CRV under the attack of Uni V3: In-depth analysis of Curve business model, competition situation and current valuation
Research institution: Mint Ventures
Researcher: Xu Xiaopeng
The last update time: 2021.9.3 11:10
1. Highlights of the report
1.1. Core investment logic
Curve can firmly rank second in the battle for liquidity of the DeFi protocol, with a TVL of more than 10 US $billion. This is the result of accurate product positioning, sophisticated mechanism design, and long-term stable operation. Its core competitive advantage are as follows:
i. By focusing on the trading market of stablecoins and stable consideration assets in the early stage, it has built a strong dominance in this segment and become the preferred platform for asset issuers, large-value traders, and market makers seeking stable returns, forming an obvious network effect;
ii. It has an excellent token model, which is embodied in:
· The distribution of all scarce resources on the platform is deeply tied to governance rights (veCRV), which can only be exchanged for token CRV through lock-up. A large number of long-term lock-ups have reduced the circulating market capitalization of the project.
· It fully introduces the game among all participants (liquidity providers, asset and bill issuers) on the platform to form a continuous competition for governance rights (veCRV). This further increases the demand for CRV and undertakes the selling pressure of CRV that continues to unlock.
· The final result of the above two are: a. The stable currency price guarantees the APY of liquidity providers, retaining the liquidity; b. Multi-participants of the system are deeply tied to the development of the Curve platform, which improves the participation and effectiveness of governance; c. It creates extremely high switching costs for core participants, who are difficult to leave since they have staked a large number of CRVs for a long time.
1.2. Main risks
Main risks come from challenges from DEX such as Uniswap, unsatisfactory development of new business in the transaction of non-stable consideration assets, market share centralization of stablecoins, and regulatory risks.
1.3. Valuation
Overall, Curve has a clear competitive advantage in the field of stable consideration asset transaction. Its excellent token economic model further strengthens its moat and provides strong support for its token price.
However, both the vertical historical valuation comparison and the horizontal comparison with other trading protocols show that the valuation of Curve is too high at the current stage.
2. Basic situation of the project
2.1. Project business scope
Curve is a trading protocol based on the automated market maker (AMM) model. It mainly focuses on the trading of stablecoins, wrapped assets (such as wbtc\renbtc) and staking assets (stEth). However, it has also recently begun to explore the trading business of unstable consideration assets. Compared with other trading protocols such as Uniswap and Sushiswap, Curve provides more concentrated trading pairs with extremely low trading slippage and handling fees, which can meet the huge demand for asset trading.
2.2. Project history and roadmap
The Curve project was established in November 2019, and its important events occurred as follows:
2.3. Business situation
2.3.1 Service object
As a decentralized trading platform, Curve differs from Uniswap and other comprehensive spot trading platforms mainly in the types of transaction. At present, the transaction types of Curve focus on stablecoins (USD assets), and other BTC and ETH derivatives assets with a target price of 1:1.
In addition, after the release of Curve V2, Curve also launched the Tricrypto pool, opening up the exchange of USDT, WBTC, ETH and other non-stable consideration assets.
It should be noted that, unlike Uniswap and other mainstream AMM spot trading platforms whose main service objects are market makers and traders, Curve actually has three main service objects.
The first two are market makers and traders. The third type of service objects is ignored by most people. They are the issuers and operators of the derivative assets of stablecoins, BTC and ETH, as well as bill issuers. For Curve, the magnitude of the third group determines the business ceiling of its stablecoins and stable consideration assets.
For stablecoin issuers, the first priority is to ensure that their stablecoin prices do not de-anchor. In addition, they also need to have an excellent exchange depth of low slippage at the anchored price point. These two points are the major premise for the stablecoins to carry out subsequent scenarios and user expansion, and also the starting point for users’ confidence in the stablecoins.
However, these two points are not so easy to realize, especially the “low slippage under huge trades”.
Curve is currently the best solution to solve these two pain points of stablecoin issuers. Thus, most stablecoin issuers choose to establish stablecoin exchange pools on Curve and provide token subsidies in the initial stage so as to encourage market makers to provide liquidity.
At present, the USD stablecoin UST operated by Terra, GUSD issued by Gemini, PAX and other well-known stablecoins, which have seen a rapid rise in market capitalization recently, have established stablecoin liquidity pools on Curve.
In addition, the LUSD over-collateralized and minted by emerging coin market protocol Liquity, algorithmic stablecoin FRAX, etc., have also established an excellent depth on Curve. The excellent exchange depth is an important source of user’s confidence in accepting a stablecoin.
Similar to stablecoin issuers, there are also BTC asset issuers on Ethereum. In addition to WBTC (mainly operated by the well-known crypto institution Bitgo) with the largest issuance and strongest consensus, there are also Renbtc issued by Ren, sBTC issued by Synthetix, HBTC issued by Huobi, and BBTC issued by Binance, etc.
The Ethereum version of BTC issued by these institutions wants to be adopted by more users and scenarios. They also have to solve the problems of de-anchor from the real BTC price and the depth. Therefore, these institutions have also launched the liquidity pool of BTC assets through proposals on Curve, ensuring the stable consideration and depth of their BTC assets.
Under the Eth2.0 POS mechanism, a large number of staking service platforms have emerged, such as Lido, Ankr, etc. When users deposit ETH on these staking platforms to seek staking rewards, they will get corresponding deposit certificates. For example, Lido’s ETH staking certificate is stETH.
