Decentralized finance (DeFi) platforms and their associated yields have earned a unique reputation across traditional finance and even the broader crypto market as risky, unsustainable, and even Ponzi-esque. Where does the yield come from and how is it 100 times higher than the rates offered from bonds, certificate of deposits, or savings accounts?
A handful of protocols essentially created peer-to-peer lending, trading, and insurance protocols that remove a middleman like a bank, exchange, or insurance company and allow smaller users to take their place.
Aside from offering low trading and lending fees, DeFi protocols have been generous in giving away their “governance tokens.” These native tokens often hold rights to a small percentage of protocol earnings, much as a company might pay dividends to shareholders.
Furthermore, some of the most prominent protocols have given token holders a share in the responsibility to control the future plans, upgrades and offerings of the project itself. Curve DAO and its native token CRV are examples of that governance model with the token playing a vital role in the protocol and the broader DeFi universe.
Introduction to Curve DAO
Until recently, Curve had been extremely under-discussed, considering the major role it holds in DeFi across blockchains. Recent shifts in tokenomics led its native token, CRV, to become net deflationary; subsequently, the price is up 122% since the token became deflationary.
When you see something with an unusually high APY it could mean two things:
* a temporary APY spike which will not last for long;
* something risky where APY represents the market pricing the risk.
Do not rush to ape. If APY=100% and you wait for 1 hour, you missed just 0.008%
— Curve Finance (@CurveFinance) November 14, 2021
To understand DeFi yields, it is almost essential to understand the inner workings of Curve. So what does Curve do and how does it do it? The Curve is a decentralized exchange, known for its pegged-asset swaps like fiat-pegged stablecoins or assets that trade at a 1-1 ratio. With over $3 billion in deposits, Curve’s largest pool is known as 3pool and contains DAI, USDC, and USDT.
The stable coin pools have gained traction offering high liquidity and low fees (0.004%) because Curve uses its native token to reward liquidity providers instead of higher swap fees. Below you can see the results of swapping $75 million from USDC to USDT on Curve, Sushi, and Uniswap, with Curve optimizing the swap with significantly less slippage than its competitors.
Slippage is the difference between expected and executed price on a trade, or how far away from the market price the trade executes.
Curve’s importance in the DeFi ecosystem
Over the past six months, Curve has made just $34.1 million in swap fees, even though it has $16.5 billion in TVL on Ethereum’s main network and has kept its trading volume consistently high. Curve and its liquidity providers make $0.40 on every $1,000 in trading volume, compared with another popular decentralized exchange, Sushi, which makes $3 on every $1,000 in trading volume for its liquidity providers.
Oftentimes, liquidity would migrate to exchanges with higher fee brackets for higher returns, and yet Curve has the lowest fees and more liquidity locked than any other exchange. The project’s real secret is subsidizing liquidity with the CRV token, keeping yields high enough for liquidity providers to stay in its pools.
Curve now has almost $18.8 billion in TVL across seven different ecosystems, making it the second-largest decentralized application, or dapp, behind Aave and giving the project 11.4% of Ethereum’s overall DeFi TVL. According to Curve’s release schedule, during the third quarter, about 113 million CRV tokens were released to the community. At the current price and TVL, that equates to a 12% annual percentage yield to stakes and liquidity providers, not accounting for swap fees and incentive programs from alternative chains like Polygon and Avalanche.
Providing such enormous liquidity rewards has given Curve the reputation of being the backbone of all DeFi yields. A jump in CRV price usually signals a “risk-on” DeFi market, with yields trickling down throughout the ecosystem. Stablecoin swaps are not the only source of DeFi yield. Aave and Compound both offer relatively attractive returns on stablecoins and crypto assets for providing collateralized loans.
However, the demand for swapping stables is an essential piece of arbitraging lending rates or moving capital between protocols and exchanges. Curve has established itself as a go-to player for large swaps and passive yield, as well as a testing ground for decentralized stablecoins like DAI or MIM, and tokenized assets like staked ether.
DeFi TVL hitting all-time highs most likely signals a growing hunger for yield. Large funds or high-net-worth individuals will use Curve, Yearn, and Convex for non-volatile yields, making the “Curve Wars” as important as ever.