Examining The Explosive Growth of Curve Finance, One of Yield Farming's Biggest Winners
Also, COMP token incentives change, 0x's Matcha launch, prediction markets heat up.
Hello Defiers! Another busy day in DeFi. Today we dive into one of the biggest winners of the yield farming boom, stablecoin-focused DEX Curve
- Examining Curve’s surge to second-largest DEX by volume
- COMP holders vote to change token incentives
- 0x launches DEX aggregator Matcha
- Prediction markets space heats up with Omen and Polymarket
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Stablecoin DEX Curve Surges Amid Yield Farming Boom
As yield farming continues to push demand for stablecoins, one platform is taking the cake.
Volume on the Curve Finance decentralized exchange jumped by $213M on the week COMP distribution launched, a ~16x increase from the previous week, as farmers scrambled to get their hands on USDT to maximize their earnings.
In the past two weeks, Curve’s cumulative volume has grown over 120% to just over $550M at the time of writing from $250M on June 15th .
And there’s no signs of this slowing. With the release of a framework for the CRV governance token, yield farmers are quickly flocking to Curve to take advantage of some of DeFi’s highest APY’s and the promise of retroactive token distributions.
The hunt for CRV combined with a top trading venue for tokens which yield the highest APYs has propelled Curve to the 2nd slot amongst all DEXs, from 7th before the yield farming boom started, sitting behind Uniswap’s $142M, at $82M worth of volume in the past week according to Dune Analytics.
Besides its surging activity, another interesting aspect about Curve is its mysterious roots. The website lists no official team members and the project has no Medium or publication to reference an official launch date.
Despite this, we can deduce that the project was conceived in 2019, with NuChyper’s CTO Michael Egorov releasing the official whitepaperon November 10th of the past year. Julien Bonteloup, an early investor in the project, told The Defiant Curve has since raised a private round from known people in the industry.
Despite this amorphous, pseudo-anonymous structure, Curve has continued to ship new features and product upgrades such as adding virtually one new Curvepool per month, enhanced swap interfaces and automatic staking onramps for liquidity incentives like Synthetix.
This cadence is best highlighted by Curve’s integrations with top DEX aggregators like 1inch, Paraswap and DEX.ag in tandem with asset management partners like Zapper, Zerion and InstaDapp.
For those who have been keeping an eye on Curve, you surely remember iEarn Finance (now YEarn), a project by Andre Cronje which offers a sleek front-end to connect to Curve’s liquidity pools without having to deal with their retro interface.
Despite taking a temporary hiatus, the industry-favorite Curve extension is set to introduce new trading strategies in the coming weeks.
Curve is becoming known for its low-slippage. The protocol’s AMM is designed in such a way that assets which share similar price targets (like $1 in the case of stablecoins) benefit from flatter curves than DEXs like Uniswap.
A great visual explainer of how this works from Kerman Kohli can be found here.
This novel approach to mitigate slippage has fueled large order trading which rivals that of centralized exchanges like Binance - best highlighted by this trade from the Synthetix Foundation in which $2.5M of sUSD was exchanged for USDC with only $50 of slippage and $1.77 in gas.
Here’s a look at how little slippage Curve’s trading pairs incur relative to transaction depth.
Graph by Michal Herzyk - please note that transaction depth for other DEXs is not being measure in stablecoin pairs like Curve
Now, Curve is starting to expand into uncharted territory with BTC liquidity pools. With the release of the renBTC pool and the sBTC pool, users can now trade different Ethereum-based Bitcoin wrappers with minimal slippage in tandem with liquidity incentives in the form of SNX, REN, BAL and CRV tokens. More on this here.
The sBTC incentives come in tandem with the sUSD trial in which those who provide liquidity to the sUSD Curvepool are able to earn ~23% APY denominated in SNX at the time of writing.
The Road Ahead
As Curve solidifies its place in the DEX landscape, projects with stablecoins or pegged wrappers will increasingly seek to trade on Curve to incentivize liquidity.
But, Curve has been intentional about the assets it supports - as Balancer’s recent black hat attack goes to show a liquidity pool is only as strong as its weakest token.
Regardless, the new hunt to farm CRV has continued to show the power of liquidity mining, with the number of unique LPs jumping by 65% from 1,286 two weeks ago to 2,115 at the time of writing.
The TLDR is that CRV will be issued retroactively, with the protocol’s 0.04% trading fees (which have accounted for roughly $2M in earnings to date) allocated to tokenholders using an Aragon-based CurveDAO and time-weighted voting.
To stay up with Curve, be sure to follow them on Twitter. If you’re reading this, you may very well stand a chance against the influx of new farmers once the CRV distribution goes public.
COMP Users Vote to Change Token Incentives
A proposal to upgrade the distribution of COMP, Compound’s governance token, was approved on Tuesday. Once the upgrade goes live, two changes will be introduced. One is a security update that will prevent malicious players from using flash loans to manipulate markets across the system to influence the distribution of COMP. Second, and most importantly, is new incentive mechanism for liquidity providers.