In the crypto world where day is the evolutionary unit, users are extremely sensitive to the liquidity and application scenarios of all their assets. Although stETH is backed by relatively safe ETH assets, the prices of stETH and ETH will be seriously anchored or difficult to exchange, if there is no sufficient liquidity between stETH and ETH. On the one hand, it prevents users from switching stETH back to ETH, and on the other hand, it will also cause other top Defi projects such as Aave and Compound to adopt stETH. This will eventually make users unwilling to choose Lido as their staking platform.
Therefore, staking operating platforms like Lido and Ankr have also launched their own liquidity pools of staked asset certificates and ETH on Curve.
In addition to the asset issuers and staking platforms, another type of institution that needs to build a liquidity pool on Curve is the bill issuers. The most popular bill is interest-bearing assets, such as Compound’s cToken, Aave’s aToken, Yearn’s yToken, etc. If the liquidity of the bills issued by them is sufficient, it is also good for the development of their own business. This part will be detailed in the section of “Business Classification”.
Market makers provide Curve with liquidity, and traders provide Curve with transaction fees. Then what are the contributions of various asset issuance and operators to Curve? The answer is: huge demand for Curve tokens.
This point will be analyzed in the section of “Token Model”.
2.3.2. Business Classification
As mentioned earlier, Curve’s trading business is categorized into stablecoin, stable consideration assets and other non-stable consideration assets. Next, we will sort out the situation of these businesses.
2.3.2.1. Stablecoin trade
At present, there are 26 core USD stablecoin pools on Curve. Among them, there are 3 pools with daily trading volume of more than US $10 million: the 3pool, Lusd+3crv pool and sUSD (DAI+USDC+USDT) pool, separately with trading volume of US $82.2 million, US $25, and US $17.3 million. Other pools with large trading volumes include UST (US $6.8 million), USDN (US $5.6 million), MIM (US $4.2 million), etc.
It is worth mentioning that Curve’s Aave stablecoin pool (aDAI+aUSDC+aUSDT) on Polygon has a daily trading volume of up to US $8.2 million.
PS: All the above data are retrieved on September 1, 2021.
In addition to the USD stablecoin pool, there is also a EURO fund pool on Curve, but with small trading volume and capital volume.
It is worth mentioning that the assets of many stablecoin pools are actually “Defi bills”, such as cDAI\cUSDC in the Compound pool, yDAI\yUSDC\yUSDT\yTUSD in the Y (Yearn) pool, and MIM in the MIM pool. These assets are not simple stablecoins, but vouchers that can be used to redeem the agreed principal + interest from the issuance platform, that is, the “bills” in traditional finance. The issuers and payers of these bills are DeFi project. Due to the nature of their cash-like assets, we also classify them into the stablecoin category.
2.3.2.2. Trade of stable consideration assets
Stable consideration assets include BTC mirror assets on Ethereum issued by various institutions, ETH staking certificates, and synthetic assets created by Synthetix such as sLink, etc.
The largest trading volume of BTC assets is the RenBtc pool, with a daily trading volume of US $29.5 million, followed by the SBTC pool with US $9.3 million.
The largest trading volume of ETH assets is the sETH pool which is the eth synthetic asset created by the Synthetix protocol, with a daily trading volume of US $8.4 million, followed by Lido’s ETH staking certificate stETH pool, with a daily trading volume of US $4.5 million.
The sLink pool which is Link synthetic asset created by the Synthetix protocol has a daily trading volume of US $1.3 million.
In general, the trading volume of stable consideration assets is much smaller than that of stablecoins.
Curve’s stable consideration asset trading pool on Polygon only has renbtc and wbtc, with a daily trading volume of only US $130,000.
PS: All the above data are retrieved on September 1, 2021.
2.3.2.3. Trade of unstable consideration assets
After the launch of V2 version, Curve launched a fund pool for non-stable consideration asset trade and began to officially enter the trading market outside of stable assets. At present, the non-stable consideration assets in the main trading pools of Curve mainly target at the two mainstream assets in the crypto world: BTC and ETH.
This fund pool is called the Tricrypto pool, containing assets of BTC, ETH and USDT. This means that market makers can deposit BTC, ETH and USDT to it, while traders can also use BTC, ETH and USDT to exchange the other two assets in this pool.
At present, the daily trading volume of Tricrypto on the Ethereum version of Curve is US $24 million, and the Tricrypto pool on Polygon has a trading volume of US $10.2 million.
This is still a good result considering that the Tricrypto pool has been online soon,
2.3.2.4. Factory pool
The factory pool is an experimental liquidity pool outside of the core asset pool of Curve. It can be spontaneously established by users, and can earn CRV incentives through the Gauge weight vote function (one of the core governance modules on Curve, which determines the incentive allocation of CRV produced daily through voting).
At present, the amount of funds in the factory pool is not large, among which the liquidity of the top ranked ibEUR/sEUR fund pool is 19.45 million euros and the daily trading volume is US $1.5 million.
2.3.2.5. Multi-chain business situation
Curve currently deploys services on the four chains of ETH, Polygon, Fantom and xDAI. The general situation is as follows:
Although the business volume of Polygon and Fantom has risen rapidly, Ethereum is still the main business ground of Curve at present.
2.3.2.6. Summary
The author counts and ranks the Curve liquidity pools with the largest daily trading on the Ethereum chain, as follows:
Some of these situations are worth noting:
· Stablecoin trade is still the largest business of Curve, accounting for more than half of the total. In addition to the two centralized stablecoins — USDT and USDC, decentralized and even algorithmic stablecoins such as LUSD, FRAX, and UST have significantly increased their proportion in the stablecoin business of Curve.
