Thread by @Bhenji7

Understanding the "CURVE WARS" and the powerful model of veTokenomics to attract liquidity for DeFi.

DeFi refers to financial applications built on blockchain technologies, typically using smart contracts. Smart contracts are automated enforceable agreements that do not need intermediaries to execute.

Anyone with an internet connection can access them to perform financial transactions and many other activities.

DeFi is a playground for innovative financial models and one of such models is Curve finance which has literally changed the game for various DeFi projects. It has attracted billions of dollars in liquidity to its native token pools.

CURVE FINANCE
Curve finance is a decentralized exchange that has devised a way to efficiently swap stable coins while avoiding slippage costs. This has attracted a lot of users to swap between stable coins DAI USDC USDT (the famous 3 pool).

Curve focuses on stable coin which means liquidity providers are at lower risk since volatility is lower. It was founded by Micheal Egorov and while Curve may seem rather outdated, it actually stands as the backbone for much of DeFi.

For example, swapping 1000 ETH to USDC on Curve finance at the time of writing pays $1,661,659 while on sushiswap a leading DEX, the swap pays $1,543,660- a massive difference of $117,999.

This brings in a lot of traffic, especially from whales, which at the same time also bring a lot of rewards for liquidity providers.

While most DEXes only reward liquidity providers (LPers) with inflationary tokens which have no use case apart from governance,

Curve finance on the other side step up the game by not only paying LPers with CRV token emissions which increases reward for certain pools as "yield farming rewards" they also provide additional utility in the form of boost.

HOW CURVE WORKS
Currently, you can lock your CRV tokens for up to 4 years to receive boosts to your farms. Your time locked CRV tokens are converted to veCRV which can be used in governance, boosting rewards, earning trading fees & receiving airdrops.

Governance in Curve finance is extremely impactful because you can vote for which liquidity pools get additional incentives in the form of $CRV.

The more veCRV you have, the more you can boost the CRV rewards from your liquidity pool. You can boost your CRV rewards as high as 2.5x if you apply the maximum amount of veCRV required for your deposited liquidity.

Now you might be wondering or asking yourself "why would a user stake CRV on CONVEX FINANCE" rather than CURVE for veCRV, or "why would you deposit Curve LP tokens in YEARN FINANCE"- well, its all about the boosted rewards.

CURVE WARS
This is the battle between DeFi protocols for profit maximization with the Curve boost function. Each DeFi protocol locks up their CRV to obtain as much veCRV as possible.

These DeFi protocols has not only incentivized the CRV deposits to obtain governance voting power in Curve Finance to raise the returns, but has also begun to incentivize the governance voting rewards such as bribe and the votium incentives.

Check votium.app and bribe.crv.finance to know more

As various DeFi protocols, including Convex Finance and Yearn Finance, competed against each other to secure the governance right of Curve Finance,

the protocol which secured the most veCRV, referring to the governance voting power of Curve Finance, is Convex Finance, which holds approximately 54% of the total amount in circulation.

This means that Convex Finance has the most voting power in the governance of Curve Finance, which ultimately means that Convex Finance will be able to decide which liquidity pool to apply to the Curve Finance’s gauge weights (reward boost).

On Curve Finance, you can lock $CRV to boost your rewards and earn trading fees, but the veCRV amount required for locking, and the locking period of 4 years is incredibly prohibitive to smaller investors.

This is the gap Convex fills, aggregating CRV from all liquidity providers to deliver the maximum yield.

CONVEX FINANCE
Convex Finance (CVX) is an inventive DeFi protocol built on top of Curve Finance. This is a protocol for CRV token holders & Curve LPers, it makes it possible for them to earn additional interest rewards & Curve trading fees on their tokens.

Simply put -the platform offers boosted curve staking. Convex is the go-to choice for people that couldn’t buy a lot of CRV for maximum yield, or bear the lost opportunity cost of locking up tokens for 4 years.

Convex finance allows the following;
a) If you hold CRV tokens, Convex lets you stake them for cvxCRV.

b) If you hold Curve LP tokens, Convex lets you stake + boost them.

So basically Convex provides a platform where users can pool their assets together so that Convex can acquire more CRV, convert this CRV into veCRV (remember, the more veCRV you have, the more you can boost the CRV rewards from your liquidity pool),

then they maximize boost to all curve LP token holders.
Upon staking CRV on Convex, cvxCRV is issued, which can be staked for all the benefits that a liquidity provider gets on the Curve platform while also receiving CVX tokens as a reward.

What's the implication of this?
If you provide liquidity to one of the Convex-supported Curve liquidity pools, you get the following income streams:

No matter how large or small your stake in a curve pool is- as long as you have Curve LP tokens, Convex will let you get the maximum reward boost out of them.

--You will get part of Curve platform trading fees

--You will also get CVX tokens via Convex liquidity mining.

So even if you aren't providing huge sums of liquidity to Curve, setting and forgetting your tokens in a Curve pool, then depositing the LP tokens to Convex long term can be handsomely rewarding.

This veTokenomics model has changed the game in driving liquidity to DeFi protocols and lot of platforms have largely adopted this model since then.

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#DeFi #Curvewars #veTokenomics #Crypto