Curve Finance Review 2024: Understanding Its Unique Bonding Curve

Curve Finance is the engine behind the now-famous DeFi aggregator Yearn.finance. However, what really put Curve Finance on the map was the notorious launch of CRV (Curve Finance’s governance token). Why? Because at the time of its launch, CRV’s market cap momentarily surpassed that of Bitcoin. As you’ll see, Curve Finance is more than just another DEX.

What is Curve Finance?

Curve Finance is an Ethereum-based decentralized exchange specially designed for efficient trading between cryptocurrencies of equal value, offering high annual interest returns for liquidity providers depositing cryptocurrency funds into Curve Finance. The recently launched governance token CRV has transformed Curve Finance into a Decentralized Autonomous Organization (DAO).

Curve Finance is seen as a series of asset pools, all containing cryptocurrencies of equal value. Currently, out of the 7 pools on Curve Finance, 3 involve stablecoins, while the rest involve various versions of wrapped Bitcoin like wBTC, renBTC, sBTC. These pools can provide incredibly high interest, returning over 300% annually to liquidity providers (for the BUSD pool).

You might wonder how this is possible. The simple and short answer is that Curve Finance uses these deposited funds to provide liquidity to other DeFi protocols (e.g., Compound). This generates interest for both Compound and Curve Finance, essentially passing that interest on to liquidity providers, plus a cut of Curve Finance platform transaction fees, and some CRV tokens. Yearn.finance takes this a notch higher by automatically swapping stablecoins into the highest-yielding Curve Finance pool.

Unlike many other DeFi protocols, Curve Finance is very upfront about the potential risks of using its platform. Curve Finance’s DEX code has undergone two audits, and the CRV token contract and DAO have been audited three times.

Egorov emphasizes the need to continually review the code to ensure there are no issues. Thus, Curve Finance offers a bug bounty of up to $50,000 to anyone who can find any errors in the DEX, CRV, or DAO code.

Who Created Curve Finance?

Curve Finance was created by Russian physicist Michael Egorov, a seasoned cryptocurrency veteran. He began investing in Bitcoin during its peak in 2013, and despite initial losses, continued to use Bitcoin for cross-border transfers and even briefly mined Litecoin.

In 2016, Egorov founded a company called NuCypher, a fintech company specializing in cryptographic technologies. NyCypher evolved into a blockchain/cryptocurrency project, raising over $30 million in an ICO in 2018, and a further $20 million in private funding in 2019. Unfortunately, the NU token has not yet been listed on any major exchange.

Egorov has also been exploring DeFi protocols since 2018, starting with MakerDAO. In 2019, he was looking around for a good DEX and was not impressed with Uniswap. This prompted him to develop a new DEX called StableSwap and release a whitepaper in November 2019.

After coding and debugging, he released the protocol to the public in January this year under the name Curve Finance, with the rainbow Klein bottle as its striking logo.

In May 2020, Curve Finance hinted at issuing its own governance token, CRV. Egorov noted in interviews that a big part of transitioning to a decentralized autonomous organization was to circumvent any legal issues the Curve Finance team might face. The current Curve Finance team is based in Switzerland and consists of five people, including Egorov. Among the other four, one is a developer, and the other three work on social media and marketing.

What are Liquidity Providers?

Liquidity providers are a term used to describe people who deposit cryptocurrencies into DeFi protocols (usually decentralized exchanges). This is done to improve the quality for DEX users, as they do not have to wait forever for a trade to complete.

In many cases, liquidity providers can earn some hefty returns by providing liquidity. These rewards typically come from a cut of the protocol fees, as well as awarded protocol tokens (if available). These incentive schemes are known as liquidity mining programs. The practice of looking for the highest annual interest return on deposited funds is called liquidity farming.

What is an Automated Market Maker?

An automated market maker is any protocol that relies on smart contracts rather than order books to determine asset prices. On centralized exchanges, there’s a tug of war between buyers and sellers.

You might have noticed the different transaction fees offered by centralized exchanges to market makers and takers. Makers are those who buy or sell cryptocurrencies at prices other than the current market price on the order book, while takers are those who buy assets only at the current listing price.