· The proportion of wrapped and derivative assets of BTC and ETH is also on the rise, especially stETH, whose liquidity has reached a staggering US $4.4 billion, accounting for nearly 40% of Curve’s total TVL.
· The liquidity pools of unstable consideration assets represented by BTC and ETH have developed rapidly, with their trading volume among the highest. If the tricrypto pool on Polygon is counted, their daily trading volume will reach nearly US $30 million.
Generally speaking, Curve’s stablecoin exchange business still accounts for a relatively high proportion, but the trend of its business diversification is very obvious. This is reflected in the rapid rise of trading volume of unstable consideration assets, explosive growth of staking asset business, and the development of more stablecoin types in the stablecoin section, etc.
2.4. Team
2.4.1. Overall situation
Curve is not an anonymous team, but it has not disclosed its current staff size. On Linkedin, there are two current employees of Curve, who are the founder and CEO of Curve: Michael Egorov, and another core team member Julien Bouteloup. In August 2020, Michael Egorov was interviewed by the crypto media Crypto Briefing on Telegram. In the conversation, he said that 5 members have joined the team, namely two developers Angel Angelov and Ben Hauser, and three community workers Charlie Watkins, Kendrick Lama and Chris (well-known Chinese crypto KOL, Youtube: Mr. Block). In addition, there is another Michwill in the Curve team in the Discord channel of Curve.
The team should be at least a group of 8 people now.
2.4.2. Founder Michael Egorov
Michael Egorov is the founder and CEO of Curve. He received a bachelor’s degree in Applied Mathematics and Physics from the Moscow Institute of Physics and Technology, a PhD degree in Physics from Swinburne University of Technology, and a postdoctoral degree in Physics from Monash University.
In terms of career history, he worked as a software engineer in many companies from 2007 to 2015. In 2013, he was introduced to Bitcoin. In 2015, he left LinkedIn to start his own business. He co-founded NuCypher and served as CTO, officially shifting from the traditional industry to the blockchain industry.
NuCypher aims to provide a data privacy layer for blockchains and DAPP. In 2016, it received a seed round of investment from the well-known startup incubator Y Combinator, and in 2017 it again received investment from well-known cryptocurrency institutions such as Compound and Polychain, with a total of US $440 million financing. The current code update of this project is still active.
During his time at NuCypher, Michael Egorov began to use the MakerDAO protocol, and began to think about liquidity, dynamic collateral and other issues. He started to develop Curve in the second half of 2019. During the development period, Yearn founder Andre Cronje also participated in product design discussions.
In June 2020, Michael Egorov left NuCypher and became the full-time CEO of Curve.
2.4.3. Core member Julien Bouteloup
According to his information on Linkedin, Julien Bouteloup spent his early years on consulting work for blockchain business, and his clients included judicial and financial institutions. He joined the Curve team in January 2020. At the same time, he established Stake DAO, a platform that helps users obtain multi-chain yields through staking and yield farming. The platform also passed Curve’s community vote in February 2021, thus it joined Curve’s governance whitelist. The whitelist allows users to deposit CRV on Stake DAO and entrust the platform for governance and revenue. He is currently the CEO of Stake Capital, a Defi quantitative hedge fund.
2.4.4. Financing
Curve has not publicly disclosed its financing and funding. However, the token distribution is designed to allocate 30% of CRV tokens to project shareholders.
3. Business analysis
3.1. Industry space and potential
3.1.1. Classification
The track where Curve is located is DEX. In addition to Ethereum, it is also deployed on other major chains such as Polygon and Fantom.
DEX is a concept opposite to CEX (centralized exchange), where the main difference is whether users have the private keys to their own assets.
In the current DEX design, there are mainly two types: AMM and order book. The order book model is similar to the order matching mode of centralized exchanges, and the AMM (Automated Market Maker) model is currently adopted by more protocols.
At present, AMM model is adopted by DEX with top trading volume and TVL on main chains, including Curve and Uniswap on Ethereum, Pancakeswap on BSC, and Quick on Polygon, etc.
3.1.2. Market size
According to the multi-chain data of Debank, the highest daily trading volume of mainstream DEX protocols in 2021 reached US $24 billion (two plunges on May 19 and May 29). The daily trading volume in the peak trading season from April to May was US $7–10 billion. The recent 24-hour trading volume of DEX is around US $4.7 billion, nearly 9 times higher than the trading volume of US $500 million in the same period last year.
The number of DEX active addresses has also experienced a significant growth. In 2021, the number of active addresses of mainstream DEXs reached a record of nearly 900,000 daily active addresses on May 12, and recently remained at the level of 400,000+, up about 20 times year-on-year.
As one of underlying protocols in the crypto world, DEX’s number of users and trading volume will continue to rise with the development of crypto business.
However, as emphasized many times before, Curve’s strength lies in its stable consideration assets. In addition to the counter assets of current stablecoins and mainstream cryptocurrencies, the foreign exchange market has always been an area that Curve wants to enter.
In an interview with crypto media Rekt in July, Michael Egorov who is the founder and CEO of Curve, said that Curve has plans to enter the foreign exchange market in the method of stablecoins, which is one of Curve’s future growth sources.
What is the daily trading volume in the foreign exchange market now? About 6 trillion dollars.
