Automated market makers, or AMM for short, has had a significant influence on the crypto landscape. Balancer, Uniswap, and Pancake, amongst other liquidity protocols, provide the opportunity for anyone to become a market maker as well as gain fees on a significant number of different market pairs.
One crucial question that, however, remains at this point is; can these automated market makers compete with centralized exchanges? Possibly, however, there is one area that they are already showing great potential, and that is in “stablecoin trading,” and curve finance is at the center of this space.
What is Curve Finance?
Curve finance can be referred to as a decentralized exchange (DEX) on Ethereum. The main purpose of its design or creation is for swapping between stable coins. It can also be DeFined as a decentralized liquidity aggregator that allows anyone to place their funds to various pools of token locked in a smart contract (Liquidity pool) and gain profits. All that is required is an Ethereum wallet and some funds before you can proceed to swap different stable coins with low slippage and fees. You could consider the curve as “Uniswap for stablecoins” with a unique pricing formula, which makes it great for swapping between various tokenized versions of a coin.
Automated market makers (AMM) operate with a pricing algorithm rather than an order book, and due to how the pricing formula works on the curve, it can efficiently serve the usefulness or purpose of swapping between tokens that stay in the same price range. As earlier stated, this means that it is not only perfect for swapping between stablecoins but also various tokenized versions of a coin. This is why, the curve is one of the most efficient ways of swapping various tokenized versions of Bitcoin like Sbtc, WNTC, and renBTC.
Currently, there are a total of 17 curve pools that are available for swapping between the many different assets and stablecoins, and they are constantly changing due to the market demands and regular changing landscape of DeFi. Some of the most prominent stablecoins available are; sUSD, USDT, TUSD, DAI, USDC, BUSD, amongst others.
How Does Curve Finance Work?
As earlier stated, assets are priced using a pricing formula rather than an order book. The formula that is being used by the curve is uniquely and specifically designed to help facilitate swaps that occur in a similar range.
Let’s consider an example; we are aware that 1 USDT should be equivalent to 1 USDC, which should also be the equivalent of 1 BUSD and so on. If you decide to convert a USDT of 100 million dollars to USDC before converting it to BUSD, it will result in some slippage. Hence, the design of the curve formula is aimed at minimizing this slippage as much as possible.
One thing to understand about the example above is that the curve formula wouldn’t function efficiently if they weren’t in the same price range. However, the system doesn’t necessarily need to account for that because if USDT could be at a value of 0.7 dollars, then there is something else that is wrong outside of the curve. The system can’t mend or correct things outside of its control, and the formula does its job well, as long as the tokens maintain their peg.
This usually results in extremely low slippage, even for large sizes. Also, the spread on the curve can conveniently compete with some of the centralized exchanges as well as OTC desks that have the best liquidity. There are various assumptions regarding trust and risk, so execution and liquidity don’t necessarily count for the whole picture; however it is certainly fascinating to view the competition between the centralized and decentralized world by using this means.
What is the Curve Finance (CRV) token?
Crv is an Ethereum-based cryptocurrency and governance token of Curve Dao, which is a decentralized autonomous organization operating on the protocol. CRV is regularly being dispensed to liquidity providers of the protocol with an annual reduction in its rate.
The Risk Of Curve Finance
The curve has been audited by Trail of bits. We can all agree that since the project has been audited, then it is DeFinitely and absolutely safe to use, right? In this case, the answer is absolutely not as risks are always involved, especially when making use of any smart contract, irrespective of how many audits it has. It is advisable to only deposit as much as you are willing to lose.
As with any other automated market makers (AMM), it is necessary for you to consider “impermanent loss.” before adding liquidity to the curve. However, in summary, impermanent loss refers to a cost or DeFicit in the value of the dollar which liquidity providers tend to face while giving liquidity to an automated market maker.
In other to generate more income for liquidity providers, the liquidity pool may also be supplied to Yearn Finance or Compound. Thanks to composability, it doesn’t just provide the opportunity for users to trade on the curve but also other smart contracts. This, however, introduces extra risk as a lot of the DeFi protocols now rely on each other. If in a situation, one of them should record a break, then it could result in a damaging chain reaction which could affect the whole DeFi ecosystem.
The curve remains one of the most popular automated market makers (AMM) operating on the Ethereum network. It allows for high volume stablecoin trades with a reduced slippage as well as tight spreads in a non-custodial way. One of the best ways to learn about DeFi solutions is to make use of them. While this is not a piece of financial advice, if you, however, wish to learn, then it is advisable to try out some different protocols. Curve, on the one hand, is somehow challenging to master, which is why it is better to only test with small amounts while learning. One thing you DeFiantly don’t want to do is get greedy and overextend yourself, especially when dealing with an advanced protocol like the curve.
Another factor that places Curve Finance at the center of the DeFi space can be mainly attributed to how other blockchain protocols rely heavily on it. The composability among various decentralized applications undoubtedly has its risks, but it also serves as one of the strongest advantages of DeFi.