Curve Finance – a new era of spot FX on blockchain
Founded as an innovative way to trade in stablecoins as an alternative to more volatile crypto assets, the scope has expanded but the stakeholder benefits are sometimes less clear. This blog explores Curve Finance, the business case for adoption and the role of regulation.
What is Curve Finance?
Curve Finance is a permissionless automated market maker (AMM) platform that allows digital assets to be traded using liquidity pools instead of traditional centralised orderbook matching.
Since its launch in 2020, Curve Finance has grown become a top-10 DeFi protocol with a “total value locked” (a measure of the total liquidity available on the platform) of around 5.78 billion USD*. Curve was originally designed to compete with Uniswap in the spot exchange of stablecoins but its scope has extended.
How Curve Finance differs
Foreign exchange markets are core institutions that ensure access to liquidity in local and foreign currencies. Historically, exchanges are heavily regulated centralised market infrastructures and barriers to entry for market participants are usually high.
As decentralised entities, AMMs—such as Curve Finance—challenge this approach by being totally open: anyone can participate using smart contracts regardless of jurisdiction. Furthermore, Curve is non-custodial with no prerequisite to deposit funds in a custodian account in order to trade.
Curve and other AMMs facilitate the exchange of tokens using liquidity pools. These are smart contracts that hold tokens provided by market makers and liquidity providers. Participants earn trading fees and rewards in return for locking their tokens in liquidity pools so all participants are incentivised.
The business case for stakeholders
Trading fees are typically 4 basis points (bps). Half of these fees are distributed to liquidity providers with the remainder going to veCRV holders (a token issued in exchange for locking the Curve Finance governance token, CRV, in a staking contract). Liquidity deposits and withdrawals are normally subject to a fee ranging from 0 to 2 bps if they create liquidity pool imbalances.
Liquidity providers
Liquidity providers assume various risks by locking their assets inside the liquidity pools. They are rewarded for these risks through trading fees and various rewards mechanisms described below.
The Path Forward
Curve Rewards
- Trading fees: Liquidity providers earn a small portion of the trading fees.
- Interest income: Certain pools lend the funds provided by market makers to earn additional interest via protocols such as Compound and Aave.
- Pool incentives: Certain pools are allocated a portion of new CRV token as rewards to further increase the attractiveness of these pools to liquidity providers.
References
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Coon, Chris. "Governing the Wild West of Blockchain: Corporate Governance Issues with DAOs." 2023.
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Dutta, Lomesh. "What if Troubled Companies like Twitter Can Be Run by a DAO?" 6 Jan. 2023.
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World Economic Forum. "Decentralized Autonomous Organization Toolkit." Jan. 2023.
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