Understand curve pools
As you should know, providing liquidity carries some risks. So in this article, we’ll look at the different Curve pools to help you find one that suits your risk tolerance, while also explaining the risks involved in operating as a liquidity provider on Curve.
There are currently several Curve pools and new pools are being added all the time.
It’s important to understand that when you provide liquidity to a pool, no matter what coin you deposit, you essentially have an interest in all the coins in the pool, which means you want to find a pool of coins that you can hold comfortably.
Before we continue, let’s assume you’re familiar with the basics of Curve:
Understand Curve v1
All Curve liquidity meters get CRV based on how much the DAO allocates to them.
What are liquidity pools?
If you are new to Ethereum or DeFi, liquidity pools are a seemingly complicated concept to understand.
Liquidity pools are pools of tokens contained within smart contracts. If you were to create a pool of DAI and USDC, where 1 DAI = 1 USDC. You would have the same amount of tokens, say 1,000 tokens (1,000 DAI and 1,000 USDC) in the pool.
If trader 1 comes in and trades 100 DAI for 100 USDC, you would have 1,100 DAI and 900 USDC in the pool, so the price of USDC would trend down a bit to encourage another trader to trade USDC for DAI and close the pool again average
You can view these details for each pool and use them when making a deposit.
In the screenshot above for the TriCrypto v2 pool, the three fluctuating price tokens are held in similar ratios as their price. When the coins are out of proportion, traders have an incentive to take advantage of arbitrage, which brings the balances in the pool back into proportion
Base vAPY
To understand what the different pools do, it’s also important to understand how Curve makes money for liquidity providers. Curve interest results from trading fees. Every time someone uses Curve to exchange tokens through the Curve website, 1inch, Paraswap or any other Dex aggregator, a small fee is paid out to liquidity providers. Because of this, baseline vAPY increases with volume on the curve.
Some pools (Compound, PAX, Y, BUSD) also earn interest from credit logs. Behind the scenes, these four pools also use lending protocols (like Compound or AAVE) to attract more interest from liquidity providers. While this means these pools can perform better when lending rates are high, it’s also worth noting that this also introduces additional layers of risk.
All pools earn interest from trading fees, some pools also earn interest from lending, and there are also some incentive pools. You can also get CRV by providing liquidity on Curve Finance. Each liquidity indicator gets a different CRV amount depending on how much the DAO allocates to it.
Every time someone trades on Curve.fi, liquidity providers (people who have deposited funds on Curve) receive a small fee that is shared equally among all providers. This is why you will see high vAPYs on high volume, high volatility days. It is important to note that daily vAPYs can often be very low, but can also be very high as the fees depend on volume.
What are Curve fees?
Swap fees are typically around 0.04%, which is considered to be the most efficient when exchanging stablecoins on Ethereum.
Deposits and withdrawals incur fees ranging from 0% to 0.02% depending on whether there is an imbalance in the deposit and withdrawal or not. For example, if fees were 0%, users could deposit in USDC and withdraw in USDT for free. Balanced deposits or withdrawals are free.
Last update: 07/26/2023
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