Partnered With:

Curve V2 Solution Analysis: Universal vs. Customized AMM

Read this article in 14 Minutes

For a project with more lockups than Uniswap, the launch of Curve V2 doesn't seem to have generated the same level of discussion in the community. With the addition of support for trading pairs of highly volatile assets, Curve V2 will be the next general-

The Curve V2 version was launched with minimal fanfare, with no slick introductory page, no videos explaining how it works or even a decent pitch. The entire release was a white paper on the V2 fundamentals that was posted on the project website. The white paper is only five pages long, but it is full of mathematical formulas that will make the average user cringe. Therefore, before formally introducing the significance of Curve V2, it is necessary to explain in the most straightforward language how Curve implements support for unstable currency trading pairs in the V2 version.

The basic principle of Curve V2 is explained in vernacular

Don't be intimidated at first by mathematical symbols such as summation '∑' or multiplication 'Π' in the Curve whitepaper. It's not the algorithm that makes Curve so complicated. However, Curve hopes to be able to support multi-currency trading capital pool in the underlying logic from the very beginning. Therefore, the two-dimensional constant product formula XY = K, which was originally simple and easy to understand, needs to be changed to a higher dimensionThis seemingly complex multidimensional constant product form.

Therefore, in order to make it easier for the reader to understand, we have reduced the multidimensional model here to a more comprehensible two-dimensional state (dual-currency capital pool). So what does the price Curve of Curve V2 look like in a simpler two-dimensional model?

This is the price Curve from the Curve V2 whitepaper. Similar to the fitting of XY =k and X + Y =k in Curve V1, the price Curve of Curve V2 is also fitted by other basic curves. In simple terms, the Curve is closer to the Curve Curve V1 near the trading price (blue) and closer to XY = K (dotted line at lower left) away from the trading price. This creates a price curve that is smoother near the trading price, but more curved as it moves out of the range (orange). Compared to the V1 version, which was more close to a straight line, the V2 curve has a larger curve at the far end, thus increasing support for unstable currency trading pairs.

Of course, Curve V2 cannot achieve its objective of dynamically aggregating liquidity at all price points if it simply restructures a fixed price Curve. The most critical improvement of Curve V2 is the ability to automatically rebalance liquidity when prices deviate from the original aggregation range, reconstructing a Curve for the new price.

Another problem that needs to be solved at this point is, how can the system sense the change of market price and carry out the rebalancing operation when appropriate? Most of the similar projects will choose to directly access the external predictor, but the introduction of external predictor will also introduce new external risks to the system. Once the predictor fails or is manipulated, the fund security of LP is difficult to be guaranteed.

Curve V2 sought to eliminate external risk altogether by relying instead on internal data as a reference price, a mechanism officially known as the EMA (Exponentially moving Average) Predictor. Again, readers do not need to understand what EMA is. They only need to understand that the price provided by this EMA predictor is a reference price based on the comprehensive calculation of the historical transaction price of Curve and the latest transaction information. This reference price is somewhat similar to a 30-day moving average in technical analysis. It adjusts dynamically based on the latest traded price, but with a lag so as not to trigger the rebalancing mechanism too frequently when the price moves too sharply.

With the reference price provided by the internal predictor, the system has a trigger to rebalance. When the EMA's forecaster deviates more than a certain amount from the original price, the protocol automatically adjusts the shape of the entire curve, allowing liquidity to reconcentrate around the latest trading price.

How Curve V2 differs from the Uniswap V3 solution

When Curve V2 was first released, critics suggested that Curve V2 would compete directly with Uniswap V3. After all, both propose universal solutions for aggregating liquidity across all price ranges. However, if you take a closer look at how these two projects are implemented, there are clear differences between the two.

Difference 1: How do you decide where to pool liquidity

In making markets in Curve V2, LPs do not need to actively choose the aggregation range of liquidity. The system will automatically concentrate the liquidity of LP near the transaction price according to the change of the market price. Uniswap V3, on the other hand, requires LP to judge the price trend of the market and independently choose the price range for market making.

Difference two: LP's position is homogeneous

As we know, since the amount and range of market making are different for each LP, Uniswap uses NFT in V3 to represent the market making position of LP. In Curve V2, there is no such problem at all. The liquidity distribution of each LP in the fund pool is exactly the same, only the quantity difference between each other. Therefore, the position of the LP can still be represented by the same ERC20 token. This makes it much less difficult to combine other protocols with Curve.

Difference 3: How to Rebalance Capital

It is often said that after Uniswap was upgraded to V3, the passive market-making management scheme was no longer effective, and LP needed to constantly actively judge price movements and adjust positions. However, Curve V2 fully integrates the rebalancing strategy into the protocol layer itself. Users no longer need to understand the basic principles of rebalancing, nor do they need to choose among the many agent solutions in the market. They only need to consider when to deposit and when to take out.

Difference four: how to determine the transaction fee

When it comes to handling fees, Uniswap doesn't actually offer a one-size-fits-all solution. The system only provides three rates for LPs to choose, and each rate corresponds to an independent capital pool, which not only limits the range of choice for users, but also increases the degree of fragmentation of liquidity.

Curve V2, by contrast, still uses an automated solution with a built-in fee range of 0.04% to 0.4% (this rate is based on community discussion and is welcome to correct any errors). Fees are lowest when market prices approach the midpoint of liquidity aggregation and rise gradually when market prices deviate. The whole process is completely automated, without the need for LP management and intervention.

Compared to Curve V2, Uniswap V3 seems complex and difficult to use as a one-stop solution. Not only do almost all key parameters of market making need to be chosen by the users themselves, but they also need to be constantly rebalanced during the subsequent market making process. So how could two leading DEX projects, with the same industry's top development teams, deliver such different solutions to the same needs?

Methodology Debate: Application vs. Ecology

The two radically different solutions were clearly not limited to the technical capabilities of the development teams, but rather to the fact that the founders of the two teams had a very different understanding of the core demands of the industry.

The core idea of Uniswap V3 is to fundamentally address the ongoing generation of custom AMM forks by developing a common solution that can simulate any shape of price curve. So the team had to leave key metrics to the market and support the ecosystem through a developer fund. It is hoped that the market can form several mature active market-making management schemes through free competition, so as to solve the changing market demand.

The core philosophy of the Uniswap team is to acknowledge that the will of individuals and teams cannot always be right, and to leave options open to the market and community, and to participate only in the underlying infrastructure.

The Curve team took the opposite view, arguing that users' time and attention are limited and should no longer be bogged down in complex choices. The development team should provide the user with a complete and optimal solution, so that the user only has to consider when to deposit money and when to get money back, and the rest of the process is done automatically by the agreement.

The core philosophy of Curve V2 is the recognition that most users do not have professional analytical capabilities, and the need for a more professional elite to provide a package of solutions to address all the obstacles that users may encounter.

The most important difference between Curve and Uniswap is whether to build a powerful product directly, or to become a common underlying architecture that enables ecological development. Only time will tell which of the two different methodologies will ultimately pass the market test.