The introduction of COMP had a significant impact on DeFi. In a little over two weeks, total value locked (TVL) skyrocketed to $1.7B, Uniswap V.2 surpassed V.1 in total liquidity, and Balancer began distributing BAL, its governance token. But it also brought unexpected market behaviors, namely yield farming, an activity by which DeFi users leverage protocols and tools to obtain profits up to 100% APY.
Currently, lenders can use flash loans to artificially increment usage of a specific market and obtain more COMP rewards from the total distribution for that market. The security update will block smart contracts from calling the function attackers use to do this, so they won’t be able to use flash loans to exploit that potential attack vector.
Under the current distribution mechanism, COMP tokens are allocated proportionally to the interest being paid in each market across Compound. So, markets that have the highest borrowing cost get more COMP rewards, which are evenly distributed among lenders and borrowers.
Even though the initial expectation was that this design would enable a fair distribution of tokens among honest users, that wasn’t the case. Instead, users with significant amounts of assets began leveraging their positions by supplying and lending in the markets that were providing higher rewards and flocking to others when conditions changed. This behavior favored an artificial demand for certain assets, such as BAT.
New Incentive Mechanism
Once the upgrade goes live, the allocation of COMP across markets will be modified. The interest rate condition will be eliminated, and rewards will start being allocated proportionally to the borrowing demand across each market. This means that markets that lend more value will receive more rewards, which will continue to be evenly distributed among lenders and borrowers.
The upgrade could still favor certain groups of users to profit from the protocol. Yield farmers could supply ETH in Compound and borrow DAI, being entitled to COMP rewards. Then, they could take that DAI, buy more ETH, supply it on Compound again, and take a new DAI loan, subsidizing their new COMP rewards. In the next few days, we will be able to witness if rewards in Compound can attract organic usage to the protocol or if this is a game that only whales can play.
Matcha is The Hot New DEX in DeFi
The 0x team just unveiled their long-awaited Matcha DEX aggregator.
Matcha is like any other Ethereum DEX, meaning that users can swap their tokens peer-to-peer while maintaining control of their assets. However, much like 1inch, Paraswap, and DEX.AG, Matcha aggregates the best prices and least slippage to trade assets on Ethereum. Think of Matcha like an Expedia or Kayak for finding the best rates when you want to trade ETH or ERC20 tokens on Ethereum.
Additionally, the design of the website is clearly inspired by the likes of Robinhood and aims to attract more traders to try DEX trading vs centralized exchanges.
In this video, DeFi Dad discusses the following:
- What's different about Matcha and how to place limit orders
- How to track open limit orders and cancel orders
- Risks to Using Matcha
- Am I getting the best rate with Matcha?
- Try Matcha yourself at: https://matcha.xyz/
- Check out the audits from Tail of Bits and ConsenSys Diligence here: http://help.matcha.xyz/en/articles/3952924-how-secure-is-matcha
For more DeFi tutorials like this, please subscribe to DeFi Tutorials with DeFi Dad on Youtube at https://www.youtube.com/channel/UCatItl6C7wJp9txFMbXbSTg/and follow @DeFi_Dad on Twitter at https://twitter.com/DeFi_Dad
Disclaimer & Risks: Matcha and the 0x team did not to produce this video. This is not financial advice and you should approach all DeFi applications, wallets, protocols, and tools with caution. Please be aware there is always risk in using DeFi, including technical risks (ie smart contracts hacks), financial risks (ie liquidity crises), and potentially admin risk (admin key compromise, governance vulnerabilities). Also there is risk whenever using leverage (if it's ever used), and there's risk of the dollar-peg failing in any stablecoin.
Bet on This: Prediction Markets Space Heating Up
Ethereans have been pushing for decentralized prediction markets since before Ethereum itself launched, but no platform has gained meaningful traction yet. The latest attempts to crack this use case are Omen and Polymarket.
Omen was built and launched by the distributed group of developers at DXdao over the open framework developed by Gnosis.
“Omen is a decentralization maximalist prediction market platform,” according to a post on the Gnosis blog, as users can create their own markets and customize features, including: outcomes, collateral token (including the OWL token designed by Gnosis), resolution date, and oracle.
Omen plans to solve the lack of liquidity that has plagued prediction markets, by scrapping order books and using an automated market maker with Uniswap-like liquidity pools. It uses the conditional token framework, an ERC-1155 token which enables higher information discovery for prediction markets and can be wrapped in the ERC-20 standard so outcome tokens created on Omen could be traded on external DEXs.
Augur, another decentralized prediction market, is one of the first projects to build on Ethereum and is preparing to launch its V2 update in the coming weeks. Here are the differences with Omen, according to the Gnosis blog post:
Polymarket is another Ethereum-based prediction market, which launched two weeks ago and is also built on the conditional token framework developed by Gnosis.
Polymarket has centralized more of its functions than Omen as it seeks to optimize for a more user-friendly experience. The most popular market right now, with $12k in volume, is “Will Ethereum 2.0 Phase 0 launch before 2021,” with 56% voting yes.
Markets have defined resolution sources and a markets integrity committee, which is made up of the Polymarket team and its investors, settles outcomes. The project also uses an AMM for each market and is non-custodial.
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The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money.
About the founder: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.