Remember this term, Automated Market Makers (AMMs) use the ratio of assets in a given pool to determine the price of assets. Liquidity providers are incentivized to supply certain assets to these pools to ensure the ratio also remains balanced. This is what DEXs like Uniswap and Curve Finance do, and why liquidity providers must supply equal proportions of two (or more) cryptocurrencies to initiate liquidity pools on these platforms.

For example, suppose you have 10 Ethereum and 1000 USDC in your pool. This means each Ethereum is valued at 100 USDC, because the ratio is 1-100. Suppose someone buys 1 Ethereum from the pool. Now, this ratio has changed, and once recalculated, the price of Ethereum is now $111.

This incentivizes someone to arbitrage (exploit the price differences on two trading platforms) by buying at $100 on another exchange like Coinbase and selling in this hypothetical pool at $111, thereby restoring balance (the actual current market price of the asset – $100).

What is a Bonding Curve?

If you were to plot an AMM equation, you would see something called a bonding curve. It indicates that the more of an asset is purchased from the pool relative to other assets, the more expensive it becomes, growing exponentially to theoretically infinite prices.

This makes it nearly impossible for anyone to buy up all the cryptocurrencies in the pool, and when there’s too large a ratio (and price) discrepancy between pool assets, arbitrage traders are more incentivized to step in and restore balance.

Curve Finance uses a unique bonding curve—unique because it aims to compress prices into a narrower profit margin (stablecoins at $1). Thus, this curve looks more like the edge of an octagon than an actual curve. In short, it allows for greater deviation space between the ratios of stablecoins in the pool.

This means you can buy more without experiencing slippage. Egorov notes that regular bonding curves are not suitable for stablecoins or pegged assets due to the reasons outlined earlier (the prices on regular bonding curves would fluctuate too much).

What is Slippage in Cryptocurrency?

On centralized exchanges, slippage can occur a lot, especially if you’ve ever bought a low-trading-volume altcoin. You might see that there are 100 altcoins available at the current market price, but the price for the next 100 altcoins sold in the order book might be 5% higher. When you buy from more expensive sellers, the price increase is slippage.

Due to its unique bonding curve and the incredible amount of cryptocurrency deposited by liquidity providers, Curve Finance has very low slippage. Egorov claims you can easily execute trades worth over $5 million on Curve Finance with less than 0.4% slippage. Imagine trying to buy that amount of stablecoins on a cryptocurrency exchange, and after encountering significant slippage, your order book would be wiped out!

What is Impermanent Loss?

In short, impermanent loss is the potential loss experienced by liquidity providers when depositing their cryptocurrencies into a protocol instead of just holding it. For example, impermanent loss occurs when someone buys 1 ETH from the aforementioned pool of 10 ETH and 1000 USDC.

If the price of ETH rises, the liquidity provider could miss out on a few extra dollars in profit if they held all 10 ETH instead of the 9 ETH + additional USDC deposited by the person who bought 1 ETH.

As you can see, this “loss” is usually small and often temporary, but can become permanent if the user withdraws funds. The fact that Curve Finance uses stablecoins (and other pegged assets) means impermanent loss is much lower compared to other platforms like Uniswap, due to different degrees of price variation in assets.

Curve Finance Roadmap

Curve Finance doesn’t have a clearly defined roadmap. However, one very important thing to note. In interviews, Egorov mentioned that the Curve Finance team is considering adding more cryptocurrencies to Curve Finance, not just stablecoins.

He explained that this would require creating additional bonding curves to better support assets with greater volatility. This potential change, along with any others, fundamentally depends on the voting rights of CRV holders.

CRV Cryptocurrency Token

CRV is an ERC-20 token used for governance in the Curve Finance DAO. While the DEX itself is immutable, CRV holders can lock their CRV (transforming it into veCRV—voting escrowed CRV) to vote on adding new yield pools, changing existing fee structures, and even introducing a token burn scheme for CRV.

