In-Depth Analysis on the Curve Wars: What is @CurveFinance?

Written by: @CryptoTralala

What is @CurveFinance?

@CurveFinance is the #1 stablecoin swap DEX protocol within DeFi.

As stablecoins trading volumes are huge and getting bigger with DeFi opportunities and accessibility (Layers 2 and alt L1) growing every day, the idea here was to enable people to swap stablecoins with low slippage and extremely low fees
With that said, let’s see what they offer to their users:

It is important to understand how works decentralized exchange (DEX), in order to understand the added value of @curveFinance: When a user is using a DEX to trade an asset for another one, this user is actually using an existing pool containing both of these assets.

Indeed, liquidity providers (= LPs) will deposit (usually but not restricted to) equal amounts of two assets within the same pool. For each trade, the user trading one asset for the other will pay fees which will go directly to the LPs’ pocket and a small amount in the platform’s pocket. But, if the said pool does not have enough liquidity, then the user (=trader) will encounter what we call “slippage” i.e a difference between the expected price and the token price you actually get. This results in a less worthwhile trade and a loss of profitability.

So, as you can see the challenge is to bring a lot of liquidity within your pools to avoid slippage and offer the best user experience.

So, how did @curveFinance meet the challenge ?

The secret lies in their governance token: $CRV which can be locked up to 4 years.

Locked CRV are called veCRV (Vote escrowed CRV). What’s their use?
Locking your $CRV allows you to earn 50% of the trading fees depending on the amount of veCRV you own and for how long they are locked.
But there is more…

Each week, the APY reward given to the different Liquidity Pools (LP) is subject to a vote and veCRV holders the one deciding which pool will receive the best APY.

You know where I’m getting at, don’t you ?

If Im providing liquidity for the 3pool (USDC,DAI,USDT pool)which pool do I want to get the maximum APY ? 3pool. So I’ll lock my CRV, get veCRV receive trading fee rewards and be able to vote for the pool I want(i.e.the pool Im providing liquidity for) to receive the best APY.

So if I have a lot of veCRV I can control where the platform allocates curve emission. So the more veCRV you can get = more control on emission = more boosted rewards you can have.

And this is exactly why projects like @FRAXFinance or @MIM_spell want a huge curve voting power(meaning a huge amount of veCRV) and how they are incentiving people to provide liquidity for their project:by controlling which pool will get the best APY=More ppl providing liquidity for their pool=deepest liquidity and therefore maintain their stablecoin pegged to the dollar.

And on top of that they will get a tone a revenue from the fee rewards
And this is exactly what all these different projects are doing. They are controlling veCRV Vote and that’s why we are talking about a curve war.
But these projects are not simply locking veCRV to control the votes

The role of @convexFinance

So @convexFinance totally understood the importance of @CurveFinance and they managed to own a huge amount of veCRV to become the largest veCRV holder.

Therefore, @convexFinance is allowing LPs to deposit @CurveFinance LP tokens and receive the boosted @CurveFinance rewards as if they would have locked their $CRV. And they will also earn $CVX tokens. So through @convexFinance LPs are earning boosted @CurveFinance APY + $CVX APY.

This is way more huge than what @CurveFinance can offer alone.

Second option is the curve staker option. You have CRV tokens and you can deposit them into convex to get cvxCRV tokens. This is irreversible. The reason for this is that your CRV tokens will be locked in curve to becomes veCRV and boost @convexFinance rewards. cvxCRV holders can then stake to earn their normal veCRV rewards (50% of trading fees), Convex platform revenue fees, airdrops … and additional CVX APY. So once again much more interesting than the @CurveFinance rewards alone.

Furthermore, you can lock your $CVX to receive platform’s fees and voting rights. You probably understood by now: Protocols wishing to direct liquidity to their pools will gather as much CVX as possible to then vote over where the rewards will end up.Convex incentive is way more powerful than curve as for every locked CVX, there is around 5 veCRV in voting.

And … Yes .. there is more ! I swear that is almost over 😉

@convexFinance added to their platform a way to bribe veCRV holders into voting for their pool by setting an amount of their native tokens as a rewards if you vote for their pools.
So, let’s say i’m a $CVX holder. I’ll lock them for a minimum period of 16 weeks to receive vote rights. As I have now the right to vote, I will earn few tokens from the protocol I’m voting for and this will be possible each week.

Project like @FRAXFinance or @MIM_spell are therefore participating to bribe $CVX holder. @FRAXFinance being the biggest briber.

Why it is profitable for protocol to bribe $CVX holders ?

Well, for each dollar by in bribes by protocol, their underlying pool receive more than 4 dollars so more than 3 dollars profit.

I hope everything is a clear now 😃

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