In addition, Curve is actually the largest trading market for Defi bills at present. As mentioned in the section of “Business Classification”, Curve has a large number of active bill liquidity pools, such as cDAI\cUSDC in the Compound pool, yDAI\yUSDC\yUSDT\yTUSD in the Y(Yearn) pool, and ADAI\aUSDC\aUSDT in Aave pool, etc. These bill issuers are basically the leading projects in the crypto world. The higher the liquidity of their bills is, the more it helps their business development directly. It is foreseeable that the variety and market size of bills in the DeFi world will continue to expand in the future.
The bill exchange is a larger market than foreign exchange. In 2020, the total trading volume of bills in China alone exceeded RMB 148 trillion.
3.2. Token model analysis
3.2.1. Total amount of tokens and token distribution
The core token of Curve project is CRV. CRV was issued on August 13, 2020, with a total amount of 3.03 billion. The distribution of the total amount is as follows:
· 62% for liquidity providers
· 30% for shareholders, linearly unlocked within 2–4 years
· 3% for team members, linearly unlocked within 2 years
· 5% for community reserve
At present, the total amount of CRV released is about 753 million, and the average daily released CRV is about 1.45 million.
The specific unlocking schedule of CRV is as follows:
It is worth noting that, compared with most current projects, the planned release period of CRV is quite long. Even by 2026, only more than 60% of the total will be released, ensuring that CRV has a long-term budget and time for continuous liquidity incentives.
3.2.2. Value capture of tokens
First of all, it should be noted that, although the Curve token is CRV, in the mechanism designed by Curve, only the veCRV obtained by CRV after locking in the Locker module can capture the value of Curve, play the function of the token, and exercise the governance power.
The longer users lock up the CRV, the more veCRV they can obtain. Specifically, 1CRV can obtain 1veCRV by locking for 4 years, while receiving 0.25veCRV by locking for one year.
There are two other mechanisms worth noting about veCRV:
1. veCRV cannot be transferred;
2. As the locked CRV gradually approaches the unlocking date, the number of veCRV decreases linearly.
The value of CRV\veCRV to token holders includes —
· To obtain the transaction fee of the platform: After users stake and lock CRV tokens, they can obtain the transaction fee share of most transaction pools on the whole platform. The fee sharing ratio is 50% of the total fee (the other 50% for liquidity provider), and the share is allocated through 3CRV tokens (3CRV is the LP of the stablecoin swap pool 3POOL, which can be swapped 1:1 for other stablecoins).
· To accelerate yields of liquidity market-making: After locking the CRV, liquidity providers can use the Boost function to increase their CRV reward yields earned by their market-making, thereby increasing their overall market-making APR. The CRV required by Boost is determined by the amount of funds in the pool and LP.
· Protocol governance: The governance of Curve also needs to be realized through veCRV. In addition to the modification of protocol parameters, the scope of governance also includes the voting of Curve’s new liquidity pool, and the weighted distribution of CRV’s liquidity incentives among various trading pools, etc.
CRV and veCRV capture the value of the overall protocol quite adequately. They can not only obtain the commission sharing of the protocol and accelerate market-making yields, but also play a huge role in governance, creating huge demand and stable buying for CRV.
In addition to Curve’s system, users lock CRV to obtain veCRV as well as continuous airdrops of tokens from other projects supported and cooperated by Curve.
For example, the DEX project Ellipsis on BSC airdrops 25% of its total token EPS to veCRV users. CVX, a token based on Curve’s liquidity and CRV staking management platform Convex, will also airdrop 1% of the total to veCRV users. As a currency market protocol established on Polkadot, Equilibrium also has the possibility of airdrops.
3.2.3. The core demand side of CRV tokens
Unlike most project tokens that “emphasize cash flow capture but ignore functionality”, CRV tokens not only have cash flow capture capabilities, but also have extremely strong functionality in the Curve system, which is mainly reflected in the control of governance rights.
In the top DeFi projects of the same echelon, Curve’s governance participation, number and quality of proposals are among the top in the industry, praised by many as the “model of DAO governance”. The reason for this is that Curve’s governance rights have higher value and scarcity than other DeFi, attracting a large number of institutional users.
The first key question: What is the core value of platform governance rights corresponding to CRV tokens?
i. Judicatory right: Platform pass card
As mentioned in the previous section of “Business Situation”, Curve is different from Uniswap, Pancakeswap and other general spot trading platforms. It focuses on the transaction of “stable consideration assets”. Whether such assets are stablecoins such as UST issued by terra, HUSD issued by Huobi, or ETH staking certificates provided by Lido such as stETH, they all have a strong “anchoring demand”.
Stable consideration assets are different from the tokens of ordinary projects. Project tokens can rise and fall, and the demand for transaction depth is also moderate. However, if the stable consideration assets issued by the project party fluctuate sharply with insufficient depth, it means that the foundation of the project is shaken, and the business is bound to decline.
Therefore, the project party must find a place with the best depth and stability effect to make the market for its own stable consideration assets, so as to meet the transaction needs of low slippage even under huge transactions. At present, only Curve has this ability.
Unlike anyone who can provide liquidity on Uniswap, users must meet the conditions through community voting, if they want to enter the core liquidity pool of Curve: more than 30% of veCRV voting participation and more than 51% of support. With the increasing total circulation of CRV, this threshold will also become higher and higher.