Voting power can increase based on how long CRV tokens are locked. The current maximum lockup period is 4 years, offering up to 2.5 times voting power for those dedicated CRV holders (in the form of veCRV).

Any user holding at least 2500 veCRV can propose initiatives by posting on the Curve Finance DAO governance forum. At least 33% of the existing veCRV must participate in the vote for the proposal to be considered, and a quorum of 50% is needed (more than 50% of veCRV must vote in favor). Any changes to DEX parameters are implemented by the Curve Finance team. The Curve Finance DAO itself is built using Aragon.

Curve Finance Cryptocurrency ICO

There was no ICO for the CRV token. Instead, the token was unexpectedly launched on August 13th 2023 when a Twitter user named 0xc4ad (0xChad) deployed the CRV smart contract by paying over $8000 in Ethereum Gas fees.

They managed to do this by using the code on Curve Finance’s Github as a reference. The team initially denied the token’s release but surprisingly deemed it legitimate after reviewing the code.

If you’re wondering about the distribution of these CRV tokens, it might give you a headache. As you might guess, 0xChad apparently pre-mined over 80,000 CRV tokens, which were sold shortly after release on Uniswap at prices as high as 3.1 ETH ($1275), temporarily pushing CRV’s market cap over $38 trillion.

The total supply of CRV just exceeded 3 billion. 5% (150 million) of CRV will be distributed to addresses that provided liquidity to Curve Finance before the token’s release, proportional to the amount of liquidity they provided. These funds will be unlocked gradually every day over a year (365 days).

Another 5% will be allocated to the Curve Finance DAO reserve, 3% to Curve Finance employees with the same unlocking schedule as early liquidity providers, and 30% to shareholders (Egorov plus two angel investors), with a release period of 4 years and 2 years respectively.

The remaining 62% of tokens (1.86 billion) will be provided to current and future liquidity providers of Curve Finance. 766,000 CRV will be distributed daily to liquidity providers. This daily amount will decrease by 2.25% every year. Doing the math, this means that the issuance of all CRV tokens will take approximately 300 years.

How to Get CRV Cryptocurrency

CRV is traded on Binance and has been listed on other well-known exchanges such as OKEx and HTX.

You can still get CRV on Uniswap, but if you have some idle stablecoins under your couch cushion, you might be better off farming by providing liquidity to a Curve Finance pool.

CRV Cryptocurrency Wallets

Since CRV is an ERC-20 token, it can be stored in almost any wallet that supports Ethereum-based assets. CRV cryptocurrency wallets include Atomic Wallet (desktop and mobile), Exodus Wallet (desktop and mobile), Trezor (hardware), and Ledger (hardware).

You can also use Web 3.0 browser wallets, such as Metamask. This is particularly convenient if you plan to vote with CRV, as you need a Web 3.0 wallet to interact with the Curve Finance DEX and its DAO.

Hacking Incident of Curve Finance

On July 30, 2023, multiple Curve liquidity pools on Curve Finance were hacked, resulting in a cumulative loss of about $61 million in various cryptocurrencies. Following the incident, Curve offered a bounty of $1.85 million for the identity of the hacker.

Bottom Line

While there’s hardly anything negative about the Curve Finance DEX, the situation with the Curve Finance DAO is somewhat different. It all boils down to Egorov having an incredible amount of voting power compared to other token holders, as he holds the most CRV by a significant margin.

The silver lining is that as more CRV tokens are issued to previous and new liquidity providers of Curve Finance, the DAO will become more decentralized. It’s also worth noting that Egorov’s immense voting power does not pose a threat like in other DAOs, because the number of variables that token holders can modify in Curve Finance is much more conservative compared to some other community-managed DEXs and protocols.

The future of Curve Finance seems very bright. Egorov himself stated that the project has no issues establishing new partnerships. In fact, the Curve Finance team is neighbors with other major DeFi projects like Aave (also located in Switzerland’s “Crypto Valley” Zug), meaning this is just the beginning for Curve Finance, thereby highlighting the value of the CRV token. But it might never be worth more than Bitcoin again!