In the wake of Alchemix’s troubled alETH release, Curve Finance has produced two governance proposals targeting tangential products of the automated loan repayment protocol. There’s also been a flurry of chatter about possible legal action as the dustup accelerates.
The first target — Curve’s own alUSD pool. Charlie Watkins, project lead at Curve, proposed removing the alUSD gauge. This would mean that liquidity providers in the alUSD pool would no longer receive Curve’s CRV rewards, which spur liquidity provisions.
Depressing the Price
The thinking is that Alchemix is essentially propping up alUSD by selling CRV tokens. Achemix uses Yearn Finance’s DAI vault to sell CRV rewards. This generates the yield, which in turn pays off users’ alUSD loans.
So Yearn Finance’s practice of selling CRV rewards is what allows users to mint alUSD — they are taking leverage out against future yield through Alchemix. In turn, users can then deposit alUSD into Curve themselves, earning CRV rewards. In this way, the opportunity to sell CRV gives rise to alUSD, which the Curve protocol then rewards with CRV.
Watkins sees this as “essentially incentivizing with CRV a derivative product that dumps CRV.” In a sense, Curve is financing alUSDs existence through a rewards-backed Yearn vault, only to give out more CRV to alUSD holders. At the same time, Yearn and potentially alUSD holders are selling the CRV tokens and depressing the price. Watkins sees this as “double dipping.”
Others disagree. Statelayer, the handle for a user on Curve’s governance forums, says there’s “no such thing as double dipping.” Another community member, WormholeOracle, agreed, saying “every $ in Curve earns its fair share of CRV, as determined by the gauge weighting for the week. Leveraging is fair game.”
There’s a lot riding on the debate — the alUSD pool is one of the top four on Curve in terms of volume. As users who stake CRV tokens get 50% of trading fees from the exchange, they benefit from a pool which draws volume as well.
In WormholeOracle’s same comment, the user called for putting an alETH gauge to a vote.
This brings up the second issue in what has been a whirlwind week for Alchemix and its associated projects: Curve has introduced a second proposal to enforce its intellectual property rights through the traditional legal system.
More than three-quarters of 37 voters want to “assert Curve’s IP rights against infringers.”
Just like Uniswap, Curve is one of the few DeFi protocols, with a license. If Curve took legal action, it would be a first for a DAO, potentially charting a course for other DAOs as this new wave of organizations gather momentum.
The IP proposal singles out Saddle Finance, another automated market maker (AMM). Alchemix recently committed rewards of their token for an alETH pool, the protocol’s new token. As Alchemix had previously incentivized a Curve pool for alUSD, this came as a surprise.
While it is possible that hydrosam, the proposal’s author, wrote it because of Alchemix’s decision to go with an alternative AMM, the protocol wasn’t mentioned. Instead hydrosam highlights the possibility that Saddle Finance copied Curve’s code “wholesale,” despite the license.
Curve’s Twitter account doubled down saying “99% sure that the way Saddle reimplemented the code… violates the license on Curve contracts.”
Going down the legal road could get messy. Some DeFi community members believe the conflict should be kept within the blockchain system, and one, named shin, suggests Curve use Kleros, an online dispute resolution protocol.
While it remains to be seen what direction this drama takes, one thing is clear: Curve’s governance is starting to look like a battlefield. And DeFi protocols may be shaped by the outcome.