Regardless of whether a project on Curve wants to buy tickets for voting itself, or to seek support from large investors in the community, all of these increase the direct demand for CRV from institutions. The role of CRV during this process is somewhat similar to the voting rights of BNB and HT in the IEO frenzy in 2019, and it has become a rigid demand for the project parties that plan to issue tokens on Curve.
ii. The distribution of CRV incentives: the baton of liquidity
Even after launching on Curve and opening a liquidity pool, the work of asset issuers is far from over. If they want to strive for a good depth for their assets, they must make their liquidity pool obtain more allocated CRV liquidity mining rewards. Only in this way can there be market makers to provide sufficient liquidity, by which the tokens of stable asset issuers can ensure the transaction depth and the subsequent business development has a foundation.
The daily output of CRV used for liquidity mining incentives is allocated by Curve’s DAO core module “Gauge Weight Voting”. Users can vote in the “Gauge Weight Voting” through their veCRV to determine the allocation ratio of CRV in each liquidity pool for the next week. The pool with a higher allocation ratio is easier to attract sufficient liquidity.
Therefore, operators of stable assets still need sufficient veCRV for voting. In a sense, other liquidity pools are competitors of this asset operator. To ensure that their asset liquidity is always sufficient under the mining incentive of CRV, they must continue to buy CRV and vote constantly, continuing to be involuted in this war without any fire on Curve.
Summary: Stable asset operators have strong demand for anchoring and liquidity of their own issued assets. Thus, it is almost an inevitable choice for them to launch on Curve, establish liquidity pools, and obtain CRV liquidity mining incentives in order to maintain sufficient transaction depth. It is almost an inevitable choice for them. These projects have a large and long-term demand for CRV tokens, which are used to buy “launch pass of tokens” and “liquidity baton”. Of course, in addition to gaining project governance rights through CRV, these projects will also receive stable dividends from the Curve platform as a cash flow income.
The second key question: Who is fighting for CRV governance?
In addition to issuers of stable consideration assets, another strong demand for Curve governance rights is various smart pools (Yield Farming platform), such as Yearn.finance (the project party of YFI), Harvest.finance, Vesper.finance, etc. Curve is one of the core income sources of almost all Ethereum smart pools, due to its stable earning capacity, strong capital capacity and good security. They raise assets from users and deposit the wrapped assets into Curve for a commission + CRV token rewards.
The smart pools also face competition because they need to provide higher yields to users to increase their TVLs.
Therefore, on the one hand, they need to purchase the liquidity provided by CRV to increase market-making returns to meet the returns of users. The larger the amount of funds they deposit, the more accelerated CRV they need. On the other hand, they also need to fight for higher CRV liquidity mining rewards for the liquidity pool where their own funds are deposited. So, they need to keep voting in the Gauge Weight with veCRV. In addition, smart pools can also initiate proposals that benefit their own projects, or that are used to attack competing platforms.
In order to better obtain the governance rights of Curve, Yearn.finance launched the Yearn Backscratcher Vault in November 2020. Users can permanently deposit their CRVs in the Backscratcher Vault to obtain a higher APY than that of users who lock their CRVs on Curve. At the same time, Yearn has also obtained users’ voting rights, by which they can influence Curve’s decision-making direction and improve the returns of all Yearn’s Curve-based fund pools, ultimately bringing more users and higher TVL to Yearn.
Stake DAO, founded by Curve core member Julien Bouteloup, joined this competition in January 2021. It became the second CRV depository protocol after Yearn to obtain the Curve governance whitelist, through the vote of Curve DAO in February.
With the pressure of intensified competition, depository platforms began to pay attention to improving user experience. In February 2021, Yearn launched the liquidity pool of yveCRV (the certificate for users to deposit CRV on Yearn) and ETH for those who locked CRV on Yearn. In addition, it allowed Sushiswap to provide mining rewards for the pool.
In order to cope with the competition, Stake DAO launched the liquidity pool of sdveCRV (the certificate for users to deposit CRV on Stake DAO) and CRV on Balancer in May this year, providing an exit path for users.
The strongest player in this governance right competition appeared in May of this year.
Convex is a platform that provides services for Curve’s liquidity providers and CRV stakers. Compared with Curve’s vintage and complex interface, Convex has a better user experience. Within 4 years, users who deposit CRV on Convex will receive CVX token rewards from Convex.
After Convex was officially launched in mid-May, the veCRV it controlled surpassed Stake DAO and Yearn in only 2 and 14 days respectively.
In addition to the incentives of CVX, Convex’s rapid rise also stems from its development support from the official Curve team and investment from Curve’s core member. Convex is similar to Curve’s “own son”, so it quickly won the trust of the community.
Perhaps because of this, despite the competition between Convex and Year on governance rights, the veCRV controlled by Yearn also voted “Yes” in the vote on whether to add Convex to the Curve governance whitelist in April.
At present, the veCRV owned by Convex has accounted for 30.8% of the total supply, second only to the 60.6% of the official pledge of Curve, and Yearn only accounts for 7.5%.
How long will this battle for governance rights last?
Now as long as Curve still takes the lead in the exchange of stable assets, this war will not end.
3.2.4. Token model summary
As Curve said in the design goals of CRV: The main purpose of CRV tokens is to incentivize liquidity providers on the Curve Finance platform and enable as many users as possible to participate in the protocol governance.
In order to achieve this goal, Curve has made two key global designs:
The first design: All empowerment is given to voting right tokens instead of CRV.
CRV itself has no rights and interests. Only by staking CRV in exchange for voting right token veCRV, it can capture yields, perform functions, and participate in the governance game of the platform. Even airdrops of external projects are only allocated to veCRV users.
Only by providing liquidity, the veCRV on hand can play its maximum effect: 1. Accelerate the rate of return of its liquidity through the Boost function; 2. Vote for its liquidity pool and strive for more CRV distribution.
