The Curve Wars Explained: When DeFi Becomes Aggressive

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The battle for attention, power and money in DeFi

The Curve Wars began at some point in 2020, and reached a hostile climax just recently as Terra USD tried to wipe out MakerDAO’s DAI stablecoin. For the past two years, DeFi protocols have sprung up to offer the best bribes in the hope that users will provide them with liquidity. But while the incentives are great and some people are making money, what might happen when the collective confidence drops and everyone leaves the party?


If you know about DeFi, you’ve probably heard about the Curve Wars. On one level, they’re extremely complicated and take lots of research and time to understand. At a more basic human level, they’re quite simple: there’s a big pot of money that people want to get their hands on.

But following the routes and methods that clever people have formulated in order to grab their share of the prize is no easy task. Below is a basic outline of how DeFi protocols are building one platform on top of another in order to eek out some gains and create profit out of thin air.

How Curve Finance works

Curve is the biggest decentralized exchange (DEX) in DeFi by balance and volume. In the past 30 days, $20.4 billion worth of trading went through Curve. This is nearly double the transaction volume on Biswap, which is second on the list. Curve holds just over $4 billion in its smart contracts, the most of any DEX we track at DappRadar.

The top DeFi dapps by transaction volume

Curve is an automated market maker (AMM), which means there are no intermediaries when people trade crypto assets. The code that executes trades runs on the blockchain, and these programs are called smart contracts. When people exchange cryptocurrencies on AMMs, they are trading peer-to-contract, not peer-to-peer. What makes this possible are the large liquidity pools that Curve controls.

Total value locked in Curve

Because of these deep liquidity pools, users can rely on Curve to swap one type of cryptocurrency for another without worrying that there won’t be enough of what they want. In addition, deep liquidity helps to avoid the problem of huge price slippage from one day to the next. Curve also offers a few more benefits that have made it the successful platform it is:

  • Low trading fees – 0.04% of each the value of each exchange. This is very low for a DEX.
  • Composability – users can easily swap cryptocurrencies from different blockchains on Curve. 
  • StableSwap – The platform introduced the StableSwap mechanism. It enables users to efficiently swap tokens of the same value and is especially useful for whales who want to exchange large amounts of money.
  • CRV token rewards – Curve offers excellent rewards to users for staking their crypto to increase liquidity in the pools.

With so many incentives, Curve attracted huge numbers of users who staked their assets on the platform and helped create the deep liquidity pools. Importantly, Curve offers higher rewards to users who commit their assets for longer. As the graphic below shows, locking up one CRV for one year earns someone 0.25 Vote-Escrowed CRV (veCRV). By the fourth year, stakers earn one veCRV for every CRV they’ve staked.

Curve’s veCRV reward structure

These rewards are generated by 0.04% swapping fees that Curve charges on each trade. 50% of these fees go to users who add to the liquidity pools and 50% goes to users who hold veCRV.

What’s more, the veCRV tokens give holders voting rights on which liquidity pools receive more CRV as rewards for staking. Simply put, if you hold enough veCRV, you have the power to direct more rewards in your own direction.

To acquire enough voting power to sway a vote, a person would need to lock away billions of dollars as a volatile cryptocurrency for four years. And not many people have either the resources or willingness to do this. 

But if one entity could aggregate everyone’s CRV into a single treasury and control enough of the voting rights, then suddenly, that entity has the ability to direct vast sums of money and assets towards a single goal.

Enter Convex Finance and the beginning of the Curve Wars.

What Convex Finance did

Convex recognized that most people don’t want to lock away their CRV for four years at a time. But not doing this means people can’t access the most profitable rewards available in the fourth year of staking.

So Convex created a system whereby users could stake Convex CRV (cvxCRV) on their platform and instantly receive the maximum veCRV yield without needing to lock in their tokens. 

Convex was able to achieve this because of the mechanism on Curve that means staking pool rewards increase as a user locks up more veCRV. By aggregating everyone’s veCRV and leaving it staked for the full four year term, Convex unlocked the maximum yield. Convex uses these rewards to bribe people to stake their money on the Convex platform. 

