What is the Curve protocol?
Curve Finance is a widely used decentralized finance (DeFi) protocol that provides an easy way to trade fixed-price tokens, or stablecoins, without suffering slippage and losing money. Like other protocols it comes with its own token and various rewards for participation. It has also spawned a “fork,” called Swerve. Curve Finance is compatible with several other popular protocols, such as Compound and Yearn.finance, which provide lucrative “yield.”
To understand what exactly Curve Finance is and does, it’s important to understand its context. On typical, centralised cryptocurrency exchanges, prices of assets are determined by order-books, a long ledger of buy and sell orders for an asset, the aggregate of which generates a rough price.
On decentralized exchanges, however, there isn’t always sufficient liquidity in a market to produce any meaningful aggregate. If only one person is selling BananaCoin against, say, PICKLE, there won’t be enough data for the order-book to scan.
This is where protocols like Curve Finance come in. Curve is what DeFiers call an Automated Market Maker, or AMM. These protocols are used by decentralized exchanges to provide liquidity and also generate pricing when it is otherwise difficult. They use smart contracts: pieces of code that automate complex transactions. Indeed when a trader places a buy or sell order he is not interfacing directly with a human counterparty (the other participant in a financial exchange); when it comes to protocols like Curve Finance, rather, the counterparty is the smart contract.
What makes Curve so effective in automating stablecoin matchmaking/pricing is its “pricing algorithm,” called “StableSwap,” which it includes in place of an order book. Many AMMs use these, including the popular Uniswap, which bases price on the ratio of the number of assets being sold and the number being bought. If there are three $BananaCoins and four $PICKLES in a “pool,” and a trader tries to swap a $Banana for a $PICKLE, the number of $PICKLEs will go up relative to the number of Bananas, and the asset’s price will increase.
In thinly traded markets, however, this can lead to a phenomenon called “slippage,” in which the price of an asset changes dramatically when the sale is executed. This is especially challenging when it comes to stablecoins, which are designed to be pegged within a narrow price range. If you’re selling a dollar-pegged DAI for $0.70, you’re losing out.
Curve Finance has its own pricing algorithm that responds to this, and is well suited for these sorts of tokens, especially when traded against each other in roughly the same price range (i.e., DAI for USDC).
While the Curve algorithm is densely complex, one concept worth attempting to understand is “rebalancing.” Basically, Curve offers over a dozen “pools” of funds which are accessible through its website and contain various combinations of stablecoins.
The stability of these combinations is calculated to minimize slippage and is vital to the success and health of the protocol. Curve’s innovation is to introduce a “rebalancing fee” to traders, which essentially offsets any shift in these finely tuned proportions caused by their trade. It will either cost a user extra to make up for a shortfall or refund them in the event they have actually added a surplus of one of the tokens in the pool. The result is that the pools, like the value of their contents, remain stable.
Curve users who pool their money, called “liquidity providers,” are rewarded in several ways. First, they are rewarded with transaction fees. On every trade there is a 0.04 percent fee levied, 50 percent of which goes out to the liquidity providers and the other 50 percent to the holders of the veCRV token, one of the many tokens associated with the Curve platform.
Second, Curve can be integrated with other DeFi protocols such as Yearn and Compound, which allow users to “stake” tokens and generate a certain amount of interest. The Curve-Compound intersection, for instance, permits the liquidity provider to generate that interest from funds deposited in pools, increasing earnings. This interoperability is known as “composability” and while it greatly enhances the functionality of individual DeFi platforms it also introduces a new risk; the more the DeFi network is interdependent on each other, the more susceptible they are to each other’s vulnerabilities.
What is CRV?
Curve also incentives liquidity providers with CRV tokens, which, unlike stablecoins, can fluctuate dramatically in price. CRV is Curve’s DAO — decentralized autonomous organization — governance token. CRV holders are able to vote on changes to the Curve protocol and participate in network governance decisions. There is currently a max supply of 3.03 billion CRV tokens with a gradual release of CRV into circulation (62% of total supply is reserved for this distribution process.) When first created to support the Curve DAO, 30% of CRV was allocated to investors, 3% to Curve employees and 5% to a community reserve.
Holders of CRV wishing to participate in network governance can choose to “lock up” their holdings and in turn generate a new token, “veCRV,” which vests holders with the ability to either vote or — with enough veCRV — to submit their own proposals for consideration. The longer assets are locked in, the more stakers are rewarded in veCRV (increasing their voting power) and the more return they can earn on their provided liquidity.
Before trading any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset. First and foremost:
No Canadian securities regulatory authority has expressed an opinion about the Curve protocol, including an opinion that CRV or veCRV is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of Curve prior to making it available on Wealthsimple Crypto and has concluded that CRV is not and is unlikely to be deemed a security or derivative. However, there is a risk that this conclusion could change in the future and the impact of this on an asset’s value is outlined in our Product Disclosure.
We evaluated Curve based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of Curve, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that first created Curve;
- The supply, demand, maturity, utility and liquidity of CRV;
- Material technical risks associated with Curve, including any code defects, security breaches and other threats concerning Curve and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and
- Legal and regulatory risks associated with Curve, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of CRV or veCRV.
Like all other crypto assets, there are some general risks to investing in Curve. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Each of these risks are described in more detail in our in-app Product Disclosure. In addition to these general risks, we note that as with other DeFi platforms, Curve presents an increased short history risk and is still undergoing audits of its smart contracts to uncover vulnerabilities. Further, the Curve community is not under any legal or regulatory obligation to disclose material information to the public regarding community activities. Holders of CRV have no recourse to the Curve community or Wealthsimple if the cryptocurrency declines in value for any reason.
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading Curve. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc. dated June 18, 2021. Please be aware that the statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply to a misrepresentation in this Statement.
Last updated: July 26, 2021