Curve Finance and veCRV

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Coinmonks

3 min readMar 4, 2022

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How good Tokenomics design created value for Curve and why DeFi protocols want to be a part of Curve governance

Curve Finance Logo. Source: Asia Crypto Today

Curve Finance is an AMM-based DEX with the focus of similar-value asset swaps. This is useful for the ecosystem because most DeFi applications are centered around the usage of these wrapped and synthetic tokens that aim to mimic the price of the underlying asset. Whether it’s a stablecoin like USDC, USDT, DAI, UST or wrapped / synthetic BTC such as sBTC, renBTC or wBTC.

Curve stabilizes the prices of stablecoins and synthesized / wrapped assets and allows users to trade in less liquid assets for those that are more broadly used in DeFi. Curve currently (2021/3/4) has the highest total value locked (source: Defillama) across all DeFi protocols. The high TVL provides low slippage aka you pay less per swap.

The Liquidity Problem

Curve has the pools for all the similar value assets, but why would the protocols use it? DeFi protocols need liquidity otherwise they can’t scale. Most liquidity providers aren’t charitable and here to make money so they provide their capital to protocols and pools that earns them the highest yield.

The yield liquidity providers would make from fees isn’t enough, so usually projects incentivise LPs by rewarding them with a high APY from their native token. This comes with a bunch of problems like sell pressure on token price and the inflation of token supply. How can a DeFi protocol cope? This is where Curve aligns incentives.

Hm.. that’s not exactly a liquidity pool. Photo by Enis Yavuz from Unsplash

Curve DAO Token

To understand how Curve helps protocols and LPs we must first understand the Curve DAO Token. The purpose of the CRV token is to incentivise liquidity providers to use the protocol and to get as many users as possible involved in the governance.

The three main use cases for CRV are

To access these features, you have to lock your CRV to acquire veCRV which is a non transferable token. The longer you lock your CRV, the more voting power and boosts you get with veCRV. Locking rewards look like this:

Lock 1000 CRV for 1 years = get 250 veCRV
Lock 1000 CRV for 4 years = get 1000 veCRV

The most important use case for the CRV token is governance. Why would participants care about governance? Voting power is in the best interest of DeFi protocols, let me explain why.

Gauges

Gauge weights are the percentage of CRV emissions that are rewarded to specific liquidity pools. On a weekly basis, governance participants can vote on gauge weights with veCRV. Those that get the most votes get the most rewards. Curve governance is valuable because protocols can vote for their own pools (or the pools that’s in the best interest for them) so they can get more rewards.

The War for Governance

The power of Curve governance was so valuable that as several protocols started to invest in veCRV, a war has emerged between them to fight for the most voting power. Convex Finance currently holds most of the voting power, a protocol created to get Curve LPs the highest ROI on their funds.

Regardless the biggest winner here is Curve thanks to their token design.
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