Openfi: Curve (updated)
Disclaimer: The following piece is simply a summary of my opinions and should not be construed as investment advice or regulatory analysis.
DeFi on Ethereum and other Layer 1 blockchains has grown exponentially so far this year. Given the recent developments, I thought it would be helpful to share some updates on “Blue Chip” projects for new users curious about the space, starting with Curve Finance. In this post, I’ll cover how Curve is currently tackling multi-chain expansion, responding to new competitors, deploying liquidity mining programs, and much more.
Disclaimer: The following piece is simply a summary of my opinions and should not be construed as investment advice.
O: Opportunity - How large is the Total Addressable Market?
Score: 4.5/5
The market for DeFi on Ethereum is growing exponentially. Total value locked (TVL) is now over $79.6 billion, up from $12.4 billion in November 2020, the last time I analyzed Curve in an OpenFi post. Many DeFi projects, including Curve have since expanded to other Layer 1 blockchains, like Avalanche and Solana, which has increased the TVL of the entire DeFi ecosystem to over $154 Billion.
Curve offers liquidity pools designed for frictionless stablecoin trading. Think of Curve as the Forex platform for digital assets. As the appetite for stablecoins, synthetic assets, and wrapped assets continues to grow within the space, the need for liquidity will only increase. In Q2 alone, stablecoins had over $1.7 trillion in transaction volume (up over 1,000% year over year) and reached a market cap of over $100 Billion. Curve has established itself as a market leader, surpassing Uniswap in TVL and second only to Aave amongst all DeFi protocols.
P: Product - How innovative is the product and is the product 3x faster, more efficient, cheaper than existing products out there, and easy to use?
Score: 5/5
Curve’s overall goal is to provide frictionless trading of stablecoins. One way Curve achieves a seamless user experience is with low fees of 4 basis points (bps) per trade. Whereas trading fees on Uniswap recently moved from 30 bps to a more staggered fee structure of either 5 bps, 30 bps or 100 bps, depending on the specific asset pair. The market average is 25 bps making Curve still consistently a more cost-effective application to swap stablecoins. Throughout this analysis, I’ll discuss asset management DeFi projects like Yearn.finance, StakeDAO, and Convex finance that have integrated with Curve to give liquidity providers (LPs) a unique opportunity to both earn fees from trading as well as interest from lending LP tokens.
Curve is also expanding its product offerings to compete directly with Uniswap V3 and with automated market makers (AMM). Curve’s product expansion allows for swaps between volatile assets similarly as Uniswap V3, except automated. So far, Curve has established itself as a strong protocol in the stablecoin category, and there are a lot of opportunities for innovation as it diversifies and begins to compete with other variable asset AMMs.
E: Experience - Does the team have any previous experience architecting projects and previous experience within the cryptocurrency industry?
Score: 3.5/5
To recap from the previous OpenFi piece on Curve: Micheal Egorov is the CEO and Founder of Curve and previously was a Russian physics professor and founder of NuCypher, and a Senior Software Engineer at Linkedin. Since the last OpenFi piece, Curve also has welcomed several notable contributors:
Philippe Masset - an experienced software engineer, who spent 3 years at Buffer and Founder of DeFi company, Upspent.
Manuel Garcia - spent 4 years as the CTO of Protofire and recently started as CEO of Bootnode, a crypto company.
Julien Bouteloup - a serial entrepreneur in the Blockchain sector and the founder of StakeDAO, Stake Capital, Rekt and has been contributing to Curve for over a year.
Sam Werner - graduated from the Imperial College of London with a PhD in Computer Science and recently worked at Unilever and R3.
Charlie Watkins - a new project lead at Curve
Ben Hauser - a new head Engineer at Curve
N: Network Effects - Will more people in the network benefit when others join and are there high switching costs and stickiness in using the platform?
Score: 4/5
Curve has expanded to other blockchain platforms beyond Ethereum, such as Polygon, Fantom, and xDai. This multi-chain strategic approach has increased the TVL in the protocol and its overall volume, similar to a company expanding in different countries for customer acquisition.
One thing to be mindful of with Curve and other open-source projects in DeFi is that exclusivity is hard to come by. Curve had some intellectual property issues with Saddle Finance, a similar protocol backed by crypto VC funds that allegedly copied much of Curve’s codebase. This debate demonstrates the low barrier to entry and competitive environment for Curve and other open-source DeFi projects.