To this end, Convex currently controls over 50% of the total supply of CRV, which gives it a huge say in the management of Curve’s liquidity pools. Holding this amount of CRV also ensures Convex’s own depositors the maximum staking rewards.

As things stand today, Convex offers a variable annual percentage rate (vAPR) of 61.27%. It’s variable because it depends on the trading activity of any given day and it’s liable to change regularly. But still, a vAPR of 61.27% means someone could deposit $100 worth of cvxCRV with Convex and would make a profit of $61.27 in a year.

Convex Finance’s reward structure, at the time of writing

In order to prop up their own ecosystem and maintain as much control over it as possible, Convex pays out 10.84% of its rewards in CVX tokens. CVX tokens give holders voting rights on how Convex uses its veCRV. Ultimately, holding CVX gives you the power to contribute to the decision around how liquidity pools pay out their rewards.

Earning 61.27% in passive income – a figure unheard of in traditional finance today – and acquiring a vote to decide how Curve distributes rewards from its huge liquidity pools, are two huge incentives to deposit money with Convex. 

But while most people are happy to benefit from these rewards on a personal level, other DeFi protocols have sprung up. These new competitors have come up with methods to take their own portion of control and share of the money.

Votium and Llama Airforce Union join the party

Holders of CVX can deposit their tokens as Vote Locked CVX (vlCVX) with Votium, and Votium will choose the optimized staking option which offers the best incentives. In practical terms, when a holder deposits their vlCVX with Votium, they are handing over their voting rights and receiving a reward in return.

Because Votium has the mathematical and computing power to make the best choice on which option will provide the best returns, they take a small chunk of the rewards and give the rest to the original CVX holder.

The issue with Votium’s strategy is that vlCVX stakers are rewarded in whatever token(s) makes up the liquidity pool that was voted for. This often results in the rewards being a small amount of several cryptocurrencies and tokens that aren’t worth the gas it would cost to claim them. 

Which is where Llama Airforce Union (LAU) comes in. This protocol was built in order to pool all of a person’s Votium rewards into a single asset. By joining the Union, ‘you forward your bribe rewards to Llama Airforce’, who collectively claims them, turns them into cvxCRV, puts this into an auto-compounder and airdrops users their share of the profit.

Where Terra fits into the story

DappRadar has an article here detailing how Maker DAO and Terra created their own, more hostile battleground as splinter conflict in the Curve Wars. 

In short, Terra’s UST stablecoin flipped Maker DAO’s DAI stablecoin in December 2021. Then Maker DAO’s co-founder began a war of words when he called UST a Ponzi scheme. Do Kwon, CEO of Terra, clapped back by introducing a new liquidity pool called 4pool and excluding DAI from it. 

The aim of this move was to draw funds away from 3pool, Curve’s largest pool, thus starving Maker DAO of access to liquidity. Ultimately, if Terra’s plans had come to fruition, Maker DAO’s DAI stablecoin and its Maker (MKR) token. MKR is Maker DAO’s governance and utility token; it’s the foundation on which Maker DAO’s entire DeFi ecosystem is built.

This all happened a month ago. Since then, Terra’s fortunes have infamously declined, so it seems like this portion of the Curve Wars is finished. But it does show the levels that DeFi protocols will go to to survive in this hyper-competitive industry.

The Curve Wars: a very modern narrative

As I wrote at the beginning of this article: the Curve Wars are very complicated on one level. There’s a lot of extremely complicated math and financial wrangling that underpins the whole system. Knowing how each moving part interacts with the entire ecosystem is key to know where the money-making opportunities are. 

But take a step back and the whole concept is fairly simple: people want to access the large amounts of liquidity that Curve has at its disposal. They do this by finding arbitrage opportunities or protocol loopholes which they can exploit. it’s the innovative ways they game the system that is complicated; the ultimate goal is nothing new. It’s a story of money, power and profit, a tale as old as time.

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