2022-02-15 16:32:48
The Curve Wars Vol. 2
recap
In the last article we learned why Curve is one of the most important corner stones of DeFi and the lifeblood of stablecoin liquidity.
The cycle of Curve goes like this:
-> because of the homogenic trading pairs Curve LPs have a reduced risk of Impermanent Loss (IL)
-> because of the reduced risk of IL Curve can offer smaller trading fees as its competitors (because trading fees are offered to LPs to offset IL)
-> because of the smaller fees the pools attract liquidity
-> this deep liquidity ensures minimal slippage
And which kind of asset benefits most from minimized slippage?
stablecoins!
And this is the reason why various stablecoin protocols are fighting over influence within the Curve ecosystem. They want to determine the highest Gauge weight to their pools, because this raises CRV emissions within these pools, and these enlarged emissions for LPs lead to increasing liquidity and this ultimately leads to improved peg-stability.
The deeper the liquidity the less the slippage and therefore the higher the peg-stability. This concept is also very interesting for non-stablecoin projects, because in traditional liquidity mining, LPs get rewarded in native tokens which dilutes the supply. if the protocol instead incentivizes users to provide liquidity on Curve the LPs would be rewarded in CRV emissions instead of the protocols native token. The protocol would need veCRV to boost CRV emissions for their pool. The CRV emissions (Gauge weight) are controlled by veCRV holders. So, the scarce resource that the whole Curve War revolves around is veCRV.
Convex Finance
Convex Finance was the first protocol that saw the potential of accruing voting power in form of veCRV. So, what it did was offer CRV holders an alternative to locking their CRV tokens at Curve for 4 years and a solution to get the maximum boost without locking for 4 years:
- convert CRV to cvxCRV (irreversible)
- stake cvxCRV on Convex
By doing so, CRV holders get the same rewards as they would get by locking on Curve (trading fees) + CVX rewards + 10% of Convex total CRV earnings. The APY for CRV holders is therefore higher as with staking in Curve itself, and on top of that the tokens are not locked for 4 years.
cvxCRV can be unstaked anytime and traded against CRV (Convex incentivizes this pool so that the peg for cvxCRV-CVX is above 1.0 to incentivize LPs).
In turn for a better APY and a liquid token CRV holders have to give up voting rights on their CRV. As their CRV are locked irreversible, the voting rights go to Convex Finance. Convex essentially separates CRV returns and CRV voting power. And as we have learned in Vol. 1 CRV voting power is an extremely powerful resource. The native token of Convex Finance (CVX) is essentially tokenized CRV voting power.
Several protocols understood the value of CRV voting rights early, among them where Yearn Finance, Stake DAO and Badger DAO. They and some others competed against each other to acquire as much CRV voting power as possible. They were eclipsed by Convex, which used above outlined tactic to become a CRV blackhole. The protocol now controls 53% of the total CRV voting power. This means that one CVX token controls the equivalent 4.98 CRV in voting power.
And this brings us to bribes. Every CVX holder is eligible to control the underlying CRV voting power if he locks his tokens for 16 weeks (in comparison to locking CRV on Convex this is not irreversible) and create vlCVX (vote-locked CVX). To this day, 74.94% of CVX is locked. Every vlCVX can collect bribes on a bi-weekly basis. Protocols bribe vlCVX holders to vote on the gauge weights of their pools (remember the flywheel of liquidity), because it is the most economically efficient way to get access to CRV voting power.
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