At its peak, Curve DAO’s CRV token rallied 127% in Q4 2021. It then extended a five-month winning streak to hit a high of $6.98 in January this year. While CRV price has since fallen back below $3, its price performance can be attributed to what the crypto world calls the Curve Wars.
Credit: CoinMarketCap / CRV Q4 2021 - present
Essentially, the Curve Wars are caused by protocols built on Curve who are fighting against one another to obtain the highest APY for their users.
What is Curve?
Curve is an automated market maker (AMM) DEX for stablecoins that launched in January 2020. Curve is well-known for its deep liquidity, low fees and low slippage.
Curve.fi Swap Pools
Curve DAO launched in August 2020 with CRV as its native governance token. CRV is primarily earned through yield farming on Curve — liquidity providers deposit crypto assets into pools and earn CRV as rewards.
As a governance token, holders lock CRV to get veCRV (vote escrowed CRV). veCRV gives holders voting power to determine updates to the Curve protocol — most often adjusting liquidity pool rewards. It is precisely this mechanism that is causing the Curve Wars.
Locking CRV gives holders veCRV
Explaining the Curve Wars
Keep in mind that Curve is an AMM, which makes use of liquidity pools to execute trades. A project with low APY or yields will not attract users to provide liquidity for the stablecoin pair, thus rendering the project ineffective.
These protocols know that the easiest way to offer high yields — and thus attract liquidity — is to influence governance of Curve. If they have the largest voting power, they can easily create and vote for proposals that benefit them.
They do this by:
1. Buying and accumulating large amounts of CRV tokens
Locked CRV would be translated into veCRV and thus voting power — to propose and increase the LP rewards for their pools.
2. Bribing users to vote
Protocols often bribe CRV holders to vote for proposals in their favour by offering other tokens as rewards.
The Yearn vs Convex Battle
Today, Convex Finance (Convex) is the second largest DeFi protocol. But let’s retrace our steps: At one point last year, Andre Cronje’s Yearn Finance (Yearn) and Convex were the two biggest contenders in the Curve Wars, and thus DeFi.
Yearn is a yield aggregator protocol. To put it simply, Yearn moves stablecoin deposits among different yield farming pools to maximize gains. Convex was originally built as a Curve optimizer, allowing users to earn more rewards with CRV.
How did Convex overtake Yearn?
Added benefits to attract liquidity
Holders can convert CRV to cvxCRV (LP token). Depositing cvxCRV on Convex earns the holder the base Curve APR reward + boosted CRV APR + CVX tokens.
While this conversion is irreversible, cvxCRV can be swapped back to CRV at a 1:1 ratio on Uniswap and SushiSwap.
Moving voting power to CVX from CRV
Convex’s large stores of CRV are translated into major voting power. (As of January 2022, Convex is the largest owner of veCRV, holding 47% of the total supply.)
Users recognise that Curve governance decisions can be influenced via Convex and thus CVX, its governance token. Instead of veCRV, which Convex owns almost half of, people are starting to stock up on CVX — some to replicate what Convex did with Curve.
In contrast, Yearn’s governance token YFI cannot be used in the same way.
The Curve Wars is really a war for CRV. Perhaps this is a result of good tokenomics and project execution by Curve. No matter which protocol wins, Curve and CRV holders still benefit.
The views expressed in this article are the author's alone and do not necessarily represent the views of ApolloX.
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