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Curve is a decentralized exchange (DEX) with a specific orientation towards stablecoins and stablecoin-related activities, such as swaps and yield generation. Curve operates as an automated market maker (AMM) that works to pair agents with others to conduct transactions without an intermediary party. Curve powers its platform through its own novel dual token infrastructure in the form of CRV and locked CRV tokens (veCRV). This token infrastructure enabled unique liquidity battles known as “Curve Wars.'' Due to the unique voting rights stemming from locking up CRV into veCRV, governance over the protocol is extremely sought after, leading to the phenomenon known as ‘Curve Wars.’ Curve Finance was launched in January 2020 following the publication of the original StableSwap whitepaper by Michael Egorov. Following the protocol build, the CRV token was officially launched in August 2020.

The Curve Finance protocol aims to minimize user swap fees, reduce slippage, and continually guarantee high amounts of liquidity. Curve accomplishes this through economic incentives, novel technology, and strategic partnerships with other DeFi protocols, such as Compound and Yearn Finance.

Primary Use Case

Outside of the protocol’s base functionality, Curve’s main value proposition is letting users swap between stablecoins and synthetics at an extremely low commission rate (typically 0.04%). Because of the protocol’s built-in incentives, liquidity tends to be very deep on Curve. These factors combined provide lenders competitive interest returns without having to rely on volatile assets (BTC, ETH), specifically outperforming other DeFi protocols for competitive rates on stablecoins.

Curve offers over 30 different liquidity pools that allow swaps, such as:

• tricrypto2 (USDT - wBTC - WETH)
• steth (ETH - stETH)
• 3pool (DAI - USDC - USDT)
• STG / USDC
• CRV / ETH
• renBTC / wBTC
• busdv2 (BUSD - 3CRV)

Secondary Use Cases

Because of the dual token infrastructure, the unique tokenomics associated with Curve’s native CRV token allows for a phenomenon known as ‘Curve Wars.’ The Curve Finance protocol operates through the CurveDAO, an Aragon-based decentralized autonomous organization. The CurveDAO controls some highly strategic pieces of the Curve Finance protocol’s functionality. To participate in this governance, participants must hold locked CRV tokens, e.g. veCRV. The veCRV token (vote-escrowed CRV) is CRV’s designated token that’s been locked into governance for voting on proposals. The key incentive for holding veCRV is time-based. The longer you keep your CRV locked, the more tokens you receive and the greater voting power you have over the protocol.  

The motivation for controlling votes within CurveDAO is higher because of the implications it has for the individual pools. For instance, one of the powers from controlling protocol votes is the ability to adjust gauge weights, a way of determining the amount of CRV token awards allotted to each Curve pool. This is ultimately what allows pools to incentivize their own users with more competitive rates so LPs in different pools are motivated to accumulate veCRV.

There’ss an additional element to consider within Curve Wars called bribes. There are numerous investors wtihin the Curve community that also hold veCRV tokens outside of pools. Due to the importance of veCRV, pools often look to encourage those holders to direct their votes via bribes. CRV bribes allow for various protocols to release rewards to veCRV holders that contribute their votes to a pool.

Substantial amounts of veCRV are needed to receive maximum LP rewards for pools, so aggregators like Convex Finance (CVX) compile all users’ veCRV deposits to ensure a maximum yield rate is obtained without directly needing the veCRV. Bribing can be thought of as an arbitrage opportunity on CRV emissions. Users that allot their veCRV to pools could earn CVX in return (the bribe). In summation, the users obtain an additional asset and the pool obtains additional emissions.

Competitive Advantage

Curve’s competitive advantage is its overall value proposition to the broader market in being the industry leader for stablecoin yields. Rather than choosing to directly compete against other major DeFi blue chip protocols, such as Uniswap, SushiSwap, Aave, Compound, and others, Curve carved out its own niche based on unique, underlying technologies centered around an area of major demand within the industry.

Specifically, Curve holds a competitive advantage from its own constant sum AMM model that’ll be discussed in more detail in Technology. Ultimately, this AMM model enables market-leading stablecoin yield rates without sacrificing stability or diversity within the protocol’s existing liquidity pools. Curve also benefits from its unique tokenomic structure that creates significant organic demand for its native token, CRV.

Challenges to Adoption

As is the case with many other liquidity-based protocols, Curve faces scalability challenges due to the inherent problem of impermanent loss. This impacts the bottom line revenue of liquidity providers and can be a hindrance when attempting to scale up liquidity as, without proper incentives or impermanent loss protection, liquidity providers may choose to move their capital elsewhere. This is where Curve as a DeFi protocol faces the harshest competition. Ultimately, the protocol that can offer the most competitive and sustainablerates without sacrificing security will win the liquidity war and end up attracting the most value over time.