Curve Finance (referred to as Curve below) at first glance is a strange project. Its goal is to provide low slippage and low fees for stablecoin exchanges. This design optimizes the limited field of stablecoin exchanges compared to Uniswap. However, this protocol precisely solves an important pain point of cryptocurrencies - stablecoin exchanges and stablecoin yield farming.
Curve's founder, Michael Egorov, is a Russian physicist. He started investing in Bitcoin in 2013 and has been involved in blockchain-related work ever since, making him an experienced cryptocurrency veteran. In 2018, he began exploring DeFi, and in 2019, he started exploring how to create a better DEX than Uniswap, which resulted in the launch of Curve Finance in January 2020.
Curve is also a type of CFMM, but it is suitable for tokens with exchange prices close to 1:1. Stablecoins are the most suitable type of tokens.
Each pool in Curve can have multiple tokens. Its exchange function is designed for stablecoins: the price ratio of two tokens in the pool is insensitive to the quantity of tokens, ensuring that the exchange price of tokens remains close to 1:1 within a large range. Take the 3pool, the most basic asset pool in Curve, as an example. The pool contains three stablecoins pegged to the US dollar: DAI, USDC, and USDT. The pool has approximately 500 million DAI and 1 billion USDC. According to the Uniswap formula, 1 DAI is equal to 2 USDC. In Curve, the exchange ratio is 1:1.00014. Although the quantity of DAI is only half of USDC, its price is only 0.014% higher than USDC.
This exchange function comes at a cost. When the relative quantity of an asset in the pool becomes significant, its price will decrease much faster than in Uniswap. If all tokens in the pool maintain a 1:1 exchange rate, the protocol operates without issues. However, if a token cannot maintain its peg to the US dollar for some reason, for example, if USDT can only be exchanged for 0.7 USD due to insufficient reserves, then due to Curve's insensitivity to price changes, a large amount of USDT will be exchanged for DAI or USDC before it drops to 0.7. When the proportion of USDT reaches a certain level, such as 95%, the price of USDT will rapidly drop below 0.7 USD. Similar to Uniswap, the pool's funds are provided by LPs, who bear this loss. Curve has been operating for nearly 2 years, and so far, there has been no risk of assets deviating from their pegs.
Stablecoin traders have two requirements: stable prices around 1:1 and low fees. Therefore, Curve's fees are relatively low compared to Uniswap, only 0.04%.
Another feature of Curve is idle asset yield farming. In reality, the assets in Curve's 3pool are not native tokens. For example, DAI is actually Compound's bond token cDAI (see the section on Compound above). When you deposit DAI into the 3pool as an LP, Curve first deposits the DAI into Compound to exchange it for cDAI. At this point, cDAI becomes an interest-bearing DAI bond, and then cDAI is deposited into the pool. So the actual assets in the pool are cDAI, cUSDC, and cUSDT. As an LP, you will receive Curve's own bond token, crvToken (also an LP token), which can be called crv3pool (more commonly known as 3CRV). Your crv3pool represents a portion of the entire pool, not just cDAI. For example, if you deposit 5 million DAI, and the pool currently has 50 million cDAI, 100 million cUSDC, and 100 million cUSDT (for simplicity, assume DAI, cDAI, and other assets have a 1:1 price ratio), then the assets you actually own in the pool will be approximately 1 million cDAI, 2 million cUSDC, and 2 million cUSDT.
When a trader exchanges tokens, the pool converts the deposited assets into cTokens and then redeems the exchanged assets from cTokens to return them to the trader. For example, if trader A exchanges 10,000 DAI for 10,000 USDC, the pool will exchange 10,000 cUSDC back into 10,000 USDC for the trader and convert 10,000 DAI into the corresponding 10,000 cDAI.
Curve has activated an underdeveloped market - stablecoin exchanges and yield farming. Before Curve appeared, stablecoin exchanges were always a big problem. It was very difficult to exchange a large amount of USDT for DAI or USDC because the liquidity of these tokens was scattered across various exchanges, and significant discounts and expensive fees were required for large transactions. By attracting stablecoin holders to provide liquidity through yields, setting up dedicated exchange functions for stablecoins, and offering low fees, Curve has created a stablecoin exchange with low slippage and low fees.
In addition to stablecoins pegged to the US dollar, Curve also provides liquidity pools for BTC and ETH tokens. Furthermore, the V2 version has developed a universal exchange function suitable for trading pairs of all currencies, including non-stablecoin exchanges. Both Uniswap and Curve's new versions are no longer limited to their respective fields and are attempting to accommodate various other forms of transactions. It is currently difficult to predict whether a monopolistic DEX will emerge in the future.