What is Curve Finance? Exploring Ethereum's stablecoin DEX

Ethereum’s network is home to a wide range of unique projects. Ever since it created the ERC-20 token model, thousands of tokens have been launched. In time, new products have emerged as well, such as decentralized applications (DApps), decentralized finance (DeFi) protocols, and decentralized exchanges (DEXs).

One example of a DEX is Curve Finance, which is Ethereum’s go-to DEX for stablecoin trading. It may not be the largest DEX in Ethereum’s ecosystem, but Curve has certainly left a mark. This guide will explore Curve, explaining what it is, how it works, and what the project has to offer. We'll also address the Curve Finance token, CRV, and the potential risks of the project.

What is Curve Finance?

Curve Finance is a DEX that runs on Ethereum’s network. It specifically functions as a decentralized liquidity pool for stablecoin trading. Unlike other exchanges, it doesn't use an order book. Instead, Curve relies on an automated market maker (AMM) model for matching liquidity.

Curve was founded by Michael Egorov, who previously co-founded the crypto infrastructure protocol NuCypher, where he also served as CTO. Egorov also founded LoanCoin, a decentralized crowdlending network. Before getting into crypto, Egorov studied at the Moscow Institute of Physics and Technology and the Swinburne University of Technology.

Curve Finance is known for its simple usability, as all you need to access the DEX is an Ethereum wallet. Once you have this, you can start swapping different stablecoins at very low trading fees. While Uniswap is Ethereum’s biggest DEX, Curve Finance is still the largest for stablecoins.

What is an AMM?

An automated market maker (AMM) is a DEX protocol used for matching liquidity. It’s used by Curve Finance, as well as many other DEXs. Its role is to replace an order book and use a pricing algorithm to price assets. That way, digital assets can be traded using liquidity pools, instead of matching buyers and sellers.

How does Curve Finance work?

Curve is a fully decentralized and permissionless protocol, run by the Curve decentralized autonomous organization (DAO). The Curve DAO token, CRV, is used as the project's native cryptocurrency. Thanks to its decentralized nature, anyone can provide liquidity to one or more pools. Meanwhile, smart contracts are used to carry out any swap.

Smart contracts contain liquidity granted to the DEX by its community. In return, community members receive rewards for offering their tokens. Meanwhile, the tokens are used to match orders submitted to the exchange. By adopting this method, Curve users can swap two or more tokens. These swaps can include paired stablecoins or wrapped tokens with the underlying collateral.

Stable liquidity pools

Curve Finance was launched in 2020 when the DeFi sector took off. The project emerged with the intention of creating an AMM exchange with low fees and an efficient fiat savings account. The DEX focuses on stablecoins, which allow traders to avoid some of the more volatile aspects of the crypto industry. Meanwhile, traders can still access potentially high returns by using lending protocols.

Incentives for liquidity providers

Since Curve Finance’s model can't function without liquidity providers, attracting as many as possible is imperative. That's why Curve offers various incentives to its users. For example, Curve Finance offers lower transaction fees when compared to competitors such as Uniswap. The project also allows users to earn rewards from outside the Curve network. This is possible thanks to so-called interoperable tokens. For example, if DAI is lent out on Compound Finance, the DAI tokens are exchanged for cDAI. Curve users can use cDAI in Curve’s own liquidity pools.

Curve is also integrated with other projects, such as Yearsn and Synthetix. This allows liquidity providers to maximize their returns, which in turn, encourages users to come back to the platform and provide liquidity to Curve.

There are many other ways to make gains from providing liquidity on this platform, including the following:

  • Trading fees: Liquidity providers make gains from fees paid by the platform’s traders.

  • High APY: Annual Percentage Yields (APY) for stablecoin deposits on Curve can be high.

  • Yield farming: Any funds deposited into LPs that end up not being utilized are used in other DeFi protocols for extra income.

  • veCRV token: By locking up Curve’s native CRV token, users receive veCRV. After that, veCRV holders can use the tokens to further boost their deposit APY.

  • Boosted pools: Some Curve Finance pools offer extra incentives for additional liquidity. This may include high yields for LPs, and Curve is known for yield farming of stablecoins.

With all this at their disposal, Curve liquidity providers can mix and match their income streams however they want to. It’s in their interest to earn as much as possible in exchange for the use of their tokens.

Curve Finance (CRV) tokenomics

Back in August 2020, Curve Finance began seeking full decentralization through decentralized governance. To achieve this, the project launched its own DAO. Like other DAOs, Curve Finance introduced its native token, CRV.

Following the launch of CRV, Curve released a distribution schedule that's expected to be completed by 2026.

Crv
CRV token distribution schedule. Source: ICO Analytics.

The total supply of 3.303 billion tokens is distributed in the following way:

  • 62% to community liquidity providers.

  • 30% to shareholders (team and investors) with two to four years vesting.

  • 3% to employees with two years vesting.

The Curve DAO token, CRV, grants its holders voting rights on various proposals. They can also make proposals themselves for the wider community to vote on. Anyone with CRV tokens that are vote-locked can propose updates to the protocol. This can include changing the fees, creating new LPs, adjusting rewards for yield farming, and more.

The CRV token can be purchased or earned from yield farming after the user deposits assets into LPs.

As of April 2024, CRV tokens have a current circulating supply of 1.19 billion, which makes up about 36% of its maximum supply is 3.303 billion.

CRV has numerous use cases within the Curve Finance ecosystem. Apart from being used as a governance token, it also offers LP rewards and boosts yields. Meanwhile, CRV is also used for token burns. Burns are generally used to reduce the circulating supply of an asset, and involve locking up tokens in a separate, one-way smart contract.

The risks of Curve Finance

While Curve Finance offers plenty of advantages, it's important to understand the project's risks. Curve Finance has been audited twice by Trail of Bits and once by Quantstamp. Of course, this doesn’t mean that the project is risk-free, but it’s a good start.

One of the biggest risks that Curve faces is its reliance on other DeFi protocols, as the majority of Curve’s liquidity pools are supplied by other protocols to generate additional income. If one of those protocols were to face financial difficulties, there could be a chain reaction that affects many of them.

The final word

Curve Finance is one of the most popular AMMs on Ethereum. It supports high-volume trading of stablecoins and wrapped cryptocurrencies. It offers tight spreads and low slippage, and numerous DeFi protocols rely heavily on it. As such, Curve Finance is at the core of Ethereum’s DeFi sector.

All of this suggests the project has a promising future. There are still risks involved — as is true for every crypto project. However, Curve Finance’s chances of remaining in-demand and operational are high.

FAQs

What is Curve in crypto?

Curve is a decentralized exchange and an AMM protocol that enables stablecoin swaps. It also supports swaps of wrapped crypto. Additionally, Curve is integrated with a number of other projects in Ethereum’s DeFi sector.

How safe is Curve Finance?

Curve Finance is as safe as any established cryptocurrency. When dealing with crypto, there are always risks involved. However, the protocol has been audited and is considered a safe platform to use.

Who founded Curve Finance?

Curve was outlined in a white paper by Michael Egorov in November 2019, and launched soon after in January 2020. Before launching the project, Egorov worked on several other developments in the crypto industry.

Is Curve fee-free?

No, Curve does charge fees. However, its fees are still quite low in comparison to other similar projects like Uniswap or Balancer.

Is Curve a real bank?

Curve Finance isn't a bank, but rather a DEX that offers yield farming. Its primary role is to offer stablecoin and wrapped crypto swaps. However, by becoming a liquidity pool provider, you can earn passive returns from your dealings with the project.

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