Curve benefits from network effects associated with integrating more projects onto the protocol. Curve has integrated notable DeFi projects via integration with Curve’s smart contracts and creating token pairs between alike or stable assets. Applications integrated with Curve include asset management protocols Alchemix, Enzyme Finance, Pickle Finance, Harvest Finance, Alpha Homora, StakeDAO, and BadgerDAO. Along with fixed income protocols, including Element Finance and lending protocol, Aave. Projects like Convex Finance have also aimed to make the experience of Curve finance more seamless and easy for users by boosting yields by default which typically requires manual purchase of Curve tokens and then locking them up. Curve also has more unique offerings beyond standard DeFi applications such as StaFi, a derivative product.
F: Fundamentals: Do the underlying unit economics and any financial assumptions make sense within the current network?
Score: 4/5
Liquidity providers on Curve earn 0.50% yield for providing their USDC, DAI, and USDT on the platform. In addition to receiving a percentage of the trading fees, users also receive CRV governance tokens as rewards, increasing one’s effective annual percentage yield (APY) to anywhere between 3% - 7.9% (compared to Coinbase’s 0.15% annual rate on USDC). Curve’s industry-low trading fees provide a highly sustainable financial model with high rates of return.
A major criticism of Curve is its token inflation schedule by boosting APYs using veCRV. The incentives on the platform benefit long-term holders of the CRV token via staking for veCRV, where short-term holders have experienced losses. While high inflation helps to decentralize the protocol and give tokens to liquidity providers, it increases selling pressure on the secondary market. Delphi Digital has uncovered that despite this concern, 93% of Curve’s minted supply for CRV has been locked up for users to generate veCRV and vote on interest rate changes. With this much of the token supply locked up, it ends up negating inflation.
Curve currently has annual revenues of $31.5 Million on Ethereum. According to Messari Analysts, volatile and uncertain DeFi markets actually help Curve’s performance and contribute to the protocol’s high revenue. Due to the nature of stablecoins, individuals tend to opt for these types of low-risk investments when the DeFi market has a downturn. To compare this to traditional finance, Curve is similar to portfolios holding treasury bills, CD’s, and other more stable investments as a derisking mechanism.
I: Incentives - Are there proper cryptoeconomic incentives in place for actors to participate in the intended actions to grow the platform or network including early adopters, late adopters?
Score: 4/5
In addition to the basic liquidity rewards above, Curve offers incentives by allowing users to vote lock tokens (veCRV), boosting rewards by up to 2.5x. 62% of veCRV will be distributed to liquidity providers, with an additional 35% to investors and community members to encourage growth and retention.
By locking up their tokens, Curve users become long-term holders of CRV tokens who can participate in passing proposals they believe will improve and bring more value to the protocol. For example, the proposal to reward trading fees to veCRV holders was a community-led proposal. veCRV holders can now also vote on how CRV inflation is distributed to liquidity pools.
Allowing users to lock their CRV tokens for veCRV to vote on boosting rates also holds the asset management protocols supported by Curve (including Convex, Yearn, and StakeDAO) accountable for determining proper user rewards. To prevent potential abuse of voting power, Curve created Curve’s Smart Wallet White List for projects that attract $130 Million of veCRV supply, and the decentralized Curve community approves inclusion to the list via a vote. Joining White List incentives projects to prioritize benefiting the Curve community because token holders have the power to delist them as they see fit.
Curve has begun expanding to other EVM compatible layer 1 blockchains and is implementing incentive programs to bootstrap initial liquidity for each expansion. So far, the largest incentive program they have run is with Polygon at $6 Million in liquidity mining rewards. The rewards are distributed to stakers and liquidity providers on Curve. Users receive their typical platform fees and CRV rewards plus additional MATIC tokens. Curve will be expanding to Avalanche, as well with a $7 Million liquidity mining rewards program structured similarly to Polygon’s program, except rewards are paid out in AVAX (Avalanche’s network governance token).
Overall Score: 25/30
As you can see, the Curve team has been busy with platform upgrades, partnerships, and multi-chain expansion efforts, making it an excellent liquidity platform to use. Due to this and other operational improvements, I’ve added 2.5 total points to the overall score since the last review. I look forward to seeing Curve on Avalanche in the coming weeks as part of the Avalanche Rush program. I’ll be doing a few more lookbacks for other major DeFi protocols, so stay tuned!