What is Curve?

Curve is a decentralised exchange (DEX), initially designed for efficient stablecoin trading. DEXs aim to provide an alternative to central parties managing user funds and matching buyers and sellers. Just like Uniswap, Curve uses liquidity pools to satisfy trades unlike the supply and demand of order books seen on centralised exchanges (CEXs). By moving to Curve, users not only retain self-custody, they see their fees and slippage reduced dramatically on stable swaps. This enabled Curve to corner a huge share of the market and bring whales on-chain. This activity was secured through a proprietary invariant or ‘curve’, that differs from the standard AMM model (x * y = k). More details on this standard model can be found here.

Curve Finance

Due to the innovative model, the protocol still serves as the main liquidity source for pools of ‘stable’ assets. This extends beyond stablecoins such as that found in the 3CRV pool (USDC, USDC, DAI), and into other like-for-like assets such as ETH-stETH (staked ETH) or different versions of wrapped BTC. Recently, further innovations in price modelling have led to the introduction of similarly behaving pools for non-stable assets.

The main features of the protocol are:

  • High liquidity
  • Low slippage
  • Low fees
  • 2 or more tokens in a pool
  • Permissionless and customisable pools
  • Plain pools
  • Lending pools (earn interest from lending & trading fees)
  • Metapools (pair one token with an LP token = list less liquid assets & prevent dilution)

Curve V1 vs Curve V2

Curve V1 pools are solely composed of stable-like assets pooled together. The below diagram shows how the curves differ. When a pool is balanced within a certain range, slippage is optimised to ensure an equal swap — allowing for around 100 times less slippage.

Curve V2 Pricing Model
Curve V1 Price Model vs Uniswap V2

Curve V2 broke free from the shackles of stable pools and enabled pools to hold assets with different prices. This new model, similar to Uniswap V3, concentrates liquidity around current prices to achieve higher efficiency. Unlike in Uniswap V3 where market makers must update their positions, Curve V2 manages this all for the liquidity providers (LPs). As trades occur, the pool re-adjusts its internal price to the highest liquidity region (to minimise slippage). This is achieved by taking a running EMA (exponential moving average) of the pool and re-centering liquidity at the EMA when it would not incur losses for LPs. For a further dive into the mechanics behind Curve V2, visit this article.

What Networks is Curve Available on?

Curve is available on several EVM (Ethereum Virtual Machine) compatible chains. It is currently available on:

  • Ethereum
  • Arbitrum
  • Avalanche
  • Celo
  • Fantom
  • Polygon
  • Optimism
  • Kava
  • Gnosis
  • Moonbeam

What Assets are Available on Curve?

As the Curve protocol is permissionless, any ERC20 token can be pooled with multiple other tokens to create a pool using the Factory smart contract. These pools can be freely traded once liquidity is added.

Providing Liquidity on Curve

By providing liquidity to a pool, an LP earns yield through the trading fees paid by those users making swaps. 50% of all trader fees are distributed directly to LPs, hence the base vAPY increases with volume on each pool. Swap fees are typically around 0.04%, but can increase up to 0.4% on V2 pools when the price strays too far from the internal oracle (EMA) price. It is important to note that providing liquidity to a pool will give an LP exposure to every asset in the pool.

In addition to trading fees, some pools also earn interest from lending protocols where capital is used to generate higher yield for LPs — although LPs must be aware of the increased layers of risk in these pools.

Further to these fees, some pools also come with incentives baked in, where a certain protocol wants to deepen liquidity on its pool so offers its native token as an additional incentive.

Finally, CRV tokens can also be emitted to pools depending on the gauge weights. This is where the Curve DAO (veCRV holders) control the flow of CRV inflation to their desired pools.

As a last sweetener to the deal, holders of vote-escrowed CRV (veCRV) have the opportunity to boost their LP rewards by up to 2.5x.

What is veCRV?

As introduced above, veCRV is a representation of CRV tokens that have been vote-locked to earn rewards and participate in governance. CRV can be locked for up to 4 years, where the amount of veCRV returned is proportional to the lock time.

veCRV holders receive the other 50% of trading fees from the Curve protocol. These rewards are distributed in the form of purchased 3CRV LP tokens. Further incentives for veCRV include boosting your LP rewards and voting to direct gauge rewards.

veCRV Incentives
The value-add of veCRV on top of being an LP

Curve Fees

As mentioned above, swap fees on Curve range between 0.04% and 0.4%. These fees are split equally between LPs and veCRV holders. The main source of fee data currently available is at Defillama, as shown below.

Curve Protocol Fees
Curve Finance Weekly Fees

Additional data can be found at the following links:

Curve Tokenomics

The CRV token serves to incentivise LPs on Curve in addition to incentivising users to participate in the governance of the protocol. The three main uses are voting, staking and boosting, as discussed above. All these actions require you to vote-lock your CRV in return for veCRV.

Curve Token Allocations

A total of 3.03b tokens were initially minted, and were reserved at the following allocations:

  • 62% to community LPs
  • 30% to shareholders (team and investors at 2-4 year vesting)
  • 3% to employees (2-year vesting)
  • 5% for the community reserve

The initial supply of 1.3b tokens (~43%) was distributed to the allocations for shareholders, employees and community reserve, with 5% going to pre-CRV LPs with 1-year vesting. The initial release rate of CRV to LPs was around 2m CRV per day. See below for the full release schedule.

Curve Vested Release Schedule
CRV Release Schedule

Is Curve Safe?

Curve’s core smart contracts have been audited by Trail of Bits. Additionally, the Curve DAO contracts have been audited by Trail of Bits, Quantstamp and mixBytes. However, it must be stated that audits don’t eliminate risks entirely.

On top of the inherent risks with the Curve smart contracts (as with all contracts), joining a pool as an LP introduces systematic risk for all of the tokens in the pool. Where lending protocols are used to increase yield, additional risks from the lending protocol are also tied to the LP.

Despite the risks, Curve has been operating for over two years with several billion held in pools and is one of the most trusted and security-conscious protocols in all of DeFi.

Final Thoughts

Curve Finance provides a great opportunity to earn yield on your assets by providing liquidity and earning fees. LP rewards can be further boosted by holding veCRV, which also has the added benefit of governance participation. While there are risks in any DeFi protocol, Curve has been operating with no major issues since its inception in 2019, making it one of the most trusted and secure platforms in DeFi.

As such, Curve is a great opportunity for any investor looking to take advantage of DeFi yield farming. With its low fees, high liquidity pools and attractive incentives, Curve is sure to be one of the top protocols for yield farms and liquidity providers in 2023 & beyond.