Cryptocurrencies are usually traded on exchanges, which may be centralised or decentralised.
In DeFi, trading relies on Automated Market Makers (AMMs) which use liquidity pools to allow trading to take place without the need for a buyer to match with a seller, or vice versa.
The prices of assets on most AMMs are a direct result of the balance of tokens within each pool. For example, if token ABC has double the value of XYZ, there would be half as many ABC in the pool as XYZ. Consequently, a pool of two dollar-pegged stablecoins aims to maintain a ratio of 1:1 at all times.
The above, known as the ‘constant product formula’, is an elegant and efficient solution which facilitates trading of volatile assets. However, under this system, users can be impacted by significant price impact on larger trades, as the trade skews the balances of the tokens in the pool and, in turn, their prices.
Large volume trades are often made between different stablecoins, for example when market makers use arbitrage to stabilise prices, whilst making a profit. Curve was initially designed to solve the issue of excessive slippage when swapping stablecoins, via the “StableSwap” invariant, making the process more efficient.
This price curve differs from the ‘constant product’ model in that it allows large transactions between like-assets (such as fiat-linked stablecoins, wrapped assets such as wBTC, and liquid wrappers such as stETH, sdCRV, etc.) to be executed with minimal price impact.
Curve’s 3pool is often considered the “backbone” of DeFi, where the deepest liquidity can be found between the stablecoin giants USDT, USDC and DAI. The 3pool also acts as a base-pool, meaning its LP token (3CRV) is used to pair against other stablecoins.
By allowing large players to execute their trades at the best rates, Curve has managed to capture a huge amount of trading volume in DeFi, establishing itself on multiple chains in the process.
Curve’s pools are popular amongst Liquidity Providers (LPs) seeking yield farming opportunities; since lower volatility between assets means lower risk of impermanent loss. As with other AMMs, LPs receive a share of trading fees simply by depositing into the pool; but Curve’s revolutionary ve-Tokenomics also attract depositors by offering additional CRV rewards to certain pools, voted on by holders of veCRV.
This dynamic has created a whole ecosystem of yield-aggregators, bribe markets and now Liquid Lockers to capture the value of these CRV emissions. Stake DAO has worked alongside Curve since its inception as one of just three protocols initially whitelisted to lock CRV for veCRV. Liquid Lockers take Stake DAO’s original mission to the next level by providing the maximum benefits of veCRV ownership without the need to lock up your tokens.