How Swapping and Staking on Curve Drives High User Engagement

curve
On-Chain Markets Update by Pedro Negron IntoTheBlock

Curve Finance was launched in 2020 with the initial purpose of creating an automated market maker (AMM) exchange for assets pegged to one another. By using efficient algorithms they soon experienced incredible growth, offering some of the lowest fees, slippage, and impermanent loss in the DeFi space.

Since their focus was on stable assets, fees for liquidity providers (LPs) tended to be smaller. This created the need for the protocol to offer incentives to its liquidity providers. These incentives were given in the form of CRV which also works as a governance token for the Curve DAO. This article analyzes Curve’s high user engagement on the swapping and staking side of the protocol.

Volume traded is an important indicator to understand DEXes. They show the platform’s usage. IntoTheBlock gathers all daily volume traded on Curve’s pools on Ethereum and aggregates it into a single indicator.

The indicator shows Curve’s volume traded on the Ethereum blockchain. User adoption is demonstrated by daily volumes reaching as high as $2.5B, as was the case on Jan. 27, 2022. Furthermore, volume also gives insight into the fees (revenues) that LPs are generating. On this same date, Curve LPs generated around $760,000 in revenues, without counting the additional incentives provided by the protocol in the form of CRV.

DEXs are one of the major drivers of DeFi’s growth. DeFi offers benefits in privacy and security, and in addition crypto users are adopting this technology to gain advantage of the yield generating strategies available in the ecosystem. 

In order to analyze this growth, IntoTheBlock measures the protocol’s total value locked (TVL) of the specific protocol being studied. This indicator allows us to gauge the value deposited into the protocol in order to generate yield.

The metric depicts the clear growth in TVL that the Curve protocol has experienced. Reaching TVL highs on the Ethereum blockchain of $21.8 billion during January 3rd 2022. This attraction ultimately placed Curve as the top DeFi protocol ranked by TVL and also made Curve pools hold around 10% of DeFi’s entire TVL. By analyzing this indicator it becomes clear that investors seek to generate yield on their assets and liquidity providing has been one of their main strategies.

In addition, another important metric to consider when analyzing Curve’s user engagement is the overlap between addresses that trade and those that provide liquidity on the protocol.

Source: IntoTheBlock

The portion of addresses that provided liquidity to the protocol and also used the swap function during Q4 2021 was approximately 72%. Curve’s high user involvement in supply and demand stems from several factors. First, users probably like low fees, low slippage and low impermanent loss. 

High TVL results in low slippage trading, and with Curve having a high TVL in DeFi, users will be attracted to trade on the platform as long as the TVL stays high and the slippage stays low. In addition providing asset pairs with similar behavior creates the perfect scenario for liquidity providers who do not want to risk impermanent losses. Finally, due to Curve’s low fees, the protocol incentivizes its LP’s with governance tokens, drawing DeFi users to the protocol. Ultimately, this provides a clear view of Curve’s user overlap on the protocol’s two distinct functions.

Deeper liquidity pools bring more stability and increase the adoption of the protocol. The ultimate goal for DEXes is to increase their volume traded and the TVL provided to the protocol. New developments of the protocol should focus solely on this ultimate goal. Removing friction for users involved in the protocol’s both functions is an aspect to take into consideration.

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