What Is Curve Finance? Curve Wars Explained

7 min read

Learn about Curve Finance including how its voting and reward mechanism led to Curve Wars.

One of the major concerns for DeFi users and traders is price slippage while trading stablecoins. If you're one of them, you might need to know about Curve Finance, a popular DEX that lets you swap stablecoins with low slippage.

Curve Finance is one of the leading DEXes, and it has been successful in attracting liquidity providers to its platform. In large part this is due to the token emission rewards and the mechanism which governs these rewards that have led to high levels of engagement from the community and the influx of liquidity;  this is commonly referred to as the Curve wars.

This post will explore Curve Finance and explain the Curve Wars.

Curve Finance Overview#

Curve Finance is a popular DeFi exchange that offers users the ability to swap stablecoins without having to worry about slippage. It's one of the most liquid exchanges, sitting in the top 5 in terms of Total Value Locked (TVL) among Ethereum protocols, and is a trusted name in the world of DeFi.

Here’s a fact! Even though stablecoins are designed to have constant values, there can be slight fluctuations depending on factors such as demand/supply, market volatility, etc. So, a stablecoin pair may not always have a perfect 1:1 ratio.

Curve Finance has designed its algorithm in such a way that there’s minimal impact from price differences among the coins while trading. Thus, there’s low slippage, resulting in an efficient swap for  traders.

Besides low slippage, another reason for Curve’s popularity is its low transaction fee, i.e., 0.04% for Ethereum networks.

The Curve Finance exchange also attracts liquidity providers through the emission of CRV tokens. The platform aims to maintain the value of CRV tokens through its tokenomics.

Now, let’s go into the details on CRV and veCRV.

What Are CRV and veCRV?#

CRV is simply the native token of Curve Finance. In the Curve ecosystem, the CRV token plays a vital role by incentivizing liquidity providers and granting them the power to vote in governance matters.

Users who provide liquidity to a trading pool on Curve will not only earn a share of all of the trading fees from that pool, but also receive additional CRV tokens as incentives. Users can either trade their CRV tokens on crypto marketplaces or use them as governance tokens to take part in  Curve’s voting process.

veCRV, short for Vote Escrowed Curve, gives  more voting power to influence which pools CRV emissions are allocated to.

Users can acquire veCRV by locking up CRV for a set period of time. The longer users lock up CRV, the more veCRV they'll be awarded. Users have the option of locking CRV tokens for one week to four years. Every ten days, veCRV holders vote to decide how the CRV rewards are to be distributed across the pools.

Choosing a longer lock-up time offers greater rewards, not just in the form of passive income but also through having the opportunity to boost the rewards received from different CRV pools. Liquidity providers with no veCRV will also receive the base reward for providing liquidity to a pool. However, those who hold veCRV could receive more than double that amount.

The CRV/veCRV system of tokenomics allows Curve to steadily emit new CRV tokens while giving people an incentive to lock them up rather than sell them right away. This prevents excessive downward pressure on the price of the CRV token.

The Curve Wars Explained#

With Curve Finance letting veCRV holders vote on CRV emissions, this leads to Curve Wars. Projects that participate in the Curve ecosystem want to ensure their protocols offer the highest rewards to attract more liquidity providers.

To achieve this, they must ensure they have the largest veCRV holdings and therefore the most voting power. The protocols engage in a competition to acquire the most veCRV tokens, so they can influence that more rewards would go to their liquidity pools.

Top Competitors in the Curve Wars#

Currently, the biggest players in the Curve Wars are:

  • Convex Finance ($CVX)
  • StakeDAO ($SDT)
  • Yearn Protocol ($YFI)

These platforms all have significant veCRV holdings and incentivize users to hold CRV tokens with them. However, Convex Finance is by far the leader. It offers a competitive ROI (Return on Investment) on CRV and has the most veCRV tokens, making it the most impactful platform for those looking to influence votes.

How Is Convex Finance Dominating the Curve Wars?#

At the moment, Convex Finance is the project that holds the most veCRV tokens and therefore has the most votes. Convex became the dominant force in the Curve Wars by creating its own liquid version of veCRV. Using this, investors can earn Curve platform fees without having to lock up their CRV tokens to receive veCRV.

Essentially, users can deposit their CRV tokens into Convex, and the platform gives them cvxCRV in exchange. Convex then stakes the deposited CRV, getting veCRV tokens for themselves. The cvxCRV holders earn a share of the veCRV rewards that Convex yields. And can also sell their cvxCRV for CRV (or any other token) whenever they wish.

This is a win-win situation for both parties. Convex gets the aggregated voting rights from the veCRV, and users still get a chance to earn veCRV rewards without having to sacrifice flexibility. This way, Convex has managed to gain control of around 40% of the supply of veCRV.

Because Convex has such significant veCRV holdings, many rival projects have started looking for other ways to influence the vote. Instead of trying to acquire veCRV,  the projects collect CVX from Convex Finance itself. Several DAOs, including Badger, and Frax, have taken the approach of acquiring large amounts of CVX to control their voting power.

Furthermore, several projects have started bribing veCRV holders by offering them rewards in the form of other Tokens in exchange for their votes favoring specific pools. This strategy of bribery aims to impact voting decisions and secure a larger portion of emissions to their liquidity pools. However, this practice raises ethical issues regarding the integrity and fairness of the governance process.

cvxCRV is a transferable token, unlike veCRV, and this has led to another layer in the system. Just as Convex is benefitting from getting people to lock up Curve tokens, the Votium protocol is using the same approach to incentivize Convex users. This platform rewards users for depositing their CVX tokens as vlCVX so that the protocol can earn more voting power on Convex.

A Complex Economy within an Economy#

As you can see above, the Curve Wars have given rise to an entire economy. Convex claims to have earned $329 million in revenue till now on a TVL of just over $3 billion.

Similarly, Votium, Abracadabra, and other protocols have all attached themselves to Curve and have their own staking and reward systems.

Neptune Mutual’s Vote Escrow Feature Implementation#

We at Neptune Mutual are also introducing the vote escrow feature. This will facilitate our community members with governance powers in terms of token rewards and encourage users to engage in our community for a long time.

Similar to Curve Finance, Neptune Mutual also lets LPs lock their NPM tokens for a certain period to receive vote escrow tokens (veNPM). The longer the NPM tokens are locked, the more voting power they receive.

Final Words#

DeFi insurance capacity needs to grow in order to have a better protected industry, and to achieve this, we need to encourage LPs to fund cover pools. NPM emissions, liquidity gauge controller and the veNPM are the tools that we are using to boost liquidity in our marketplace to drive growth.

If you run a DeFi platform and would like to offer your users a way to protect their funds, take a look at our parametric cover pools. Our decentralized insurance protocol is available to projects operating on Ethereum, Arbitrum, and BNB chain giving users peace of mind that their holdings will be protected in the event of a hack or exploit.

In fact, there’s a cover pool for Curve Finance in the Neptune Mutual Marketplace. You can purchase cover for protecting your funds on Curve Finance on both the Ethereum and Arbitrum chains.

If you'd like to know more about our cover pools or have an interest in working with us as a liquidity provider, please do not hesitate to get in touch.