DeFi or Decentralized finance is achieving a lot through the method of yield farming. Let's take a look into how it all came together.
The decentralized finance (DeFi) platform and associated revenue has earned a unique reputation in traditional finance and even the broader crypto market for being risky, unsustainable and even Ponzi-style. Where does the return come from and how is it 100 times higher than the interest rate on a bond, certificate of deposit or savings account? Some protocols essentially create the same credit, trade, and insurance protocols that remove intermediaries such as banks, exchanges, or insurance companies and allow smaller consumers to replace them.
Here are some very basic examples:
- Uniswap and Curve allow any user to create markets and earn trading fees from token exchanges.
- Aave and Compound allow each user to provide secured loans to other speculators and get most of the loan interest rates.
- Maker allows each user to create their own decentralized stable coin, DAI, by providing cryptocurrencies as collateral.
The DeFi protocol not only offers low trading and credit fees, but also generously distributes their "management tokens". These proprietary tokens often hold rights to a fraction of the minute earnings, just as companies can pay dividends to shareholders.
In addition, some of the most popular protocols have given token holders shared responsibility for controlling future plans, upgrades, and project proposals themselves. Curve DAO and its own CRV token are examples of this management model, with tokens playing an important role in the protocol and in the wider DeFi universe.
Introduction to the DAO Curve
To date, Curve has been very little discussed due to the key role it plays in the blockchain in DeFi. Recent changes in tokennomics have resulted in its own token, CRV, being net deflationary; Furthermore, the price has gone up 122% since the token went into deflation. To understand DeFi results, understanding how the inside of Curve works is almost essential. What does Curve do and how does it do it?
Curve is a decentralized exchange known for its exchange of tied assets such as fixed fiat stable coins or assets traded in a 1:1 ratio. With a deposit of over $3 billion, Curve's largest pool is known as the 3pool and includes DAI, USDC and USDT. Stable coin pools have gained strength by offering high liquidity and low fees (0.004%) as Curve uses its own token to reward liquidity providers instead of higher swap fees. Below are the results of a $75 million USDC to USDT exchange from Curve, Sushi and Uniswap, as Curve optimizes the exchange with significantly less slippage than its competitors. Slip is the difference between the expected price and the transaction execution price, or how far it is from the market price of the transaction.
CRV To Tokenomy
CRV holders can "stake" their tokens on the platform and block them for a fixed period from one week to four years to determine their voting weight. Depending on the height of the blocked curve and the length of time blocked, the participants receive an adjusted amount of the vote deposit curve (veCRV). VeCRV holders can then vote on how CRV prices will be distributed across the Curve pool by assigning weights to the "pool estimator" based on their financial importance. Counter is a tool to measure which pool has the most weight with prices and votes measured every two weeks via snapshots.
As a result, a system was created to bribe the veCRV holder to select a certain weight. Projects like Abracadabra pay veCRV holders with their own tokens for weekly bribes to increase the profitability of their decentralized stablecoins by increasing demand for their own projects. Abracadabra has paid the equivalent of $1.9 million to veCRV holders willing to vote for their stable coin pool in the past two weeks alone, now giving their pool 32.5% of the relative weight of the Measurement.
VeCRV holders also get a share of the timber revenue through replacement costs. According to the Curve document, “the community-led proposal introduces a 50% management fee on all trading fees. This fee is collected and used to purchase 3CRV, the LP token for TriPool which is then distributed to veCRV holders.
VeCRV's dynamic capabilities strongly support CRV demand, even with inflation, to meet the demand for maximum profitability and low-cost exchange. However, as can be seen below, the emission schedule was delayed due to the expiration of the initial consumer premium. Demand for CRV keys is also increasing, turning net worth into a "deflationary" asset. CRV held for voting will not be counted as part of token delivery as it is illiquid and will mostly be held for the next three to four years.
