What is Curve Finance?

What is Curve?

Curve Finance is a decentralized exchange suited for efficient stablecoin swaps, volatile asset trading, and lending. It adjusts trades using advanced AMM algorithms, including innovations like the gamma parameter and exponential moving averages for price scaling.

Curve supports cross-chain interoperability on EVM-compatible chains and connects lending protocols with unique soft-liquidation mechanics. Liquidity providers earn fees and incentives by depositing assets into pools, backed by resilient risk mitigation measures and independent audits.

Governance is controlled by CRV token holders through a DAO, with veCRV boosting rewards and voting power. The protocol’s innovations, such as crvUSD and lending markets, restructure decentralized finance by enhancing stability and accessibility for users.

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How Does Curve Finance Work?

The decentralized exchange underpinning Curve Finance is built on a well-designed protocol and set of smart contracts that utilize the following components:

• Liquidity Pools: Curve pools are smart contracts that aggregate user deposits, enabling swaps. They are categorized into StableSwap (for stablecoins) and CryptoSwap pools (for volatile pairs).
• Soft-Liquidation Mechanism: Curve’s lending markets use LLAMMA (Lending Automated Market Maker Algorithm), which gradually adjusts collateral rather than liquidating it outright.
• Cross-Chain Integration: The protocol exists on Ethereum and several EVM-compatible blockchains, utilizing bridges to ease asset transfers.
• veCRV Governance Framework: Users can lock CRV tokens to earn veCRV, granting them voting power to influence reward distributions, protocol upgrades, and gauge weights.
• crvUSD Implementation: Curve’s native stablecoin, crvUSD, is minted through overcollateralization and it features an innovative risk management system.
• Fee Structure and Incentives: Transaction fees within Curve are split between liquidity providers and veCRV holders.

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Supported Chains

Curve is available on 15+ EVM chains including Ethereum, Arbitrum, Avalanche, Celo, Fantom (Sonic), Polygon, Optimism, Taiko, Kava, Gnosis, Moonbeam, Base, Fraxtal, and X Layer.

Together they have a total value locked of about $2.5 billion which is a massive 89% decline from its high of $23 billion in before the Terra UST depeg in 2022. As of now, about $2.3 billion or literally 92% of the Curve's liquidity is allocated on Ethereum.

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What is Curve V2?

Curve V2, launched in 2021, introduced advanced mechanisms to support a wider range of assets and improve liquidity management. It addressed volatility and trading reliability by implementing flexible, adjustable parameters, including:

• Bonding Curve Improvements: The ‘A’ parameter optimizes liquidity concentration at expected rates, while ‘Gamma’ ensures balanced liquidity distribution, even in uneven pools.
• Price Adjustment Tools: Features like the Exponential Moving Average (EMA) oracle and parameters like ‘MA Half Time’ adapt trading prices to market changes seamlessly.
• Dynamic Fee Model: ‘Fee Mid’ sets the minimum fee for balanced pools, while ‘Fee Out’ applies maximum fees to imbalanced conditions. ‘Fee Gamma’ determines how fees scale as the pool shifts from balanced to imbalanced states.

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Curve Tokenomics

Curve Finance employs a token system centered around three key tokens: CRV, the governance and utility token; veCRV, a vote-escrowed token for governance and rewards; and crvUSD, a decentralized stablecoin. These tokens work in tandem to facilitate stability within the platform.

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1. CRV

The CRV token is the governance and utility token of Curve DAO, with a fixed total supply of 3.03 billion tokens. Its primary utilities include governance participation, liquidity provider rewards, and earning protocol fees. Here is the breakdown of its allocation:

• Community Emissions (57%): 1.727 billion CRV allocated to liquidity providers as rewards, distributed over 200 years with decreasing emissions.
• Early Users (5%): 151.5 million CRV distributed to pre-launch liquidity providers, vested for one year.
• Core Team (26.43%): 800.96 million CRV allocated to the team, vested over four years.
• Investors (3.57%): 108.13 million CRV distributed to investors, with a two-to-four-year vesting period.
• Employees (3%): 90.91 million CRV allocated to employees, vested over two years.
• Community Reserve (5%): 151.5 million CRV reserved for community initiatives, with at least a one-year vesting period.

As an interesting fact, CRV emissions decrease by 16% annually, following a model similar to Bitcoin’s halving. Vote-locking CRV into veCRV grants voting power, boosts rewards, and enables fee sharing, aligning governance incentives with protocol growth.

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2. veCRV

veCRV, or vote-escrowed CRV is a non-transferable balance created by locking CRV tokens for durations between one week and four years. The amount of veCRV received depends on the lock duration, with longer locks granting more veCRV.

Holders use veCRV to vote on DAO proposals, influence reward distributions, and boost their liquidity rewards. veCRV also allows access to a share of platform fees.

