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Do you really know Curve, the uncrowned king of AMM

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As we all know, DEX with AMM mechanism generally has three major pain points: high transaction fees, high slippage and impermanent loss risk.

Original title: "Curve-The Uncrowned King"

Original source: ContinueGroup

As we all know, there are three major pain points in DEX with AMM mechanism : High transaction fees, high slippage and risk of impermanent loss. As a DEX that also adopts the AMM mechanism, Curve solves the above pain points by establishing similar value asset pools (such as various stable currency assets), and has established a series of unique innovative mechanisms to encourage LPs to provide liquidity. Since its launch in early 2020, Curve has been playing the role of an industry innovation pioneer and pioneer in the Defi industry, and is currently one of the irreplaceable industry leaders.

At present, Curve’s transaction fees, transaction slippage and impermanent losses are far lower In many AMM DEX such as Uniswap or Sushiswap. Among the transaction sources of 1inch, the share is not much different from that of Uni and Sushi, indicating:

-End users have a very strong demand for the services provided by Curve, not weaker than Uniswap;

-Curve transaction path is very competitive and can be preferred by 1inch.

- It has a monopoly position in large-amount stablecoin transactions, and the handling fee is extremely low (0.038%). For large-amount stablecoin users, there is no doubt that they will choose Curve.

Given that Curve's stablecoin exchange business has the lowest data moisture content, its TVL of 5.9Billion can almost be compared with Uniswap, and the daily transaction volume has grown rapidly to 1.15 billion US dollars recently. It has caught up with Uniswap at the same level, and its single-user daily transaction volume has reached an astonishing $1.3 million, more than 6 times that of Sushiswap and Balancer, and more than 60 times that of Uniswap, which shows that its business revolves around high-net-worth customers. The infinite room for improvement in the professional field has formed an irreplaceable value for Curve.

In a mature financial market, the two core demands are to improve the efficiency of capital utilization and the principle of no arbitrage, and Curve's curve design determines that Curve is not driven by arbitrage (Sushiswap and Uniswap Over 80% of trading volume is driven by arbitrage), meanwhile, Curve was the first AMM to improve capital efficiency, and has now become a niche market for stablecoin trading.

If the innovation in the field of AMM has just begun and is moving towards Improving capital efficiency is advancing by leaps and bounds, and Curve is undoubtedly the player who has gone the farthest and thought the most on this road.

1. AMM curve innovation

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The complete AMM mechanism has three major components: liquidity provider (LP), liquidity mining pool (composed of various trading pairs) and mathematical formulas (curve ). It can be seen that for the AMM mechanism, the most essential innovation is the thinking and continuous iteration of the pricing curve.

1. Constant product function

Constant product function "X *Y=K", its liquidity is evenly distributed along the price curve, as shown in the figure below:

The advantage of the constant product function is that it can ensure that any asset has liquidity at any price, which is also Uniswap's Prosperity foundation - long-tail asset prosperity. But the disadvantage is that capital utilization efficiency is "diluted" and "reduced" by the infinite price range:

For users Generally speaking, the larger the transaction volume, the larger the price range spanned, the more the price deviates, and the higher the slippage - leading to greater losses. The essence of the loss comes from the characteristics of the X*Y=K curve. The more the price deviates, the more room for arbitrage The larger it is, the more it promotes mean reversion.

If you use the constant sum function "X+Y=K" as shown in the figure below, you can simply achieve low slippage , but at the same time, it is easy to be drained of liquidity and cannot play the role of a market maker.

For liquidity providers (LP), impermanent losses come from unilateral fluctuations—making impermanent losses eternal, and the more violent the fluctuations around mean reversion, the higher the transaction fees charged. Therefore, in the absence of project token incentives, being an LP is actually a short-term bet:

-The ratio of the value of the two assets will not change much , to avoid impermanent losses

-The transaction is active, and the pool charges a large amount of transaction fees.

