Curve Finance is aiming to surpass the “big man” Uniswap to become the leading DeFi protocol. Let’s learn about this exchange liquidity pool on Ethereum with CoinCu.
What is Curve Finance?
Curve is an AMM (Automated Market Maker) protocol built on the Ethereum blockchain. The main purpose of Curve is for DeFi users to swap cryptocurrencies with each other through pools. That is, users will contribute their cryptocurrencies to pools to create liquidity. In return, they will be rewarded based on the contribution rate to the pool.
It sounds like Curve Finance is similar to protocols like Uniswap, Balancer… but it has one point that makes it stand out. The Curve protocol focuses on stablecoins. Curve’s goal for stablecoin trading is to minimize fees and price fluctuations.
These often happen due to the wide range of options available in the market. Curve currently allows trading of stablecoins such as DAI, USDT, USDC, GUSD, TUSD, BUSD, UST, EURS, PAX, sUSD, USDN, USDP, RSV, and LINKUSD. Users can also trade ETH, LINK, and some cryptographic BTC assets like wBTC or yuan.
Curve Finance’s AMM Model
Curve Finance uses market-making algorithms and cryptocurrency pools. Meanwhile, traditional decentralized exchanges use peer-to-peer markets that allow cryptocurrency users to trade among themselves.
The Curve protocol is characterized by minimal slippage and fiduciary savings accounts for liquidity providers. All of these are managed by smart contracts that operate on the Ethereum network. Egorov created this system to provide a medium of exchange that acts as a bridge between decentralized stablecoins (e.g. DAI) and centralized stablecoins (USDT).
You can imagine this, the bridge created between these stablecoins will work as the stability fee provided by the protocol increases. If this is the case, users will not be able to switch between stablecoins because the fees are too large. In turn, Curve will be able to give users the ability to take advantage of the best options available on the market at the time.
Pool Curve Finance
Curve’s liquidity pools are no different from Uniswap’s model. The liquidity pool will be controlled by a smart contract. Through this, large amounts of cryptocurrencies are accumulated and deposited by liquidity providers (LPs). This liquidity is used to facilitate loans and swaps.
Each loan or swap will incur a small fee or interest. Part of this fee will be given to liquidity providers. Curve is also built on this model. However, instead of using volatile assets, it is geared towards stable currencies. For example, liquidity providers can offer stablecoins, DAI, or USDT to the Curve pool.
Smart contracts manage transaction rates in these pools independently. If a pool offers trading between DAI/USDT for 1,000 DAI and 1,000 USDT, the exchange rate is 1:1. If that rate changes (for example, 800 DAI or 1200 USDT), the exchange rate will move to DAI. This rebalancing ensures that there is always liquidity in the pools.
This is also the principle that Uniswap uses. That is what allows this system to be classified as an AMM. As we mentioned, fees are charged for each profit-generating activity generated by the liquidity providers. LPs will earn more if they have multiple pools and vice versa.
Integration with other DeFi protocols
Curve Finance integrates with other platforms to provide more stablecoin liquidity, thereby allowing for higher returns. That’s why Curve pools exist in Yearn Finance, Uniswap or Compound. Curve pools have two goals: to act as an exchange and to provide liquidity to other protocols.
Users when performing stablecoin swaps on Curve platform pay 0.04% per transaction. Half of this fee will be paid to LP, the other half will be paid to veCRV holders (CRV – Curve native token is locked).
What makes Curve Finance stand out?
To understand why Curve is a prominent protocol today, let’s take a look at the main features of Curve such as:
- Users can retrieve their assets from the platform at any time.
- Curve has a lower risk than other DeFi protocols. Furthermore, transaction fees and slippage are lower due to Curve’s focus on stablecoins.
- Users can stake CRV. This gives rewards and the opportunity to vote in the Curve DAO.
- The CRV token makes it easier to use Curve in the DeFi ecosystem.
How is Curve designed to provide all these features? The answer is right here.
Curve Finance’s design
First of all, Curve’s trading platform uses a mathematical feature to allow stablecoins to trade at the best price. This is a bonding curve. The bonding curve here is for stablecoins only. It allows users to trade more stablecoins at lower prices.
Next, Curve Finance encourages crypto enthusiasts to lend liquidity to their pools. In return, they receive a certain amount of CRV as an incentive. Liquidity pools use algorithms to determine the price of an asset. The AMM protocol is a smart contract that allows transactions to take place without an order book.
Finally, the platform allows users to stake CRV and receive a portion of the protocol’s transaction fees. They can also vote to lock the CRV for increased liquidity rewards. CRV holders can contribute to the decision-making process by voting through Curve’s governance process.
With consistency, Curve Finance focuses on trading stablecoins through the AMM model. What Curve has and is doing is likely to grow even bigger in the near future. Hope CoinCu’s article has helped you better understand this protocol.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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