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3. crvUSD

crvUSD is Curve Finance’s decentralized stablecoin, minted by locking collateral like ETH or BTC. It uses a "soft liquidation" mechanism via the LLAMMA algorithm, gradually converting collateral into crvUSD to avoid abrupt liquidations.

Curve also introduced "Savings crvUSD" (scrvUSD), a yield-bearing variant that lets users earn interest on crvUSD deposits.

Although crvUSD’s $75–80 million total value locked (TVL) is small compared to the $200 billion stablecoin market, it ranks 12th among crypto-backed stablecoins, behind competitors like Ethena’s USDe and MakerDAO’s DAI.

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Liquidity Provision and Lending on Curve

Beyond DeFi trading, Curve offers users multiple opportunities to engage with the platform, from providing liquidity in pools for low-slippage trading to borrowing assets using collateral. Both mechanisms work to maximize rewards for users.

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Providing Liquidity

Curve allows users to deposit assets into liquidity pools to help asset trading and rewards earning. These pools deploy automated market maker algorithms to provide low-slippage swaps and optimize fee distribution. As a bonus, veCRV holders can boost LP rewards up to 2.5x.

Liquidity providers receive LP tokens representing their share in the pool, which accrue value from trading fees. By staking these tokens in reward gauges, users can earn CRV and other incentives, with allocations determined by veCRV holders through governance voting.

For additional alpha reports, users can check the best weekly yields and other metrics on the official Curve blog or perform advanced technical analysis using DefiLlama’s yields tool.

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Lending and Borrowing

Lending and borrowing on Curve allow users to utilize their assets efficiently while leveraging the platform’s advanced risk management systems.

1. Choose a Lending Market: Visit the Curve platform and proceed to the lending section. Select a lending market that supports your desired collateral and borrowing asset.
2. Supply Collateral: Deposit eligible collateral (e.g., ETH, BTC, or liquid staking tokens) into the lending market. Your collateral is automatically divided into bands by the LLAMMA system.
3. Borrow Assets: Choose the asset you want to borrow, such as crvUSD or other supported tokens. Enter the desired amount, ensuring it does not exceed the borrowing limit based on your collateral.
4. Monitor Your Loan Health: Use the platform’s dashboard to track the health of your loan. If your collateral value drops, soft-liquidation will gradually convert collateral to the borrowed asset.
5. Repay and Withdraw Collateral: Repay the borrowed amount, including any accrued interest. Once the debt is cleared, withdraw your remaining collateral from the lending pool.
6. Optional: Stake for Additional Rewards: Stake-supplied assets in liquidity gauges to earn additional CRV rewards and other incentives.

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Is Curve Safe?

Curve Finance operates as a multi-layered DeFi protocol, with each component carrying distinct risks that users must understand and manage. Below are key considerations highlighting the diverse safety aspects of Curve:

1. Smart Contract Risk: The protocol relies on audited smart contracts from Trail of Bits and QuantStamp for its liquidity and lending pools but bugs or exploits can still occur.
2. Stablecoin and Peg Risks: Curve’s pools often involve stablecoins, which are prone to depegging under adverse conditions.
3. Impermanent Loss: CryptoSwap and StableSwap pools are designed to reduce impermanent loss, but price volatility or external factors like liquidity migration can still lead to losses.
4. Governance and Counterparty Risk: veCRV holders control key parameters in the protocol's governance model, so community decisions can cause delays during emergencies.

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Who Won the Curve Wars?

The Curve Wars were a competition among protocols to acquire veCRV tokens and control governance for directing CRV emissions. Convex Finance ended up as the winner, using its cvxCRV model to gain the largest share of veCRV holdings and at its peak it controlled nearly 40% of veCRV.

This period (mostly in 2022) saw the rise of third-party bribes with Convex and StakeDAO providing additional token rewards (bribes) in CVX and SDT, directly to liquidity providers or veCRV holders in exchange for votes favoring their specific pools.

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Founder

Curve Finance was founded in 2020 by Michael Egorov, a physicist with a background in computational science. Before Curve, Egorov was involved in encryption projects, notably co-founding NuCypher, which focuses on data privacy. His expertise heavily influenced Curve’s algorithmic approach.

In June 2024, Egorov faced costly liquidations totaling approximately $140 million in CRV tokens due to a sharp decline in CRV's price. Later in December he repurchased $1.2 million worth of CRV tokens to support its price but was again liquidated for about $898,000.

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Bottom Line

Curve Finance was launched to address onchain crypto trading inefficiencies and quickly became one of the most important DeFi protocols.

In 2022, it achieved a remarkable $20+ billion TVL, symbolizing its dominance during DeFi's peak thanks to the V2 protocol, battling alongside Uniswap's V3 for the top DEX in crypto.

The Curve Wars was epic as protocols vied for control over CRV emissions. Sadly, most recent headlines have focused more on founder Igor’s financial losses, rather than Curve's achievements.