Basics for DeFi
The dynamic capabilities of the CRV token and ecosystem have made this project an attractive building block for several other DeFi projects, namely Yearn and Convex. Both projects can be seen as “Yield Optimizers” that rotate assets between sets of curves and eliminate the hassle of using CRV tokens effectively. Both protocols allow users to deposit liquid curves (LP) or CRV positions in their vault, which then collects rewards - both making LP positions difficult and reinvesting in CRV to optimize profitability.
Born to DeFi Summer, Yearn quickly started making big bets on veCRV, holding nearly 10% of the inventory when Convex hit the market. However, within a few months, Convex managed to absorb more than 35% of veCRV broadcasts. The race to control voting and increase Curve's profitability has been dubbed the "Curve War," and some in the DeFi community believe the project is playing a zero-sum game. Bankless Headquarters highlights where the two protocols differ and how each gains its competitive advantage.
"There are three main differences between Convex and Yearn:
- In Convex, users have to manually reinvest their rewards in different vaults to combine, rather than doing it automatically in Yearn. Do Convex has a lower fee structure as it retains 16% of profits in the form of performance fees, while Yearn charges an administration fee of 2% along with 20% of profits
- In Convex, users can "farm" CVX, which can also be reinvested in various vaults. The two protocols no doubt compete to some degree, but their combined presence seems to increase Curve's share of the whole. In fact, yearn is likely one of the biggest investors in any given convex strategy, with $724 million deposited into Covex's sETH strategy and $586 million deposited into his usdn3crv strategy.
- While Convex proponents claim that the protocol already has a much larger percentage of veCRV than yearn, the developers at Yearn @bantg suggest that Yearn's responsibility for most of Convex's CRV inventory and Total Locked Out (TVL) only eases the strength of the two. product. Over time, Yearn and Convex seem to have a symbiotic and positive effect on each other. However, the positive effects of both on the Curve and CRV were more pronounced. If the demand for stable income continues to grow, the battle for maximum improvement in the Curve has just begun. Yearn and Convex will continue to buy CRVs to keep pace with the increase in TVL and offer the highest possible returns.
Early consumer rewards are also running out, meaning CRV emissions have peaked. A recent article explains the recent adoption of CRV and why it's so visible, even as the wave of “dog coins” hit crypto. Narrative is taking over.
The importance of curves in the DeFi ecosystem
In the last six months, Curve has only generated $34.1 million in swap fees, despite having $16.5 billion in TVL on the Ethereum core network and keeping its trading volume high. Curve and its liquidity providers generate $0.40 per $1,000 trading volume compared to another popular decentralized exchange, Sushi, which generates $3 per $1,000 trading volume for its liquidity providers. Often times, liquidity will move to higher interest exchanges for higher returns, but Curve has the lowest fees and more liquidity than other exchanges. The real secret of this project is to subsidize liquidity with CRV tokens to keep profitability high enough for liquidity providers to stay in their pools.
Curve already has nearly $18.8 billion in TVL across seven different ecosystems, making it the second largest decentralized app, or Dapp, after Aave, which accounts for 11.4% of the DeFi TVL Ethereum project. According to Curve's release schedule, approximately 113 million CRV tokens were released to the community in the third quarter. At current and TVL prices, this corresponds to a 12% annualized return for participants and liquidity providers, with the exception of swap and incentive programs from alternative chains such as Polygon and Avalanche. Delivering such generous liquidity rewards has earned Curve the reputation of being the backbone of all DeFi revenue. A spike in CRV prices typically signals a "risky" DeFi market, with profitability flowing throughout the ecosystem.
Stablecoin exchanges are not the only source of DeFi's profitability. Aave and Compound offer relatively attractive returns on stablecoys and crypto assets for secured loans. However, the requirement for a stable exchange is an integral part of the arbitration rate or the transfer of funds between the protocol and the exchange. Curve has established itself as a player for large exchanges and passive returns as well as a testing ground for decentralized stable coins like DAI or MIM and tokenized assets like promised ether. DeFi TVL hit its highest score ever, most likely signalling a growing hunger for profitability. Big funds or high net worth individuals will use Curve, Yearn, and Convex for steady income, making Curve Wars just as important as ever.