Since its creation, Curve has regularly been among the top projects in decentralized finance (DeFi) as measured by the total value of assets locked in its smart contracts (TVL). Because it offers efficient exchange among stablecoins through its specialized automated market maker (AMM), Curve has become an integral part of DeFi infrastructure.
The AMM model for decentralized exchanges was pioneered and popularized by Uniswap, but it has since been adopted by many other DeFi protocols—including Curve. Most AMM-based platforms allow trade of more volatile assets, necessitating a mathematical model, called a bonding curve, that accounts for a wide range of prices.
Since its introduction, Curve has expanded on its original AMM and has begun to support trading of non-stablecoin crypto assets. It has also expanded from its original home on Ethereum to many other layer 1 blockchains and layer 2 solutions.
CRV is Curve Finance’s governance token and is offered as a reward to liquidity providers. CRV can also be locked into a smart contract to grant holders voting rights allowing them to make changes to the platform and direct its financial incentives.
How was Curve developed?
“Curve”, originally introduced as StableSwap, was created in a 2019 by Michael Egorov, a software engineer who previously served as CTO of a San Francisco-based computer security company. StableSwap was ultimately renamed to Curve before officially launching in early 2020. While Curve’s direction is now largely in the hands of community governance through a decentralized autonomous organization (DAO), a small team of developers (including Egorov) continue to build the technology that powers the platform.
In 2021, Egorov launched Curve v2, which allowed for non-stablecoin swaps using a slightly tweaked AMM model. Its first Ethereum-based pool was called TriCrypto and contained USDT, WBTC, and WETH.
After the launch of CRV, the total value locked (TVL) on the platform rose by 4x over the course of only a few days. By January 2022, Curve’s TVL was more than $24 billion, at least partially driven by the “Curve Wars” described below. However, TVL on the platform sagged along with the total value of the whole crypto market over the course of 2022.
How does Curve work?
Curve was originally developed for traders to swap stablecoins, which are performed for several reasons.
For instance, DeFi traders might need to swap stablecoins if they took out a loan in USDC from a decentralized lending/borrowing protocol, but only have USDT to repay it. However, perhaps the most important use of Curve is arbitrage. Arbitrage traders, or arbitrageurs, take advantage of small differences in prices between similarly priced assets by trading them on different markets for a small profit. Arbitrage ensures that the same assets usually trade at consistent prices on various trading platforms including liquidity pools, decentralized exchanges, and centralized exchanges.
A modified AMM
Decentralized exchanges (DEX) like Uniswap, Sushiswap, and Curve operate through automated market makers (AMMs) to facilitate the trade of assets using smart contract technology.
In AMMs, liquidity providers (LPs) lock their assets into liquidity pools (special smart contracts on the platform), which are then used by traders to swap their assets. For instance, if a trader wants to swap their USDC for USDT, they can deposit USDC into a USDC/USDT pool and receive an equivalent value of USDT, minus a fee. The funds in the pool are supplied by LPs who collect fees for providing liquidity to traders.
In order to maintain an equivalent amount of value in the pool, AMM platforms use the constant product formula, which is a mathematical model that helps balance assets and creates the “bonding curve” of token valuation.
In this design, swaps (e.g., swapping USDC to USDT) cause the prices of the assets to change in accordance with the constant product formula (that is, they move to steeper parts of the curve). Depending on the amount of liquidity in the pool, large swaps can cause significant price movements. In the case of stablecoins, this could cause one of the tokens to significantly deviate from its $1 peg price. When a trader experiences this difference in expected and realized price, it is called slippage.
Curve aims to change the constant product formula to “flatten” a part of the curve near an expected constant price of pooled assets—such as $1 for stablecoins. This allows bigger trades to be made within a tight range to help minimize slippage. This can also work for non-fiat tokens with pegged values like stETH and ETH, since they theoretically track similar values.
However, slippage is not entirely avoided in this model. In fact, when prices fall outside of the optimized range—intended to occur rarely—high slippage is a significant risk. This was put on display in March 2023 when USDC traded at less than $0.90. In the frenzy, one user lost $2 million to slippage in a CRV stablecoin pool.
Rewards on Curve
Liquidity providers (LPs) benefit from the fees paid by traders who use Curve to swap assets. The swapping fees are split among all LPs, based on the amount of liquidity provided. The rewards (called variable APY or vAPY) are based on exchange volumes in that pool.
In addition to swapping fees, CRV tokens are used to reward LPs who are providing liquidity to certain pools. The distribution of these token APR (tAPR) rewards is governed by community voting. Yield farmers actively seek out these opportunities. Additionally, rewards can be “boosted” by locking CRV into the protocol for a dedicated amount of time. For example, by locking CRV into Curve’s smart contracts and receiving veCRV in return, a user may be able to boost the rewards they receive by 2.5x.
Of note, there are also pools that support rewards by lending deposited funds through third party DeFi platforms like Yearn Finance, Compound, and Aave.
Support of non-stablecoin assets
In 2021, Curve v2 introduced swapping of non-pegged digital assets. Although its AMM model differs slightly from other decentralized exchanges, this move provided Curve pools with similar functionality to Uniswap, 1inch, Sushiswap, and others. However, while these pools that include WBTC, ETH, and other crypto assets are popular, most of the platform has remained true to its stablecoin-centric origins.
How is the CRV token used?
The CRV token was officially launched on August 13, 2020. Its purpose is to provide a means of community governance of the platform through the Curve decentralized autonomous organization (CurveDAO). It is also used as an incentive reward in liquidity pools and therefore increases usership of the exchange.
CRV and veCRV
The intermediary between CRV and its functions (staking, boosting, and voting) is another token called voting escrow CRV (veCRV). After either buying or receiving CRV as a reward, a holder can stake it in one of Curve’s smart contracts to receive veCRV in return. The amount of veCRV received depends on 1) how much CRV is locked, and 2) for how long. CRV can be locked for up to 4 years.
- Staking – Locking up CRV through staking grants holders of veCRV the ability to collect platform trading fees just like liquidity providers. The goal of this is to align incentives between LPs and those participating in community governance.
- Boosting – After receiving veCRV, Curve users can apply a “boost” to the CRV rewards they receive in liquidity pools. This feeds into the system to further support more staking, boosting, and governance participation.
- Voting – Holders of veCRV can apply their tokens to voting on governance proposals in the DAO. Importantly, voting is also how newly minted CRV is applied to different pools—directing token rewards and deciding which pools are most lucrative.
There is a total supply of 3.03 billion CRV tokens. An initial supply of 1.3 billion (43%) was released at launch, divided among the development team and investors (30%), pre-CRV liquidity providers (5%), the community reserve (5%), and employees (3%). These allocations are also representative of allocations of the total supply, and the remaining 62% of all CRV are dedicated to community liquidity providers. All CRV allocated to the team, investors, and employees of Curve are fully vested in August 2024. The initial rate of CRV token release (also known as inflation) was around 2 million per day.
Curve Finance Essentials
- Curve Finance is a stablecoin-focused decentralized exchange.
- The specialized automated market maker (AMM) used by Curve minimizes the risk of slippage for tokens with similar value (like stablecoins), making swaps among them more efficient.
- Curve’s CRV token can be locked up in return for another token called voting escrow CRV (veCRV); in doing so it is used in staking, generating rewards, and community governance.