The second design: hand over all the core resource allocation of the platform to DAO, and fully introduce competition in governance.
As mentioned earlier, the competition for CRV by asset issuers, yield platforms and other institutions is essentially a fight for the governance right of Curve. The reason why governance is so precious is that the distribution of Curve’s core resources is determined by DAO:
· Approval rights for launching tokens
· Distribution rights of liquidity
· Key parameter
· Governance whitelist
· ……
With the continuous release of CRVs, the original governance rights will continue to be diluted. On the other hand, as the CRV lock-up time gradually expires, the number of corresponding veCRVs, that is, the governance weight, will gradually decline. If they want to continue to maintain their influence, they have to continue to buy CRV, or continuously extend the lock-up time of CRV.
This also explains why the average lock-up time of CRV reaches a staggering 3.64 years (up to 4 years).
The game and involution of various institutions on Curve have generated continuous demand for CRV. This stabilizes the price of CRV under a large number of additional issuances, holds Curve’s market-making APY, and attracts liquidity. It forms a cycle.
These two designs echo with the original intention of the two tokens: “as many users as possible participate in the protocol governance” and “incentivize liquidity providers on the Curve Finance platform”.
Curve’s economic model ideas also provide nutrients to many projects in the industry. In the new token model recently released by Cream and Mobox, we can all see the shadow of Curve DAO.
However, to ensure the continued circulation of the Curve token economy, there is a prerequisite: Curve can continue to maintain its monopoly on stable consideration assets and continue to collect its “monopoly rent” from asset issuers and the yield farming platforms.
Non-administrative monopoly is often fragile most of the time, and this is especially true in the rapidly changing crypto world, where the challengers of Curve has appeared.
This will be discussed in the next section “Project Competitive Landscape”.
3.3. Project competition landscape
3.3.1. Basic market landscape & competitors
In the medium term, Curve is based on stable consideration assets while exploring the trading market for unstable consideration assets. Although the extension of trading varieties is expanding, the product positioning has not changed. Here the product position includes providing traders with “large amounts, low slippage, and low commission” services and offering market makers with “simple, safe and stable” revenue sources.
In combination with TVL, tradig volume, community reputation, and the number of combinations with external protocols, the only competitor that Curve is really scared of is Uniswap at present.
The author will compare and analyze the current competitive situation of the two.
Uniswap vs Curve: Trading Volume
On Ethereum, Uniswap dominates in trading volume, and the launch of V3 has also played a major role in promoting its business growth. Its share of total trading volume has increased from 52% in May to 68% recently, reaching 71% at its peak at the end of June. During the same period, the share of Curve’s trading volume fluctuated between 10% and 6%.
If the recent trading volume of Curve on Polygon and Fantom is included, this number can be increased by 1–2%.
Uniswap vs Curve: TVL
From the perspective of locked liquidity, Curve has industry-leading numbers. Its TVL was US $12.7 billion on September 2, compared with a total TVL of US $7.64 billion for Uniswap V2 (US $4.94 billion) + V3 (US $2.7 billion) in the same period. On the one hand, this means that Curve has a better overall depth. On the other hand, it also means that for market makers, Uniswap has a higher overall capital efficiency (but also implies higher market-making risk).
Uniswap vs Curve: Core stablecoin business
In order to facilitate the high value and low slippage exchange of stable assets, Curve does not use the traditional AMM constant product formula in the exchange formula for stable consideration assets. Instead, two basic price curves of xy=k and x+y=k are fitted according to a certain weight ratio. The specific formula is as follows:
With its V3 version update, Uniswap has introduced flexible custom parameters for market makers, who can arbitrarily determine the distribution range of their liquidity. Under this mechanism, the stablecoin market makers on Uniswap consolidate their market-making range of stablecoins around the 1:1 consideration. This greatly improves the efficiency of market-making, reducing the slippage of stablecoin exchanges compared to the past. Since then, Uniswap’s stablecoin trading volume has risen rapidly.
Trading volume
The largest stablecoin trading pool on Curve is 3POOL, which includes the exchange of three stablecoins: USDT\USDC\DAI. In addition, USDT\USDC, USDC\DAI and USDT\DAI are also the top three stablecoin pairs on Uniswap in terms of trading volume. Let’s make the following comparison:
We find that Uniswap has generated a higher trading volume, although its liquidity in the three main stablecoins is much smaller than Curve’s 3POOL. However, Uniswap’s transactions are mostly in the thousands of dollars and small tens of thousands of dollars. Uniswap has higher number of transactions, while Curve has more high-value transactions and a lower number of transactions.
Although the total TVL of UniswapV2 is still higher than that of V3, most of its stablecoin liquidity and trading volume have been migrated to V3, as follows:
From this point of view, since the launch of Uniswap V3, it has significant promoted its stablecoin transaction business. It has a higher trading volume on the three core stablecoins than Curve’s 3POOL.
Of course, in addition to 3POOL, Curve also has a richer stablecoin trading pool (such as sUSD), all of which have large trading volume. Therefore, Curve is still ahead of Uniswap in the total amount of stablecoin transactions.
Trading slippage
From the perspectives of transaction depth and slippage, we use multiple transaction amounts from small to large to test the purchase of USDC with USDT. This aims to measure the transaction loss (handling fee + slippage) of the two platforms under the same transaction amount.
