You’ve probably heard of crypto exchanges like Coinbase and Kraken, where people can buy, sell, and trade coins and tokens while the exchange takes a cut. Decentralized exchanges remove financial intermediaries from the equation and reduce that cut; in a sense, the exchange doesn’t exist — there’s just a protocol.Curve Finance is one such decentralized exchange, but with a twist: It’s designed for stablecoins, which are pegged to a fiat currency like the U.S. dollar or to another digital asset. Even though these coins should barely change in value, there’s still a market for trading.
How Does It Work?
While traditional exchanges use order books that match individual buyers and sellers, Curve is an automated market maker (AMM), a protocol that algorithmically acts as a buyer and seller, making it possible for someone to buy an asset even if no one is selling it.
This is done through multiple “liquidity pools,” groupings of tokens supplied by “liquidity providers” who are compensated with fees levied on transactions. To ensure that one asset doesn’t get too low in a liquidity pool, the protocol will offer a slight discount on it. As more people trade for that asset, the pool rebalances.
To generate increased interest for users, some liquidity pools on the platform lend coins to other decentralized finance (DeFi) protocols. For instance, if you’re depositing stablecoins into the Y liquidity pool, you’ll need DAI, USDC, USDT, or TUSD. The protocol will then convert these into yTokens so they can generate interest on the Yearn lending protocol.
In return, you receive liquidity provider tokens, which earn interest.
What’s the Upshot?
Uniswap pioneered AMMs, where traders can swap anything from Ethereum to arcane Ethereum-based assets without much liquidity. But what’s the point of Curve, which uses a similar price algorithm emphasizing stablecoins that don’t have much volatility?
For liquidity providers, it’s simple: Earn interest on your holdings while maintaining less exposure to volatile assets. The low volatility minimizes the risk of impermanent loss — when the withdrawal amount runs less than your initial deposit. It also simplifies Curve’s algorithm: Since it’s not dealing with highly volatile assets with wildly different values, it doesn’t have to try to rebalance liquidity pools constantly.
Traders, meanwhile, can avoid being hit with high fees or high slippage (a large gap between what they expect to pay and what they actually pay by the time the trade has completed). In addition to allowing traders to arbitrage between coins with miniscule price differences, there is also a utility for such stablecoin-to-stablecoin transactions, such as when a particular cryptocurrency is only traded for a specific stablecoin.
What Blockchains Does It Work On?
Most of Curve’s business happens on Ethereum, layer-2 blockchains Arbitrum and Optimism, and the Polygon sidechain. But Curve is also available on other layer-1 blockchains, including Fantom, Celo, and Avalanche, as well as Polkadot-based Moonbeam. It also integrates with Gnosis, Kava, and Aurora.
What Can You Borrow or Lend?
Curve was initially built on Ethereum, where ETH is the common currency. Traders can find centralized stablecoins, such as USDT and USDC, and algorithmic alternatives like DAI and FRAX. You can also swap for wrapped coins such as WBTC and WETH, which are synthetic versions that hold the value of the original (i.e., BTC and ETH, respectively).
Curve is also developing its own stablecoin, crvUSD.
Who Runs It?
NuCypher co-founder Michael Egorov launched Curve Finance in early 2020.
In August 2020, he delegated some governance powers to a decentralized autonomous organization (DAO). Holders of CRV can lock up that token in exchange for the veCRV voting token, which lets them vote on — or even submit — network proposals that change the protocol.
That same month, in an apparent effort to encourage others to lock up their CRV, Egorov locked up over 620,000 of his CRV tokens to give him 71% of the voting power in the DAO. After drawing criticism, he apologized for overstepping.
In September 2020, developers forked the Curve protocol and formed Swerve Finance. They claimed that Curve was centralized and its founder had pre-mined the CRV token; they called their protocol “100% community owned and governed.”
While Swerve didn’t last, as of February 2023, Curve ranks as the third-largest DeFi protocol in terms of total value locked, a measure of the amount of money in a protocol.
What Are the Risks?
Curve Finance hasn’t been immune from the attacks that have plagued other DeFi apps. An August 2022 attack on its nameserver led to the theft of $570,000 worth of ETH, though it was able to recover most of the funds.
Hacks aren’t the only thing to be mindful of. Curve’s document section draws attention to other risks. These include errors in Curve’s smart contract, the chance that a stablecoin will collapse (e.g., the high-profile de-pegging of Terra), or a systemic issue with one of the DeFi protocols Curve is lending to.