The Bullish Case of CRV: CRV-Fi
Social-engineering a new multi-DAO Curve-oriented narrative + some random thoughts
Photo by Birmingham Museums Trust on Unsplash
Note: This post serves as a just-for-fun thought experiment and might not contain sufficient empirical evidence to support the author’s claim. No Maths either, my brain hurt. Read at your own risk.
Curve War
Unless you just entered this space, Curve War is something you should/ would have already heard. The narrative is being played over and over again, and it is now overarching with many interoperable protocols being developed around this niche.
Most explainooor threads by your friendly neighbourhood Crypto Twitters (CTs) are inaccurate, to say the least. For starters, Curve is created as an automated market maker (AMM) which specialized in stablecoins swap with low price slippage. Liquidity providers (LPs) can deposit their stablecoins into the liquidity pool on Curve to capture the ~0.04% of swap trading fee. As Curve uses the brilliant StableSwap mechanism, large trades are almost inclined to utilize Curve in swapping/ arbitraging between stablecoins - hence theoretically, would generate revenues for the LPs.
There’s a catch, however, Curve and stablecoins issuers would first need to attract a significant amount of liquidity for pool depth so that StableSwap can operate optimally. Incentives for LPs are available via the liquidity mining program, which gives out CRV to attract the deployment of funds - in simpler terms, LPs get additional CRV by depositing on Curve. CRV is the governance token of Curve protocol, and here’s where things get interesting, CRV holders can lock their tokens to get the vote-escrowed version of veCRV to decide the future distribution of CRV. This is also known as the infamous veTokenomics.
Holders of CRV can choose to vote-lock their CRV for 1 to 4 years at 0.25 to 1 conversion rate - vote-locking CRV for 1 year gives you 0.25 veCRV and so on (vote-locked veCRV balance is always decaying, so you need to consistently extend the locking period to sustain your balance). veCRV is an innovative mechanism, it takes out CRV from the circulation to induce supply shock and compulsorily coaligns the benefits of token holders with the longevity of the ecosystem. veCRV holders would then vote for the allotment of CRV rewards to LPs via gauge weights, and the respective liquidity pool would be receiving a daily CRV emission proportional to the percentage of total veCRV voted for it.
Convex is the first symbiotic protocol which is developed to bridge the lucrative gaps between LPs and veCRV holders, more on this here. It introduces vlCVX as an attempt to capture the power of governance (dictating CRV emission). As of right now, ~43% of total circulating CRV has been vote-locked with an average lock time of 3.59 years - amongst that, ~43% of veCRV is held by Convex as vlCVX. Therefore, it is safe to conclude that veCRV and vlCVX both play an equally important role in deciding the rewards of CRV.
End Game of Curve Ecosystem
CRV emission declines every August by 15%, therefore, less and less CRV gets emitted into the circulation. veTokenomics have effectively avoided the conventional death spiral of farm tokens by inducing supply shock, so naturally, the reduction in emissions would drive the demand up-only, right? Here’s where most CTs got this inaccurate, scarcity does not always equate to buying pressure - in fact, the value should be derived from the ecosystem itself.
Have you ever wondered about the final state of the Curve ecosystem? Most sceptics/ critics have a valid stance on this matter and perhaps 0xHamz’s take on this can be considered representative.
Basically, liquidity gets incentivized by CRV heavily on Curve while CRV emission has reached a critical mass. If emission decreases/ ceases, CRV price must appreciate, ensuring the LPs annual percentage rate (APR) can be sustained or outperformed other protocols to prevent capital flight. Most of the value accruable by the LPs is tied to the emissions of CRV instead of swapping fees and this is where the Curve War narrative comes to an uncomfortable reality. From the perspective of yield farmers, the recursive farming of CRV would not benefit from the supply shock due to emissions drop - less CRV simply means less yield.
I agree wholeheartedly with the post and concur that Curve should be treated as a liquidity centre instead of a swap centre. We should not focus solely on the swapping volume and generated trading fee. Actually, why not take a step back and reevaluate the Curve ecosystem before we jump to a conclusion?