So for a product like Uniswap, the friendliness of making money The transaction pair should be as follows

2. AMM business model

From this, we think, can a Dex have a positive profitable business model under normal conditions?

AMM has several users:

-Uninformed users: they are simply looking for liquidity, random trading, daily buying and selling etc., LP can avoid impermanent losses in the case of mean reversion, and obtain a large amount of transaction fees from such users;

-Informed users: this Class users can trade under the condition of enduring value deviation, and know something with a high probability, which will cause LP to suffer losses;

-Arbitrage users: essentially LP Informed users, although helping LP return to the pool price, at the same time shared the expenses that should belong to LP.

However, the problem is that the constant product function "X*Y=K " does not distinguish between user types.

Although LP does not care about losses when the market is hot, there are platforms With currency subsidies and currency price subsidies, everything is not a problem.

Although Uniswap has a lot of advantages and will continue :

-new token distribution channel;

- Monopoly industry retail traffic and user mind;

- Minimal user operation and acceptance cost ;

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However, once there is an AMM with better pricing, lower fees, and more in line with professional scenarios, it will definitely:

-First attract professional users and uninformed users who care more about slippage, charges, etc., to form a healthy business model;

-The migration of LP forms a trend, resulting in better depth and lower slippage;

-Formation of a real moat in professional scenarios.

3. Curve's specific asset function

Curve has gone out of its own way . The exchange scenario between assets of similar value optimizes the undeniable low slippage, low handling fee, and low risk of impermanent loss. Curve Finance uses a hybrid AMM created by combining constant sum and constant product functions: a relatively flat curve is created near the equilibrium point of the curve, similar to a constant sum function, to keep prices relatively stable while making both ends more inclined, similar to Constant product function, so there is fluidity at each point of the curve, as shown in the blue curve below:

(n represents the number of assets (n=2 in this example), A is a "zoom in Coefficient" parameter, which determines the similarity between the function and the constant product function. The lower the value of A, the closer the Curve function is to the Uniswap function.)

On the other hand, Balancer realizes the exchange of multiple assets in the same pool, and the exchange between each two assets achieves the effect of Uniswap: constant average AMM

Don't go into details, simply put, keeping k unchanged, each item in the multiplication formula represents a For assets in a pool, a parameter change of one can cause a parameter change of the other. The curve between each two assets is very similar to the Uniswap curve:

4. Capital of Uniswap V3 Efficiency evolution

In contrast to Uniswap's DAI/USDC pool, Most of the transactions in the pool are concentrated between US$0.99-1.01, but this range only uses 0.5% of LP funds, and the remaining 99.5% of funds have never been used.

This shortcoming will be resolved in Uniswap V3. In Uniswap V3, when LPs provide liquidity, LPs are allowed to choose a custom price range. For example, if the DAI/USDC pool worth 25 million U.S. dollars in V2 is concentrated in the 0.99-1.01 price range of V3, it will be in this price range Provides the same depth equivalent to $5 billion in V2, and the maximum capital efficiency will reach 4,000 times, making V3 an extremely flexible protocol that adapts to different assets. At the same time, the transaction fee can also be optionally reduced to 0.05% (while Curve is as low as 0.04%).

Second, the team

Curve founder Michael Egorov has a team of 6 people, all working remotely. In January 2020, at the beginning of the project, from the first month when Curve was launched to the time when the lockup volume reached 10 million, there was only Michael alone. Since February, I have worked closely with iearn. It is worth noting that AC can be regarded as one of the early core figures of Curve, frequently participating in product planning and external communication.

