Curve Finance is a decentralized exchange (DEX) running on Ethereum. It’s specifically designed for swapping between stablecoins. All you really want is an Ethereum wallet, a few funds, and you can swap different stablecoins with low fees and slippage.
You could think of Curve as “Uniswap for stablecoins.” Thanks of its special pricing equation, it’s also great for trading between various tokenized versions of a coin.
Automated market makers (AMM) have had a great impact on the crypto landscape. Liquidity protocols like Uniswap, Balancer, and PancakeSwap allow anyone to become a market maker and procure charges on a wide range of market pairs.
Can these AMMs meaningfully compete with centralized exchanges? Maybe. But there is one segment where they are as of now showing great potential – and that is stablecoin trading. Curve Finance is at the forefront of this space.
What is Curve Finance?
Curve Finance (https://curve.fi) is an automated market maker protocol designed for swapping between stablecoins with low fees and slippage. It’s a decentralized liquidity aggregator where anyone can add their assets to different liquidity pools and procure expenses.
If you’ve read our AMM article, you know that AMMs work with a pricing algorithm instead of an order book. Due to the way the pricing works on Curve, it can also be extremely useful for swapping between tokens that remain in a relatively similar price range.
That means it’s not only great for swapping between stablecoins but also different tokenized versions of a coin. As such, Curve is one of the most incredible ways of swap between various tokenized versions of Bitcoin, like WBTC, renBTC, and sBTC.
At the time of writing, there are 17 Curve pools available to swap between many stablecoins and assets. These are, of course, constantly changing based on market demand and the ever-changing landscape of DeFi. Probably the most popular stablecoins accessible include USDT, USDC, DAI, BUSD, TUSD, sUSD, and more.
There is no official information about Curve team, however most GitHub contributions were made by Michael Egorov, the CTO of a computer and network security company called NuCypher.
How does Curve Finance work?
As mentioned, assets are priced by a pricing formula instead of a request book. The formula used by Curve is specifically designed to facilitate swaps that occur in a roughly similar range.
For example, we know that 1 USDT should equal 1 USDC, which should equal roughly 1 BUSD, etc. However, on the off chance that you might want to switch 100 million bucks of USDT over completely to USDC, convert it to BUSD, there will be some slippage. Curve’s formula is designed to minimize this slippage as much as could possible.
One thing to note here is that on the off chance that they weren’t in a same price range, Curve’s formula wouldn’t work effectively anymore. However, the system doesn’t need to represent that. If USDT would be worth $0.7, something else outside of Curve would be terribly wrong. The system can’t retouch things outside of its control, so the same length as the tokens maintain their peg, the formula does its job very well.
This leads to extremely low slippage for even large sizes. in fact, the spread on Curve can meaningfully compete a portion of the centralized exchanges and OTC desks with the best liquidity.
There are various presumptions about trust and risk, so liquidity and execution don’t count for the entire picture. But, seeing rivalry between the centralized and the decentralized world in this way.
What is the CRV token?
CRV is the governance token of CurveDAO, a decentralized autonomous organization (DAO) running the protocol. CRV is continually distributed to liquidity providers of the protocol, with the rate decreasing annually.
As of November 2020, each trade on the platform incurs a 0.04% trading fee that goes directly to liquidity providers.
The risks of Curve Finance
Curve has been audited by Trail of Bits. Okay, so the project has been audited, which means it’s completely safe to use, right? Absolutely not! Risks are always involved when using any smart contract, no matter how many audits it has. Only deposit as much as you’re willing to lose.
As with any other AMM protocol, you’ll also need to take into account impermanent loss. If you don’t know what that is, read our article about it before adding liquidity to Curve. In short, impermanent loss is a loss in dollar value that liquidity providers can suffer while providing liquidity to an AMM.
Behind the scenes, the liquidity pool may also be supplied to Compound or yearn.finance to generate more income for liquidity providers. In addition, thanks to the magic of composability, not only can users trade on Curve, but also other smart contracts. This introduces additional risks, as many of these DeFi protocols become reliant upon each other. If one of them breaks, we may see a damaging chain reaction effect across the entire DeFi ecosystem.
Similarly to SushiSwap and Uniswap, Curve Finance also has a high profile hard fork – Swerve Finance.
Swerve promotions itself as a “fair launch,” significance there was no team or founder allocation of its governance token (SWRV). The SWRV tokens were conveyed in a liquidity mining event, where everybody had a same opportunity to farm. As such, Swerve claims to be a 100% community-owned and governed fork of Curve.
Curve is one of the most well known AMMs running on Ethereum. It facilitates with high volume stablecoin trades with low slippage and tight spreads in a non-custodial way.
another thing that places Curve Finance at the core of the DeFi space is how other blockchain protocols are intensely dependent on it. Composability between various decentralized applications has its risks, but at the same time it’s one of the strongest advantages of DeFi.
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