Bribing Lobbying Governance Vote
Curve is the great Ol’ Murica Land of all stablecoin liquidity, the land with ultimate freedom and equality of opportunity. The scene of stablecoin is still budding and is expected to experience more rapid adoption as the alternate reality has an inflation rate of 7.9%, a great read on this topic would be the report by @Rawson_Haverty. Specifically, if we were to clarify the standing of Curve in attracting future capital to stablecoins, the economic advantages accumulated by the Curve protocol via the Matthew effect should not be overlooked. Curve has a total value locked (TVL) of ~ 22.26b at the time of writing and it is generally categorized as one of the few DeFi blue chips with the likes of AAVE and Lido, so the protocol is considered battle-tested and often attributed to the property of trustworthiness as a low-risk passive yield safe haven. The point is, Curve now owns a majority TVL of stablecoin and will continue to own more in the future.
So now, let’s put CRV into our equation. veCRV and vlCVX can dictate the emission of CRV and then subsequently incentivize the deposits of stablecoins into the voted pool. To coordinate the voting decisions, Bribe (fork of the initial bribe.crv.finance which has ceased its operations following the departure of Andre Cronje and Anton Nell from the DeFi space) and Votium are made available for the respective holders of veCRV and vlCVX. Interested protocols can offer “bribes” in order to attract votes from the token holders - so the protocols can enjoy deeper liquidity which would in turn increase the visibility and adoption of the said stablecoins. To be frank, I’ve always thought that using “bribery” to describe the inner workings of the mechanism is distasteful because the connotation insinuates negative imagery - the word “vote-lobbying” might be a better choice of the term in my opinion.
Anyway, now that we’ve established that stablecoin protocols can lobby for votes as additional incentivization of their pool depth, let’s revisit the premise of the criticism. CRV emission, in this case, is not aligned with the generated trading revenue. If we were to view Curve as an AMM, then the trading fee would be the main revenue source - it doesn’t make sense if the incentivization of CRV is not (directly) proportional to the trading volume of a liquidity pool (read on “The True Sources of DeFi Yield” here). Liquidity depth should translate to the utilizability of a token and using CRV as incentivization would just create artificial growth, which is unsustainable in its nature. So, it’s a lose-lose situation, right?
Brief Discourse on ve(3,3)
In fact, ve(3,3) adopted by Solidly is the attempted solution for this grand problem faced by Curve. The goal of the creation is, I quote, “to align emission to incentives, the problem with a lot of current AMM designs is that it is easier to incentivize liquidity, instead of fees.” Basically, as an AMM, we should distribute our protocol fee-sharing tokens according to the swap volume. If we go this route, we might fall into the fallacy of simply comparing swap volume and the generated trading fee amongst typical AMM.
What is the majority type of liquidity pool on Curve? Stablecoin liquidity.
Is stablecoin liquidity the same as non-stablecoin liquidity? No, but they bear similarities for sure.
The stablecoin trilemma has been introduced by Multicoin Capital as:
Stable,
Decentralized, and
Capital-efficient.
An equivalence of a trilemma for stablecoin liquidity would be:
Visibility,
Pool utilization, and
Stability.
As a stablecoin issuer, the objective function would always be to increase the adoption of its version of the stable. To do so, they have to juggle the delicate balance between allocating budget for visibility, pool utilization, and stability. On Curve specifically, they can lobby veCRV or vlCVX holders to vote for them, so that more LPs can be attracted to deposit their capital. One problem with ve(3,3) is that it conveniently ignores the significance of stability for stablecoin liquidity and puts emphasis on visibility and pool utilization solely as the gauging metrics for adoption. The StableSwap mechanism would require a deep liquidity volume as a buffer or reserve during the unavoidable black swan event that would precede bank run or liquidation cascade.
The Volunteer’s Dilemma: Finding the Golden Mean
Nonetheless, if veCRV gains cash flow from the platform’s swapping fee, the lobbying incentives received by vlCVX would most definitely dilute the valuation of the veCRV holders. It’s a volunteer’s dilemma for vlCVX holders because they are faced with the decision to vote for (A) better pools’ utilization which benefits all veCRV including themselves for the betterment of the whole Curve ecosystem or (B) better lobbying incentives for pool stability at the expenses of veCRV holders, albeit arguably the lack of adoption on Bribe is one contributing cause to this.
It’s a convoluted problem to solve, but it’s important to reconcile the benefits of all token holders (participants) of the ecosystem to understand this dearly. A corrective narrative is needed to establish a bare minimum via auxiliary protocols, reallocating the distributions of CRV towards fee-generating pools. Vote-lobbying, despite being much more capital-efficient, is ultimately a rent-seeking act that harms the mutual benefits of the ecosystem. One possible solution can be setting a moral quota for the vlCVX, but it indirectly introduces the concept of quota and protectionism which would do more harm than good to the free-market economy.