About Michael Egorov's academic career: Michael has studied in a wide range of fields, including computers, physics, philosophy, and mathematics: 2003-2008: Moscow Institute of Physics and Technology, Applied Mathematics and Physics. Known as "Russia's MIT", it won the bronze medal in the International Olympic Physics Competition in 2003. 2008-2011: Swinburne University of Technology, Australia, obtained a double doctorate in physics and philosophy. 2011-2014: Monash University, postdoctoral fellow, researching ultracold atoms. During this period, he also worked as a LinkedIn project engineer. Michael has always maintained a love for physics. He mentioned in an interview that in Curve, the invariant of tokens is sometimes like the Hamiltonian function in quantum mechanics. Blockchain industry career: 2013: First bought BTC and began to focus on cryptocurrencies. 2016-2019: Michael participated in NuCypher as CTO, engaged in the development of distributed key management system. In 2018, Michael became an active user of some DeFi protocols, such as MakerDao; when using DEX in 2019, he didn't think Uniswap was so good. Michael saw the opportunity of stable currency, thought of developing a new stable currency DEX plan, and released the white paper in November of that year. At that time, according to his calculation, in theory, compared with the general DEX, the transaction cost can be reduced to about 1/100. Under the same amount, Curve can provide 100-1000 times higher market depth than Uniswap and Balancer. In January 2020, Michael officially launched Curve Finance in Switzerland.

3. Product innovation

As analyzed above, Curve’s transaction fees and slippage And the risk of impermanent loss is much lower than the current mainstream Dex, and the resulting problem is that the handling fee distributed to LP is also much lower than other Dex, so how does Curve rely on its unique incentive mechanism to attract LPs to continuously inject liquidity? Woolen cloth? We believe that Curve is a master of the powerful Defi ecosystem, relying on the entire Defi ecosystem to output value to users. Through the Defi portfolio, users can earn income on any corresponding Defi platform while Curve earns traditional LP income. Curve's innovations are mainly reflected in:

1. DeFi portfolio - providing more income than other DeFi protocols:

Earn income in other agreements through liquidity funds, such as the early iearn. In addition to CRV governance token rewards, there are also other protocol governance tokens rewarded in other protocol asset pools. Not long after Curve was launched, it was realized in February-March 2020:

Basic combination: users convert DAI to Compound’s cDAI, and first obtain Compound; and then put cDAI into Curve, that is, get Curve's transaction fee income.

Advanced combination: the income is further improved, users convert DAI to iearn's yDAI, and then invest in Curve. YFI’s income strategy is equivalent to being based on Curve. It can be said that Curve provides the bottom source of profit for the pyramid of DeFi mining.

These measures have provided a very innovative and inspiring model for the early DeFi building blocks. Curve is likely to cooperate with iearn (AC) in the design stage, and the team can Grasp the core of DeFi, which is to improve capital efficiency and attract funds like a black hole. It not only improves the AMM curve at the technical level, but also creates more income to win users.

2. Cross-asset exchange:

On January 18, Curve announced the launch of cross-asset Exchange transaction service, in cooperation with synthetic asset protocol Synthetix

Simply put: the cross-asset exchange process includes two transactions. Taking DAI to wBTC as an example, first DAI will be converted to sUSD, and then converted to sBTC; secondly, sBTC will be converted to wBTC.

Specifically: the first transaction is to convert DAI to sBTC. After the user confirms the transaction, they will receive a unique NFT (ERC-721) representing the transaction, and then the transaction will immediately enter a 6-minute settlement period, during which time, do not close the browser. After the Synthetix settlement period, users can complete a second transaction, exchanging sBTC for wBTC, by clicking the “Complete Transaction” button. After confirming the transaction, the user can receive wBTC.

During the whole process, Synthetix acts as a bridge (with the help of Synthetix's mortgage synthetic asset model, the exchange of sUSD and sBTC is free of slippage), Synthetix's synthetic Assets already have two pools, sBTC and sUSD, on Curve, and the liquidity of these two pools is not low. The sUSD pool has over $83 million in liquidity, while the sBTC pool has over $250 million in liquidity. Finally, the exchange of sBTC and wBTC uses Curve’s CFMM, which can achieve extremely low slippage.

