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What is Curve Finance and How It Works?

UTC by Adedamola Bada · 7 min read
What is Curve Finance and How It Works?
Photo: Unsplash

Despite being launched in January 2020, Curve Finance already seems to be poised to become one of the leading platforms in the decentralized finance space. Why? Find out in this guide.

Curve Finance is a service invested in providing a platform for people interested in trading in digital currencies to carry out activities based on Ethereum assets.

The Curve Finance service was created in January 2020 by Michael Egorov, a doctor of physics. The service is currently running on a decentralized network and has now become one of the major firms in Ethereum-based trading.

Making use of the automated market, the service uses pseudocodes to increase the liquidity of its assets in the market, unlike several other platforms that simply try to link orders to purchase to sell orders.

The automated system ensures that trades and orders are carried out at faster speeds, reducing the likelihood of fluctuation in the value of the asset the user intends to purchase. Aside from this, the automation provides greater depth to its markets, almost 100 times greater than other online platforms providing the same service.

Executing trades while making use of this service generally has low risks, with a one transaction mechanism employed; but providing liquidity in pools poses a little higher risk, but better rewards. Some of the features available on the platform are explained below:

  • Minimal Temporary Losses – these are losses incurred mid-transaction. Most services can’t execute orders immediately, they first receive an order, convert the asset to be traded into Ethereum, store, then convert back into the new asset or coin that is required. If the value of the new asset goes up between the time of order and delivery, the service bears the brunt of the loss to provide users with the value they expect. Since Curve Finance only trades in stablecoins, with an immediate transaction system, the odds of such happening are infinitesimally small.
  • Mergers – one of the several benefits of decentralized exchange systems is the combination of several forms of cryptocurrencies to maximize profit for the traders. Although, with said combination comes the need to constantly watch the exchange rates between the linked assets to avoid taking huge losses.
  • Pools – the service makes use of pools for liquidity, rewarding the providers with percentages of profits gotten from users’ patronage, but is legally not responsible for any losses incurred by the customers.

There are three subdivisions of pools – High yield, medium yield, and low yield. As suggested by the name, each pool provides a different level of profits, with a synonymous level of risk involved as well. It is however important to note that each pool, depending on its success and liquidity supplier can switch in value, with low yield having the potential to rise to a medium or even high yield pool and vice versa.

The service has seven unique pools, with four (Y, Compound, BUSD, and PAX) being lending pools – meaning you can earn money from both trading and lending. Two (sBTC and sUSD) offer incentives on trade processes and two are token-based pools (REN and sBTC)

  • Fluctuation in returns – the pools on this platform are relatively unstable, with pools that provide high returns reducing to medium and low return pools over a long period. However, switching pools is inadvisable due to the fees required to enter and trade in pools; spreading trades across pools is the best strategy, ensuring that you record significant returns after the fees have been deducted.
  • Fees – as previously highlighted, the Curve platform charges its users fees for entering and trading in pools; it is the money realized from these charges that are used to run the service efficiently. Switching pools in order to find high-return pools are unadvisable as you could end up racking up a high number in fees and charges, which may amount to over the profit realized, or deduct a huge percentage from the yield gotten.

Curve Finance vs. Uniswap

Both Curve Finance and Uniswap trade in stablecoins – given their important role in the world of decentralized finance systems and the high demand. Although they can be traded on more popular exchange systems (CEXs, DEXs), the fees charged on the popular services are way higher than employing Curve Finance or UniSwap.

Uniswap is an Ethereum asset-based online platform that enables the exchange of ERC20 tokens between users, easily provides a trading platform for buying and selling of digital currencies, while removing most of the problems faced by several decentralized exchange systems with regards to raising profits.

Trading on Uniswap entails two steps:

  • The first stablecoin is traded in for an equivalent value of Ethereum.
  • The Ethereum value is converted to its equivalent value of the second stablecoin.

In doing so, the user incurs double fees, one for each stage of the process. The flux in value of ETH assets can very easily shorten the profit of the suppliers of liquidity, which is why Curve Finance only trades stablecoins against each other directly.

Both services are very similar, with Curve being an automated and simpler version of Uniswap, having a much better user interface, lower trading fees, and better profit rates than Uniswap.

Risks Associated with Curve Finance

While the possibility has been reduced to a bare minimum, the risk of suffering impermanent losses still exists. Such losses are subject to most online platforms that use automated processes in operations rather than storing the cryptocurrencies in a wallet.

The losses arise either when the value of the assets contained in a particular pool moves in separate directions, or when the suppliers of liquidity decide to rebalance the prices of the assets in the pool to the value traded in the real market due to some changes.

Given that Curve Finance only deals in stablecoins, it is unlikely that divergence of the values will be great enough to cause great effects in the loss of profits; bearing in mind that the values of securities could change at any time.

CRV Token

CRV is Curve Finance’s base token and is obtained when a user makes use of the platform by depositing and trading a stablecoin against the others. Basically, it serves as a form of payment to suppliers of liquidity to pools on the platform as their share of money made in levies. The token was released on the platform 8 months after the start of the service by an independent developer, without the approval of the developers of the service.

The firm decided to take control of the situation by spreading the word to the general public that the token was not from the team of the establishment’s developers, but following a great deal of involvement from several users on the platform in mining, the establishment decided to claim the token as theirs, especially once checks were made on the token and confirmed that the token was dependent on their service with no foul play involved.

The service had already recorded almost 100,000 mined tokens by users in mere hours of the launch, ruffling a few feathers in the cryptocurrency industry. The CRV token hit a value of over $50 on the day of its launch but has since dropped to about $5 per token, suggesting that the token is highly unstable, so users are advised to tread with caution when purchasing tokens.

The token serves as a form of payment to the suppliers of liquidity of the pools on the platform, as a fraction of the money generated by the service on fees paid by other users. It also gives the holders a particular percentage of rights and voting power in making decisions that affect the service and its users, depending on how much of the tokens the user possesses.

Conclusion

With the future of technology and finance headed towards cryptocurrencies and decentralized network systems, it is no surprise that many several individuals and businesses are interested in getting aboard the next big thing.

Curve Finance is poised to become one of the leading platforms in the decentralized finance space, despite being relatively new in the business. Therefore, it is advisable to limit one’s investments as the service and token are relatively new, especially if you have a low-risk tolerance.

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