We find that at present, no matter for a small or large amount, the transaction loss of Curve is more than 60% less than that of Uniswap in most cases. With the further increase of transaction amount, Curve can still maintain its low slippage level when it reaches the exchange level of over 70 million. However, Uniswap will be largely unable to complete the transaction because it is out of the liquidity range set by market makers.
In summary, the larger the trading volume, the stronger the motivation of traders to use Curve. Now, only Curve can carry single currency transition of 100 million units.
Uniswap vs Curve: Other stable consideration assets
For example, stable consideration assets such as WBTC and RENBTC, stETH and ETH have basically no liquidity on Uniswap at present, and Curve has a monopoly in this part of the trading market.
Uniswap vs Curve: Unstable consideration assets
Curve released the V2 version in June this year, and introduced the multi-dimensional constant product formula:
In its V2 white paper “Automatic market-making with dynamic peg”, Curve said: “we describe a method for creating liquidity for assets which aren’t necessarily pegged to each other in a way more efficient than x · y = k invariant. We concentrate liquidity given by the current “internal oracle” price but only move that price when the loss is smaller than part of the profit which the system makes. This creates 5–10 times higher liquidity than the Uniswap invariant, as well as higher profits for liquidity providers.”
If the new formula is applied to the dual currency asset pool, its state will be the orange curve in the following figure, and the blue curve is the formula curve of the original V1 version:
Similar to the fitting the two basic price curves xy=k and x+y=k according to a certain weight ratio Curve V1, the price curve of Curve V2 is also fitted by other basic curves. To put it simply, the curve is closer to the curve shape of Curve V1 (blue) near the trading price, and closer to xy=k (dotted line at the bottom left) when it is far away from the trading price. This creates a price curve (orange) that is smoother near the trading price but more curved away from the trading price range. Compared with the price curve that is closer to a straight line in the V1 version, the V2 curve has a larger arc at the far end to increase the degree of support for non-stablecoin trading pairs.
One of the most critical improvements of Curve V2 is that, when the coin market price deviates from the original aggregation range, liquidity can be automatically rebalanced and a curve suitable for the new price can be reconstructed. Regarding to how to perceive price changes in the token market, most projects will choose to use external oracles, but there is a risk that external oracles can be manipulated.
In order to completely eliminate the possibility of oracle attacks, Curve V2 chooses to use internal data as a reference price, calling this mechanism as an exponentially moving average oracle, or EMA. The quotation provided by EMA oracles is a reference price based on the historical transaction price of Curve and the latest transaction information. This reference price is somewhat similar to the moving average in technical analysis, and it will be dynamically adjusted based on the latest transaction price. However, it also maintains a certain lag while adjusting, so as not to trigger the rebalancing mechanism too frequently when the price fluctuates sharply.
With the reference price provided by the internal oracle, the system has a trigger basis for rebalancing. When the price quoted by EMA oracles deviates from the original price by more than a certain range, the protocol will automatically adjust the shape of the entire curve, so that the liquidity gathers near the latest transaction price.
At present, this mechanism has been applied to the non-stable consideration and multiple stablecoin fund pool of Curve, called Tricrpto pool, which is currently deployed on both Ethereum and Polygon.
According to recent data, Ethereum+polygon Tricrpto pool has reached over US $30 million in daily trading volume.
Just as Uniswap’s V3 program threatening Curve’s stablecoin market, Curve’s V2 solution also represents a move into it has begun to enter the field that Uniswap is good at.
However, although the two sides began to fight hand in hand in their respective areas of strengths, in fact these two projects have huge differences in terms of protocol ideas and judgments on the industry direction.
Uniswap VS Curve: Two product ideas
Uniswap’s idea is to develop a set of universal solutions that can simulate any shape of the price curve, leaving decisions on various key parameters to the user. It expects that, through free exploration and competition, market makers can find their own market-making solutions to respond to market demands.
The Curve team believes that users expect a more concise market-making solution. At this stage, users should not be trapped in complex and diverse choices. Instead they should directly provide users with automatic solutions so that users only need to consider the amount of market-making funds and timing. All the rest can be done automatically by the Curve protocol.
Regarding the two plans of Uniswap V3 and Curve V2, the crypto media Block Beats commented:
“Acknowledging that the will of individuals and teams cannot always be correct, and fully opening up the right to choose to the market and the community, and only participating in the construction of the underlying infrastructure is the core concept of the Uniswap team. It admits that most users do not have professional analysis capabilities, so it is necessary for professional industry elites to provide a package of solutions to try to solve all obstacles that users may encounter. This is the core concept of Curve V2.
The most important difference between Curve’s and Uniswap’s top teams is whether they want to directly make a good product with powerful functions, or to become a general underlying architecture that empowers ecological development. Only time will tell which of these two different methodologies will ultimately pass the test of the market.”
It can be seen that Curve is making products with the mentality of making applications, while Uniswap is looking at its long-term development from an ecological perspective.
Perhaps with the further growth of the crypto market and the entry of more and more institutional-level market makers, the Uniswap model will have greater development potential. As far as the current market is concerned, the Curve market-making model is more in line with the needs of most market-making users.
3.3.2. Project competitive advantage and moat
Curve can firmly rank second in the battle for liquidity of all DeFi protocols, with a total TVL of US $10 billion. This is the result of accurate product positioning, sophisticated mechanism design, and long-term stable operation. Its core competitive advantage lies in:
i. By focusing on the trading market of stable coins and stable consideration assets in the early stage, it has built a strong dominance in this segment and become the preferred platform for asset issuers, large-value traders, and market makers seeking stable returns, forming an obvious network effect;
ii. It possess an excellent token model, which is embodied as follows:
· The distribution of all scarce resources on the platform is deeply tied to governance rights, which can only be exchanged for CRV token through lock-up. A large number of long-term lock-ups have reduced the circulating market cap of the project.