Disadvantages: Although the trading slippage of this scheme is almost zero, the asset price may fluctuate drastically within the 6-minute settlement period, resulting in losses. In the integration of Curve and Synthetix, we have seen Curve's strong innovation ability. By using the combination of defi to do cross-asset exchange, we have educated the market on the true value of AMM that "improves capital efficiency", and broke the curve that Curve can only do The stereotype of stable currency exchange is also the main driving force behind the return of crv value in January.

3. Openness:

Equilibrium and Ellipsis will build new Curve version, and Curve officials are also open to cooperation and provide copyright-protected code, which also feeds Curve. For example, veCRV holders will receive 25% of Ellipsis incentives, and now Ellipsis has locked up as much as 2.2 billion US dollars .

4. Tokens

1. CRV data on the chain:

Total supply: 3.03 billion pieces

Current circulation : 344 million pieces

Current total locked amount: 138 million pieces (average lockup time: 3.67 years)

Number of currency holders: 26,000

Distribution ratio:

Supply Curve:

Token address concentration:

(Remove unallocated tokens) The distribution of addresses is relatively fair:

2. Tokens Staking and community governance:

From August 2020, Curve started the road to decentralized governance by launching the DAO. Like other DAOs, CRV, as the governance token of Curve DAO, gives token holders voting rights and governance rights for community governance. CRV can be purchased directly from the secondary market or obtained through liquidity mining, that is, providing liquidity on Curve can not only obtain transaction fee income, but also reward CRV tokens. While receiving CRV rewards, LPs also have the DAO governance rights of the Curve protocol.

Locking rules

Locking CRV can obtain voting token veCRV according to time weighting, the longer the locking time, the higher the voting weight big.

Currently, it takes four years to get 1:1 veCrv, Obtain voting rights and half of the transaction fees of all pools (0.04%÷2=0.02%, according to the lock-up ratio).

At present, the community has locked 48.81% of the CRV in circulation, and the average lock-up time is 3.67 years (the average lock-up period continues to rise). Occasionally, the lock-up volume will exceed the release volume of 2 million for some days, and the selling pressure in the market is very small.

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Strong community governance:

Curve DAO: Curve DAO is a rare high-activity DAO. Since the opening of DAO voting, 53 proposals have been closed.

Prosperous node ecology: all major projects are to ensure their own In the Curve pool, stablecoins or synthetic assets are continuously purchased to lock up CRV, and put forward an application for listing in the proposal. The top players in the DeFi world are scrambling to lock their positions into the Curve ecology. From an ecological point of view, it is a moat deeper than technology.

V. Summary

When Curve is only recognized as a stablecoin transaction because the stablecoin exchange experience is too smooth At that time, it and Synthetix took out cross-asset exchange, and continued to eat the largest order in Synthetix, once again showing everyone how innovative DeFi composable banks should be; when public opinion used Uni V3 to question Curve, we judged that Curve is extremely difficult to lose It has advantages in specific asset exchange, and believes that Curve's innovation in the professional field will bring continuous competitiveness, and even enjoy more AMM innovation dividends in the future.

What is the optimal Defi ecology? Maybe there is more than one final answer. As an in-depth participant in DeFi, we believe that the fierce competition among Dex is a powerful driving force for the development of the industry, and we hope to see the prosperity of the industry in full bloom. At present, Curve has firmly occupied the specific asset trading market with its absolute advantages such as low transaction fees, low slippage, and low impermanence risk, and is constantly digging deeper, while DEXs of other AMM mechanisms such as Uniswap and Sushi provide other diversified encrypted assets. A liquidity trading platform has been established, and business boundaries have been continuously broadened. Only in this part of the market for specific asset transactions, Curve has a huge room for imagination to firmly grasp high-net-worth users. From Defi portfolios, cross-asset transactions to the recent cooperation with Equilibrium to enter the Polkadot ecosystem, Curve, as a technology-driven team that continues to surprise us, we never worry about the team's creativity. Of course, the Curve development team is also constantly exploring asset transactions other than specific assets. If it can be realized, Curve will become one of the most powerful Dex in the history of the industry.