By controlling the pools and the types of assets in each pool, Curve minimizes transient losses.
Before we enter the world of curves, we need to understand a concept called Automated Market Makers (AMMs).
What is AMM?
AMMs allow digital assets to be traded without the need for a centralized exchange by using pools of liquidity as opposed to traditional trading between buyers and sellers. At its core, users tokenize liquidity pools and the prices of the tokens in the pool are determined by a simple mathematical formula. Anyone with few ERC-20 tokens can become a liquidity provider by delivering tokens to an AMM’s liquidity pool. Liquidity providers receive a fee for providing tokens to the pool. The fee is paid by traders using a liquidity pool to exchange tokens.
So how does Curve work?
By focusing on stablecoins, Curve allows investors to avoid more volatile crypto assets while earning high interest rates through lending protocols. At AMMs like Curve, liquidity pools are constantly trying to buy low and sell high. Here’s a refresher on how this rebalancing works, this time with USD-pegged stablecoins USDT and DAI. If you have sold DAI on Curve, more DAI will be added to the pool. The pool becomes unbalanced because there is now more DAI than USDT. So the pool sells DAI at a slight discount compared to USDT to incentivize balance. The pool is rebalancing its ratio of DAI to USDC
By selling DAI at a discount, the pool is attempting to restore the pool to its original condition. By controlling the pools and the types of assets in each pool, Curve minimizes volatile losses, an AMM phenomenon where liquidity providers suffer a decline in the value of the token relative to that token’s market value due to volatility in a liquidity pool.
Incentives for liquidity providers
On an AMM exchange like Uniswap, you can earn fees on every trade. Curve trading fees are lower than Uniswap, but you can also earn rewards outside of Curve with interoperable tokens.
Compound is an example of an external DeFi protocol that Curve integrates with. The protocol also integrates with Yearn Finance and Synthetix to maximize liquidity provider incentives.
CRV token
The Curve Protocol began its odyssey toward decentralized governance with the creation of a Decentralized Autonomous Organization (DAO). The Curve DAO is controlled by the CRV token. The CRV token can be both purchased and earned through yield farming – when you deposit assets into a liquidity pool and earn tokens as a reward. Because Curve offers stability and composability, it is one of the most popular platforms associated with the DeFi ecosystem.
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