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DeFi Decrypted: What Is Curve Finance and CRV?

Despite the project only being around for less than a year, Curve Finance quickly has already become one of the leading DeFi protocols.

According to DeFi Pulse, Curve ranks at the sixth place among all decentralized finance projects with over $650 million value locked in the protocol.

But what is so special about Curve that helped it rise among the top DeFi protocols?

What Is Curve Finance?

Simply put, Curve Finance is a decentralized exchange for stablecoins (such as DAI, USDT, USDC, and PAX) and Bitcoin tokens (e.g., Wrapped Bitcoin) on Ethereum.

But most importantly, Curve functions as a decentralized protocol where users contribute their tokens to the project’s pools to supply liquidity. In exchange for providing liquidity, contributors are rewarded with an interest on their coins.

Led by Michael Egorov, Curve was founded by the project’s core team in January 2020. Since core devs were responsible for managing Curve, the project’s governance operated on a centralized basis in its early stage (which is perfectly normal for DeFi projects).

But later on, developers issued their native CRV token, distributing coins among community members who have been providing liquidity to Curve’s pools to decentralize the project’s governance.

How Is Curve Finance Different From Uniswap?

Similar to Uniswap, Curve Finance uses an automated market maker (AAM) protocol to provide liquidity to its pools and facilitate faster, more efficient trades between users.

However, on the v1.0 version of Uniswap, each token on the DEX trades directly against ETH. So, in order to swap two ERC-20 coins, the protocol executes two trades (the first token for ETH and ETH for the second digital asset after).

Since swaps are not direct on Uniswap v1.0, trading fees are higher. At the same time, there is an increased risk of slippage – the difference between the expected and the actual price of a trade – due to the protocol’s feature to maximize liquidity.

On the other hand, Curve’s AAM protocol allows traders to swap supported coins in a single trade (e.g., a direct DAI to USDC trade) to cut trading costs.

Furthermore, Curve’s high market depth reduces slippage, making the platform beneficial for even high-frequency and large-volume traders.

As a side note, it’s important to mention that Uniswap has fixed the majority of the above issues by rolling out Uniswap v2.0 in May.

What Is CRV?

CRV is a governance token that allows holders to participate in Curve’s decision-making process and vote on future protocol upgrades.

Interestingly, CRV was issued by an anonymous developer without the knowledge of the core Curve team. For this reason, when a crypto analyst spotted the token’s launch and took it to Twitter, the project’s team believed it was a scam and requested to delete the tweet.

But after realizing the coin is legit and launched without any major issues or backdoors, the core Curve team embraced CRV as the project’s official, native token.

After CRV was distributed among liquidity providers, Curve’s centralized core team-led infrastructure has been transformed into a Decentralized Autonomous Organization (DAO) called the CurveDAO. As a result, the protocol’s management has been handed over to the community.

The project uses a time-weighted voting system that gives more importance to the votes of senior members who have been around Curve for a longer time than those who participate in the decision-making process for the first time.

Curve’s goal with this process is to prevent attackers from manipulating the protocol’s voting mechanism by acquiring a significant part of CRV tokens.

It’s also important to mention CRV’s distribution model:

  • 5% of the total CRV supply to go to liquidity providers who had been supporting the protocol’s ecosystem in the past by contributing their tokens to one of Curve’s pools
  • 5% to be held at the CurveDAO community reserve
  • 3% to be distributed among Curve employees
  • 30% to be handed out to Curve shareholders
  • 57% to be distributed among (current and future) Curve liquidity providers at a diminishing rate each year (meaning that the project will mint a decreased amount of CRV tokens each year)

What Happened to CRV Since its Launch?

By looking at the charts, we can safely conclude that CRV has been on the decline since its launch in August 2020.

From the initial $12.96, Curve Finance’s native token fell to as low as $0.35 by October 26, losing approximately 97.5% of its value.

While this price movement signals a drastic fall, it’s important to note that CRV’s market capitalization – which is calculated by multiplying a coin’s price with the circulating supply – has grown significantly since its launch (from $5.58 million to $36.1 million).

Based on this data, we could attribute CRV’s price fall to the inflationary impact of rapid coin mints, which eventually facilitated a significant fall in the token’s value.

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