· It fully introduces the game among all participants (liquidity providers, asset and bill issuers) on the platform to form a continuous competition for governance rights (veCRV). This further increases the demand for CRV, and undertake the selling pressure of CRV that continues to unlock.
· The final result of the above two are: a. The stable coin price guarantees the APY of liquidity providers, retaining the liquidity; b. Multi-participants of the system are deeply tied to the development of the Curve platform, which improves the participation and effectiveness of governance; c. It creates extremely high switching costs for core participants, who are difficult to leave since they have staked a large number of CRVs for a long time.
iii. It uses the Vyper language to write codes, which it applied intellectual property rights. This created a technical and legal obstacle for projects that attempt to fork Curve.
3.4. Risks
i. Challenges from DEXs such as Uniswap have led to the erosion of market share in the stable consideration asset market
After Uniswap launched V3, the problem of trading slippage on stablecoins has been significantly improved, and the market trading volume of its core stablecoins has gradually surpassed Curve. If this trend is further expanded, Curve’s industry dominance in the field of stable consideration asset exchange will be reduced, which is the foundation of Curve. Good economic model only magnifies and consolidates this advantage.
ii. The new business expansion of unstable consideration asset transaction is not smooth
It remains to be tested whether the model adopted by Curve v2 can catch up with Uniswap V3 and expand its market share in the transaction of unstable consideration assets.
iii. Centralization of the stablecoin market share
When the landscape of the stablecoin market is solidified and several leading stablecoins have established absolute advantages, new stablecoin projects will no longer appear. This will weaken Curve’s ecological niche in the stablecoin exchange industry chain, making it impossible to collect the current “monopoly rent” from new stablecoin challengers.
iv. Regulatory risk
The regulation of stablecoins and DeFi trading platforms by regulatory agencies in various countries is the common risk faced by DeFi at present. However, the DAO governance of Curve has replaced the centralized decision-making of the team, with certain resistance to regulation.
4. Preliminary valuation
4.1. Five core issues
What business cycle is the project in? Maturity stage or the early and middle stage of development?
The PMF (Product Market Fit) of the project has been fully verified, and the core functions of the product are mature, but it is still in the early and mid-term in the development of the industry and the project.
Does the project have a solid competitive advantage? Where does it come from?
Relying on accurate market positioning and excellent economic model, the project has created obvious network effects. The existing core participants have high switching costs, so it has sufficient competitive advantage.
Is the medium and long-term investment logic of the project clear? Is it in line with the industry trend?
The medium and long-term investment logic of the project is based on the existing stable consideration asset trading market, which will gradually expand to a wider trading field and even open up a trillion-level trading market such as foreign exchange. As one of the underlying protocols of crypto business, the trading platform still has a lot of room for development, and the development of the project is in line with the general trend of the industry.
What are the main variables in the operation of the project? Are these variables easy to quantify and measure?
The main operating variables of the project are mainly two points: 1. Whether it can keep its foothold: the trading market of stable consideration assets; 2. Whether it can smoothly expand into new areas: the trading market of other assets. It can be measured by observing Curve’s transaction amount, product innovation, and competitors’ business data.
What is the management and governance of the project? What is the level of DAO?
Curve has fully realized DAO governance, and the participation and governance level of the community can be rated as the industry benchmark level.
4.2. Valuation level
This research report will use the relative valuation method to compare the valuation of Curve, including vertical comparison with past valuations and horizontal valuation comparisons with similar projects. It will draw a preliminary conclusion that its current market cap is overestimated or underestimated.
Vertical valuation comparison
Here, I use PE as a common indicator to observe the comparison between the current market cap and the previous market cap of Curve. PE = total market cap\net protocol revenue. The higher the PE value, the more overestimated the project. The PE comparison of Curve is as follows:
By comparison, we find that Curve’s PE level is at a high level and not underestimated compared with the past.
Horizontal valuation comparison
Here, I make a horizontal comparison between Curve, Uniswap and Sushiswap. Considering that Uniswap has not started to collect protocol fees, we use PS market-sales ratio (PS = total market cap\total protocol revenue) to compare these three projects horizontally. Similarly, the higher the PS value, the more overvalued the project is:
We find that Curve is also overestimated compared with Uniswap and Sushiswap, from the perspective of PS.
4.3. Summary of preliminary valuation
Overall, Curve has a clear competitive advantage in the field of stable consideration asset transaction. Its excellent token economic model further strengthens its moat, providing strong support for its token price.
However, the valuation of Curve at this stage is too high, regardless of whether it is a vertical historical valuation comparison or a horizontal comparison with other trading protocols.
5. Reference content and acknowledgments
This report needs special thanks to “小明同学@机器猫DEFI研究”, “wellkochi” in the Curve community as well as the well-known crypto KOL “@区块先生” for their great help in sharing data and information.
Other reference information:
Project market cap
Industry data
https://www.tokenterminal.com/
https://dune.xyz/hagaetc/dex-metrics
Media reports and research reports
First-Class: Curve Research Report
The Link News: Multi-dimensional analysis of top AMM: Uniswap V3, Curve V2 and Balancer V2
Messari：Valuation of Curve Finance: The Most Overlooked Protocol
*If there are obvious factual, understanding or data errors in the above content, please give me feedback and I will revise it.
