The Curve wars are back
Terra is endeavoring to slay Maker DAO and its DAI stablecoin by obstructing DAI’s liquidity on Curve Finance. They do this by launching a new pool on Curve which omits the DAI stablecoin. Without liquidity, DAI could potentially lose its peg to the US dollar and drop to zero, which would crash Maker DAO’s MKR token in the process.
Summary
- Former MakerDAO CEO calls Terra’s UST stablecoin a Ponzi scheme
- The CEO of Terra took to Twitter to announce plans to starve the Curve Finance 3pool by drawing investors to his Curve 4pool.
- The new pool on Curve Finance omits DAI stablecoin.
- If successful DAI could lose its US dollar peg and in turn, MKR could crash.
The Curve wars can be described as a battle between different DeFi protocols that need to constantly ensure that the pools they use offer the highest CRV rewards.
Curve Finance (CRV) is the most significant DeFi protocol specializing in stablecoin swaps, with $21 billion in total value locked. In addition, Curve has a market cap of more than $1 billion for its CRV governance token. Curve is the largest decentralized exchange (DEX) and it offers the deepest liquidity for stablecoins on Ethereum. Its liquidity pools are used by Fantom, Yearn Finance, Aave, SushiSwap, Synthetix, Badger DAO, Cream Finance, Compound, and others.
Users who lock CRV into veCRV receive juicy farming incentives in the form of CVX, SUSHI, and SDT. Additionally, users who lock up CRV receive trading fees, governance rights, and boosted rewards.
DAI has historically been much more significant than UST, but in December 2021, UST flipped DAI. UST is Terra’s stablecoin, pegged to the US dollar, which grew in popularity in 2021 to a market cap of $16 billion. DAI is Maker DAO’s US Dollar-pegged stablecoin which has a $9 billion market cap.
From a DeFi dapp perspective, being included in a popular Curve pool can significantly boost a project’s liquidity. Additionally, as more veCRV is added to a liquidity pool, its yields increase. For huge projects with vast amounts of CRV, it’s possible to boost rewards up to 2.5 times higher.
Convex Finance (CVX) is an incentive protocol built atop Curve Finance. Convex rewards Curve liquidity providers and CRV token holders by allowing them to stake their assets on Curve for higher yields than Curve offers. To sum it up simply, everyone using Convex is pooling their assets together so the platform can acquire more CRV, convert it into veCRV, then deliver the highest rewards to all Curve LP token holders.
Conspiracy or fact?
Founder and CEO of Terra, Do Kwon has not hidden his intentions at all. Instead, he took to Twitter on April 2 to announce plans to starve the Curve Finance 3pool by drawing investors to his Curve 4pool. DAI is the only stablecoin not in the 4pool, which says it all.
Interestingly, the war of words, and now actions, began when Maker DAO’s original co-founder accused UST of being a Ponzi scheme in January 2022. While this is purely speculation, making an enemy as powerful as Terra in the crypto space can have repercussions.
Why is 3pool so important?
Curve’s 3pool is the largest, most utilized, and significant stablecoin liquidity pool in the decentralized finance and crypto space. The liquidity pool allows investors to swap DAI, USDC, and USDT stablecoins with very low slippage and fees. Today, the 3pool has $3.2 billion in liquidity–45% of which is DAI tokens. Nearly all stablecoins pair with 3pool for liquidity. If you swap UST for USDC on a DEX, there’s a high probability that it uses the 3pool for liquidity.
Moreover, 3pool is a critical infrastructure for maintaining the peg between USDT, USDC, and DAI, and is vital for DeFi to function. Because of 3pool, USDT, USDC, and DAI have historically been the most recognized stablecoin options for traders and investors. Terra’s attack on this pool will harm DAI the most since the 3pool provides massive liquidity to DAI, while USDC and USDT are included in the new 4pool alongside UST.
Terra has teamed up with Frax and Redacted Cartel to achieve its goal of toppling DAI and Maker DAO. Frax is the largest decentralized holder of CVX tokens and Redacted Cartel has roughly two-thirds as much CVX as Frax. Combined with Terra, the three hold roughly 10% of all vote-locked CVX. Using this CVX as an incentive, the team behind 4pool can direct higher rewards to investors who stake stablecoins in 4pool. It seems reasonable to assume that this will drive investors from the 3pool to the new 4pool, effectively removing DAI from the equation.
Fight for survival
Maker DAO characterizes the new Curve war as a fight for survival rather than profit. The DAO behind DAI does have deep pockets, but it’s unclear if they’ll use it to prop up 3pool. Convex’s most significant whale, Tetranode, also teased a new venture following Terra’s 4pool announcement.
According to the latest Q1 Dapp Industry Report Terra has established itself as the second network in terms of TVL behind Ethereum with $23 billion locked at the end of March, increasing the metric by 68% from the end of 2021. Terra has become a dominant DeFi force thanks to an effective stablecoin ecosystem and DeFi protocols like Anchor offering competitive yields. Terra holds around 10% of the industry’s TVL, the second most dominant network behind Ethereum’s 60% TVL dominance.
Get your popcorn out because this will only get more interesting.
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The above does not constitute investment advice. The information given here is purely for informational purposes only. Please exercise due diligence and do your research. The writer holds positions in various cryptocurrencies, including BTC, ETH, and RADAR.
