentive alignments: People are worried about the incentive misalignment between veCRV holders and Curve as a protocol. E.g: What happens if there is a proposal with Convex’s best interest in mind, but might not be optimal for Curve?

Competitive Pressure: AMM DEXes such as Curve, Uniswap, and 1inch are competing for the same customer base. Curve wins in terms of deep liquidity, low slippage, and lower fees for stablecoin swaps. However, the question is whether Curve can maintain its current customer base and have a strong competitive edge when compared with Uniswap v3.

Closing Thoughts

Q1 2022 will be an interesting play for the Curve ecosystem. We might see more DeFi 1.0 protocols revamping their tokenomics to adopt the gauge system, as well as new DeFi 2.0 protocols with ve-tokenomics from launch. However, a lot of these incentives and the way the tokenomics are set up, still reward non-productive liquidity and abstract the upper layers of the stack whereas Uniswap is facilitating a lot more volume per TVL in v3. Again, this will be a key development to watch - will Curve be able to compete with Uniswap v3’s concentrated liquidity moving forward?