OpenFi: Curve
The first project to be evaluated under the OpenFi framework will be Curve, an automated market maker for stablecoins and other wrapped and synthetic assets.
Disclaimer: The following piece is simply a summary of my opinions and should not be construed as investment advice.
O: Opportunity - How large is the Total Addressable Market?
Score: 4/5
DeFi is on the rise with a total market cap of over $12 billion. With that, we’ve seen projects in the ecosystem become more diversified, offering more options to users. Curve offers liquidity pools for stablecoins to enable frictionless trading. As the appetite for stablecoins, synthetic assets, and wrapped assets grows within the space, the need for liquidity will only increase. Curve has established itself as a market leader, second only to Uniswap among DEX’s.
P: Product - How innovative is the product and is the product 3x faster, more efficient, cheaper than existing products out there?
Score: 5/5
Similar to the well-known Uniswap, Curve is an automated market maker (AMM). To recap, an AMM uses a constant product function (with the form x*y=k) to price assets rather than an orderbook. Curve implements a slightly more complicated function incorporating both constant sum AMM (with the form x+y=k) and constant product. Curve restricts the scope of trading to assets that are close in price, i.e. USD stablecoins like USDT and USDC or wrapped/synthetic BTC. This allows Curve to use a relatively simple constant sum curve to price assets, thus traders are able avoid slippage when assets are traded and the pool can achieve liquidity comparable to traditional centralized orderbook depths. When the pools are out of balance, the function shifts back to a constant product function.
With the overall goal of providing frictionless trading of stablecoins, fees on Curve are very low – currently at 4 bps per trade. Compared to Uniswap’s 30 bps and overall market average of 25 bps, it is 6 to 7 times cheaper to use Curve to swap stablecoins. Partnerships with Compound and Yearn.finance give liquidity providers (LPs) the ability to not only earn fees from trading, but also to earn interest from lending LP tokens.
E: Experience - Does the team have any previous experience architecting projects and previous experience within the cryptocurrency industry?
Score: 3/5
Curve was founded in 2019 by Michael Egorov, a Russian physics professor and founder of NuCypher, who was also a Senior Software Engineer at Linkedin. Michael, along with a few other developers and community members, are contributors to the Curve codebase. No other team members have been mentioned officially by the project.
Throughout the life of the project, a few vulnerabilities have been discovered, though the team was able to carefully maneuver to prevent liquidity providers from losing funds. Like many projects in the space, the Curve team operates in a very decentralized manner and many protocol upgrades are led by the community using the Curve DAO.
N: Network Effects - Will more people in the network benefit when others join and are there high switching costs and stickiness in using the platform?
Score: 3.5/5
The market for DEX’s is quite saturated with differentiation coming in the form of either lower transaction fees or more liquidity. Curve has carved out a niche for itself within stablecoins in both areas. How the liquidity pools are currently funded will allow Curve to retain users who either provide liquidity or use the platform for transferring tokens. Curve has an advantage over new players entering the market due to its already large base of liquidity. Unlike traditional technology platforms (e.g. social networks), switching costs and user stickiness are generally low here but Curve can potentially mitigate competitive risks with its already large base of users.
In addition to traditional network effects, Curve benefits from network effects associated with composability. Open smart contract platforms allow decentralized applications to seamlessly interact with each other without official collaborations between the project teams. For example, various assets in Curve liquidity pools are sent to other protocols, such as Compound and iEARN, automatically to earn yield. This is a prime example of the so-called “Money Legos” effect that makes many DeFi products very powerful.
F: Fundamentals - Do the underlying unit economics and any financial assumptions make sense within the current network?
Score: 3.5/5
Liquidity providers earn rewards for providing their stablecoins onto the platform. Rewards for USDC and DAI are currently offered at 3.53% annual rate through Curve (compared to Coinbase’s 1.25% annual rate). These rates are supported by industry-low transaction rates, which provide a highly sustainable financial model.
veCRV (voting escrow CRV tokens) are the assets created from locking CRV rewards. veCRV enables holders to participate in Curve governance, earn trading fees, and boost rewards from liquidity provided. Since September 19th, 2020, 50% of all Curve trading fees and rewards were distributed to veCRV holders in the form of CRV tokens.
One major criticism of Curve is the inflation schedule. Short-term holders of the CRV token have experienced losses since all-time highs. Part of this should be attributed to the volatility of the broader defi ecosystem, which is only natural when there is extreme excitement for new products and technologies. Some users attribute the losses to the token’s high inflation. Proponents of high inflation believe it is beneficial to decentralizing the protocol and getting tokens into the hands of LPs. Critics of high inflation are mostly concerned with increased selling pressure on the secondary market, assuming liquidity providers are not long-term holders of the CRV token. Although it is too early to tell what exactly is the right level of inflation, proposals are frequently being submitted to adjust system-wide inflation. Decentralized governance could help find the optimal solution to improve the system.
I: Incentives - Are there proper cryptoeconomic incentives in place for actors to participate in the intended actions to grow the platform or network including early adopters, late adopters?
Score: 3.5/5
We’ve already covered the basics around liquidity awards above. Curve offers additional incentives by allowing users to vote lock tokens, boosting rewards by up to 2.5x. In addition to the 62% of tokens being distributed to liquidity providers, an additional 35% will be provided to investors and community members to further encourage growth and retention.
As mentioned previously, users lock their CRV tokens in order to participate in governance proposals. As such, users of the protocol who are long-term holders of CRV tokens are able to participate in passing proposals that they believe will improve and bring more value to the protocol (for example, the proposal to reward trading fees to veCRV holders was a community-led proposal). veCRV holders can also vote on how CRV inflation is distributed to liquidity pools.
Decentralized voting on Curve is not without controversy. For example, an HBTC pool was added, to the chagrin of Curve’s community members. It has been mentioned that Huobi purchased tokens to vote on the addition of the pool. While Huobi’s intentions were most likely not malicious, it could be possible for a malicious actor to manipulate proposal votes to the detriment of the protocol.
OpenFi Score: 22.5/30
As value becomes more digitized, the need for tools like Curve will only increase. Curve’s product offering delivers on both cost and liquidity. Stablecoins lend themselves, more than any other utility tokens, to retail and institutional adoption. We are excited to see what new, innovative products the Curve platform will deliver down the road.