It boils down to the crux of this challenge - can a volunteer’s dilemma be effectively tackled? The short answer is yes, we can. The solution lies in the difference between the payoff matrix. We can shift the dominant strategy to ‘always volunteering’ in the Nash equilibrium if ‘the benefit of volunteering’ is incentivized with an external reward so that it is brought to a similar level as ‘the benefit of not volunteering’. cCRV, a product incubated by the Congruent, is set up exactly that way to achieve the realignment via introducing responsible stewardship to solve the Gordian knot. In layman’s terms, cCRV is able to provide a boosted APY while emphasising the revenue-generating ability of the Curve protocol.
The “Curve” League
The aforementioned paragraphs basically sum up the development of the Curve War narrative. In hindsight, the Curve might seem like it revolves around stablecoin liquidity and CRV farming only. I can assure you that it is much more than that in reality, hence, I would briefly discuss and list some of the potential narratives which are yet to be properly introduced.
Extending Convex-ture
Convex has established itself as the “kingmaker” and the crucial layer to Curve by synergizing using the flywheel effect. As it grows, many protocols have actually turned to accumulating CVX/ vlCVX for exposure to the Curve War because it could give a better equity return. Congruent, Frax, Badger, Terra, Redacted, and Olympus all offer different exposure levels to vlCVX (and indirectly veCRV). Check out the DAO CVX Tracker by @DefiDividends to follow the latest updates on this. Different protocols leverage their vlCVX holdings with different strategies - some incubate new products, while some use it solely for investment purposes, make sure to understand their investment stewardship principle so that you are aware of their intention.
Apart from vlCVX, Convex has also launched cvxCRV as the stripped-down version of veCRV without its governance power. The peg of cvxCRV to CRV is important as the health tracker of Convex. Thus, some protocols have decided to address this pain point instead. For instance, Congruent’s cCRV, Llama Airforce’s Union, Aladdin DAO’s Concentrator, and XBE Finance’s Compounder helps to stake more cvxCRV via different mechanisms.
Stables from the New World
As DeFi continues to receive more and more recognition, the concepts of fiat-backed and crypto-collateralized stablecoins are expected to be adopted widely. One example would be the USDp by JPEG’d which allows over-collateralization of the non-fungible tokens (NFTs). The similar concept can be extended to real-world assets (RWAs) or GameFi items, which have a huge untapped market. Naturally, Curve would always be the beneficiary due to its moat.
(Stable) Liquidity Overlord
To further enhance the capital efficiency of the liquidity deployed on Curve, the true degens have been developing different protocols to extract the value. Thanks to wizardry, now we can leverage against our liquidity pool’s position. For example, Lend Flare, dForce, Rari Capital, and Curvance (upcoming) allow the users to borrow by providing Curve LPs tokens as collateral. Most definitely, the deep liquidity depth on Curve is one of the key enablers for this.
(Unstable) Concoction
Most of the discussions so far have been focusing on stablecoin liquidity. With the introduction of the Curve v2 pool, the StableSwap formula is tweaked slightly to allow low-slippage swaps between volatile assets which are dynamically pegged. As of right now, I would argue that the routing for the Curve v2 pool is not perfect and hence, it has not been very successful in onboarding more pools. The parameters to be set for the pools can get confusing as well. On this matter, Congruent’s cCRV is building a smart router for v2 pools; as for the parameters optimization, do check out the deep-dive post by @nagakingg for more information.
ForEx and Commodities Cartel
ForEx and commodities on-chain also present a lucrative opportunity for the DeFi space. The digital trading of these two financial instruments would require deep liquidity for efficient market-making. Currently, Synthetix, Fixed Forex, and Angle are the leading protocols in this niche. In fact, the market size is still in its infant phase and sizable growth can be anticipated.
