Welcome to the second series of PYMNTS on decentralized finance, also known as DeFi.
In the first series, we looked at what DeFi is, how it works, and its uses, risks, and benefits.
See also: PYMNTS DeFi Series: What is DeFi?
In this series, we’re going to look at some of the best DeFi projects — decentralized exchanges, lending/borrowing platforms, staking platforms — and exactly what people are investing in when they’re chasing 5%, 10% returns. , even 20% or more APR.
First off, success in DeFi is measured in Total Value Locked, or TVL, which means how much people have invested in a project. The “locked” part is because there is often a wait before you can get funds back – which can be devastating if you need funds immediately or a token’s price collapses.
When we took a deep dive into TVL’s #1 DeFi project, MakerDAO, in March when we explained how algorithmic stablecoins work — a few months before the collapse of the 48B Terra/LUNA stablecoin ecosystem Dollar showed how they don’t work – we’ll start with Curve, a decentralized exchange or DEX.
See more: DeFi Series: What is an Algorithmic Stablecoin? DAI and the fiat-free dollar peg
See also: More stablecoin dips fuel credibility problem
So what is Curve?
Curve.Finance is a DEX running on Ethereum, whose automated market maker platform (AMM) focuses on the exchange of two types of cryptocurrencies, mainly stablecoins but also wrapped tokens. In both cases, the assets are equivalent.
Stablecoins are pretty straightforward, exchanging tokens like Circle’s USDC for Tether’s or Maker’s Dai’s USDT.
Wrapped tokens like Wrapped Bitcoin (wBTC) and Wrapped Ether (wETH) are Ethereum standard tokens that represent one of the related tokens. They are often created by cross-chain payment bridge programs to allow the user to take a bitcoin (BTC) and temporarily exchange it for a wBTC to be used on the Ethereum blockchain. Wrapped Ether can be used on other blockchains, for example Cardano.
The wrapped tokens are secure enough, but cross-chain bridges have faced huge hacking problems, losing about $2 billion.
Look here: Crypto’s $100M Hack and Cross-Chain Payments Problem
Which doesn’t affect Curve directly.
yield farming
Curve’s enables stablecoin exchanges with low fees and low slippage – that is, the price difference between what a trader is willing to pay and what they have to settle for. Low liquidity reinforces this.
This liquidity is provided via automated market maker pools where investors lock up tokens against yield (interest), trading fees and curve governance tokens called CRV, which play a large part in how investors earn on the platform. It currently has $4.7 billion locked, second only to Maker.
Also read: DeFi Series: What is an Automated Market Maker? The beating heart of DeFi
The quirk is that many of Curve’s locked stablecoins are lent on other platforms like Compound, Maker, and Yearn, which lend the coins to users.
This is where it gets a bit complex. On these platforms, people who secure liquidity receive not only income and income from trading fees, but also liquidity tokens. These liquidity tokens can be traded one-to-one with the crypto when an investor is locked into the lending platform. But they can also be tied to other lending platforms for yield, interest, and various governance tokens.
So, for example, if someone blocks Dai tokens in a compound lending pool AMM, they will receive cDAI liquidity tokens. These are essentially boxed Dai stablecoins. So, cDAI can be included in Curve’s liquidity pools just like regular Dai tokens.
That brings in interest, fees, and Curve’s own CVR governance tokens. With which you can generate returns elsewhere. Sophisticated – and risk-taking – yield farmers can make long, lucrative investment chains.
Continue reading: DeFi Series: What is Yield Farming and Liquidity Mining?
bribery
So these CRV tokens are a great source of revenue, although technically they are governance tokens that have no real use other than voting on changes to Curve, ranging from code updates to fee determinations.
Except.
CRV tokens can be tied to other credit pools, but they can also be vote-locked to Curve, which provides voting rights through another set of tokens, the vote-escrowed Curve (veCRV). These tokens are the actual voting tokens and are not just earned one-to-one for CRV tokens. The longer a CRV token is locked – from a week to years – the more veCRV tokens are acquired and more voting rights are earned.
Here’s the catch and where it gets interesting and even weirder than regular DeFi economics. Among other things, voting will determine how CRV rewards will be distributed across Curve’s AMM liquidity pools.
This is where the first of two vote buying – bribery – from CRV holders takes place.
This is done on the https://bribe.crv.finance website. Serious.
As the best and cheapest place to trade stablecoins and other tokens, Curve has had a major impact on the success of newer tokens and lending platforms that rely on it for liquidity.
“Crypto protocols want to channel rewards into their own tokens’ Curve liquidity pools,” Protocol wrote of the Curve Wars, which peaked in late 2021 and early 2022. “If those pools have high rewards, more people will join those pools and drive growth.”
One platform, Convex, has been so successful at garnering CRV voting rights that “a multi-layered ‘bribery’ economy in which new protocols compete furiously to bribe Convex holders into voting for their protocols, and in turn the Curve tuning controlled,” Protocol wrote. “It’s a Russian puppet of crypto governance.”
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https://www.pymnts.com/cryptocurrency/2022/defi-platforms-tighten-aml-to-court-institutional-investors/partial/
See more in: AMM, Blockchain, CRV, Cryptocurrency, Curve, Curve.Finance, Decentralized Exchange, Decentralized Finance, DeFi, Locked Stablecoins, News
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