The cryptocurrency market is gaining more and more interest over time and, as a result, more people are considering a professional career in this field. One of the technologies that make the crypto world work is Curve Finance. But what exactly does it consist of? How is it used and what does it offer that makes it so appealing to DeFi users?

In this post, we will answer these questions and help you decide if decentralised finance is a field you are interested in exploring academically. If it is, then a Master in Financial Management at Universidad Europea could be a great option for you.

Technology behind Curve Finance

Curve Finance is a decentralised finance (DeFi) protocol that enables the decentralised exchange (DEX) of stablecoins within Ethereum. Ethereum is, in turn, a programme specifically designed to facilitate an efficient exchange between cryptocurrencies of the same value. In addition, it brings high annual interest returns on cryptocurrency funds deposited with Curve Finance.

The project was launched in 2020 and since then it has become one of the most important DeFi exchange protocols. But… what is DeFi?

DeFi is short for decentralised finance, and is a financial ecosystem built on blockchain technology. Its main characteristic is that the users themselves are the ones who exchange (buy and sell) assets and financial services among themselves, without intermediaries, as a financing or investment mechanism.

Curve Finance uses the AMM protocol to facilitate transactions. AMMs, or Automated Market Makers, employ algorithms to efficiently quote tradable assets into liquidity pools. This technology works based on two components:

Liquidity pools where investors offer liquidity of stablecoins or tokens supported by the platform.

A module for exchanging and lending those stablecoins.

These components create a mechanism that makes it very easy to trade stablecoins while also giving investors a way to earn money from their investments. All thanks to the commissions generated by the operations carried out in these liquidity funds.

The system is similar to Uniswap or other DEX protocols that make use of liquidity pools. However, the main difference is in how the prices work here and the impact that this protocol has on the profits of the investors. Curve Finance makes use of a different economic invariant than that used in other AMMs, known as the StableSwap invariant. This bases its operation on a weighted system of curves, prices and dynamic slippage.

The advantages of using this protocol

The StableSwap system is designed to offer the best price, lowest losses and lowest possible trading fees without giving up profits for your investors. This feature has made Curve a favorite for stablecoin traders and liquidity providers who want minimal slippage. Keep in mind that slippage refers to the difference between the expected price of a trade and the price at which it is actually executed, and it is a recurring source of losses in certain exchanges.

Another point in favour of this DeFi protocol is that it allows you to offer a higher profit margin in the long term, and even reduce the risks of impermanent losses to a minimum, something that other projects such as Uniswap or Compound cannot offer. And what are impermanent losses? A type of loss that occurs when there is a change in the ratio of the money a liquidity provider initially invests in an AMM, such as Uniswap, and the amount of money you receive when you withdraw your investment from the project.

In short, Curve Finance offers users a new cheaper, safer and more direct token exchange alternative. Instead of exchanging Token A for ETH, and then ETH for Token B, Curve Finance eliminates high transaction fees and processes the exchange of Token A for Token B directly in a single transaction.

How does Curve Finance work?

Curve prices assets and executes trades according to a pricing algorithm which means it doesn’t use an order book or a market maker, unlike centralized exchanges like Poloniex which use both. What is unique about this formula is that it is made to allow for swaps of assets that remain in a similar price range with each other. Because of this specialization, Curve excels at mitigating slippage. This becomes apparent when comparing its slippage to that of other DEX AMMs like Uniswap, Sushiswap, and Balancer.

The pools available for swapping on Curve are referred to as “stable pools”. Stable pools are just collections of assets that are stable relative to each other. We describe it this way because stable pools don’t just refer to something like a USDT/USDC pool. It can also refer to a wBTC/BTC pool, where one wBTC (wrapped BTC) is always equal to one BTC. Although the price of BTC itself may be volatile, the value of wBTC is always pegged to it.

In order to utilize liquidity effectively, Curve uses an algorithm to concentrate it at an asset’s current price. When trades happen, the crypto pool readjusts itself in a way that doesn’t incur losses. Curve is able to keep very low fees (ranging from 0.04% to 0.4%) because liquidity providers are rewarded with CRV rather than the platform having to raise fees to compensate them.

Providing liquidity on Curve

Like any other DEX AMM, liquidity providers can earn a proportional reward percentage of swap fees when they deposit an amount of two tokens on either side of a trading pair. These rewards come in the form of the platform’s native token $CRV, discussed in the next section.

$CRV, the Curve DAO token

Like other DeFi platforms, the $CRV token is used for different purposes on Curve Finance all in service of keeping the whole operation running. Because it is a governance token, it helps decentralize the decision-making process on Curve. And to incentivize liquidity provision and active participation in the betterment of the platform, rewards are distributed to participants in the form $CRV. In all, $CRV can be used to vote on platform changes, staked to receive trading fees, and vote locked to boost rewards on provided liquidity.

What voting looks like on Curve: on Curve, users don’t vote directly with a token amount. Instead, tokens are locked in a voting escrow on the platform. The longer and more CRV that is locked, the more a user has voting power. As tokens approach their unlock time, the veCRV weight, and thus voting power, decreases. And

What staking looks like on Curve: when one stakes their CRV, they lock them up for a fixed period of time to earn what is called vote-escrowed CRV, or veCRV. The amount of veCRV earned is of course dependent on the amount of time one opts to lock their CRV up for. For example, if you lock your CRV up for one year, 1CRV=0.25veCRV. If you lock your CRV up for four years, 1CRV=1veCRV. So what does veCRV get you? In short, voting power on how CRV is distributed as well as proportional revenue from the platform’s swap fees.

Boosting on Curve: when one vote locks (mentioned above) their CRV, they can earn a boost to their rewards from providing liquidity.

How to acquire $CRV?

$CRV is available on multiple exchanges like Poloniex! You can acquire $CRV through trading a CRV/USDT trading pair.