Meta-Governor
In the recent cycle, we have witnessed some web3 cross-over social-fi projects created and experienced massive adoption by the public by incentivizing users’ participation (actions) via verifiable digital proofs hosted over the blockchain. If you ask me, it’s a glorification term for game-fi-like PvE systems which ultimately derive monetary value from the invested time and attention of the participants. Its tokenomics would require delicate planning and robust simulation to ensure the inflationary emissions of project tokens can keep up with the growth of the userbase (which itself is a huge topic for another day if I am not lazy lol). Off the top of my head are two recent projects, namely STEPN, which is basically web3 Strava and OurTube, web3 Youtube. There are definitely many more other similar projects, which I would much prefer to call them incentivizing Proofs-of-Brain in the form of digital content. In this case, Steemit or Hiveblog would always be my go-to platforms to explore and get inspiration from. For instance, Musing as a web3 Quora, TripleAReviews as a web3 Rotten Tomato, Dlive as a Twitch fork, Product Hunt fork SteemHunt, and Utopian as a web3 Stackoverflow.
Well, you might think the paragraph above seems a little bit redundant - nope, as innovations continue to occur in this field, what if we introduce a similar system for general (meta-)governance in the space? Introducing the concept of govern-to-earn/ GovFi. For long, the utility of the governance in DeFi has remained capital-centric. The quasi-decentralised system manifested by tokenomics which favours the consolidation of power and wealth would almost certainly descend then degrade into yet another centralized structure. The advocacy of decentralization could be turned into a web3 narrative if there are enough interests and attention piled on it.
Now you may ask, how is this gonna be related to Curve? As a protocol-agnostic platform, it is not a far-fetched idea to classify Curve as one of the Public Good protocols. It allows different stablecoin projects to exhibit tribalism - some of them gang up, some of them compete - in order to fight for the liquidity for their respective pools by vote-lobbying to attract more allocations of CRV as incentivization for LPs. In the meantime, there is also veFunder by @_bout3fiddy_, which is set up to garner gauge votes for fundraising purposes via moral obligations solely. Voting for veFunder would clearly be a not capital-efficient way for profit-maximization but it helps to cultivate the social value of the Curve ecosystem. Curve, therefore, would be considered a pioneer in showcasing meta-governance in DeFi because it experiments on the deviation from the capital-focus voting. In an anticipatable future, if a governance DAO is brought to life, I would expect a retroactive airdrop on all on-chain good governance which should theoretically include veCRV voting behaviours.
Now that we have touched on the probable qualitative accounting of governance, another possible product would be the rumoured on-chain credit scores. As DeFi legos are increasingly composable, metrics of responsible governance might be computable based on several verifiable data. Therefore, similarly, veCRV should innately capture the value of governance behaviour of the said DeFi participants.
The Foray into Future France
“兵无常势,水无常形。”
孙武,《孙子兵法》
“Therefore, just as water retains no constant shape, so in warfare, there are no constant conditions.”
Sun Tzu: The Art of War
It is painfully obvious that the current stage of Curve War only revolves around the emission of the CRV tokens itself. Matter of fact, it is actually a multi-front war. Stating that the narrative is coming to an end would do a great disservice to the ever-expanding ecosystem. As dictated by the Lindy effect, the robustness of Curve protocol would allow itself to remain an indispensable part of DeFi. Sure enough, CRV tokens are the mainstream yield source as of right now - but one thing to remember, many promising subprotocols are not even released yet or still developing their Proofs-of-Concept.
Where do I see Curve in future France? CRV, in the form of veCRV, is the de facto governance token. It possesses the ability to steer the directions of one of the most important base layers in the DeFi space. Perhaps, it would be fair to quote @0xSami_’s baseplate thesis if I were to wholly categorize and describe the innate true value of Curve. The protocol operates as an open-loop system with no intention to impose its own governance propensity. It allows other legos to compete democratically (within the capacity of its founding constitution/ social contract, see the controversial Mochi’s attempted exploit) for capturing the created value. As more and more participants are introduced to the ecosystem, it is hard to fade the potential network effect which would tremendously boost the overall value of Curve. I would expect CRV to be properly priced in once more utilizations are observed for the auxiliary protocols over the next few months (years). Remember, Bankless valued CRV at $4.95 in a slightly old article that only discussed the TAM for stablecoins AMM.
So, in short, yes, to say that I am a CRV maximalist would be an understatement. CRV is more likely an L1/ ecosystem play instead of viewing it as a pure DeFi protocol, and I see no worthy contender in the near timeline. Anyway, thanks for coming to my Tedtalk I guess.
Disclaimer:
The mention of protocols above does not constitute an endorsement. The author holds CRV, CVX, vlCVX and cvxCRV tokens. The opinions expressed in this article are those of the author’s and do not necessarily reflect the Congruent's official policy or position. They should not form the basis for making any financial decisions either.