Who Is the King of DeFi?
When it comes to the adoption of DeFi, this project is leading the pack . . .
History was made in crypto on September 15, 2022 as Ethereum underwent its incredible transition to fully proof of stake, otherwise known as “the merge.”
This event is expected to turn ETH into a deflationary asset, meaning that the supply goes down over time. The deflation is driven by ETH transaction fees being burned, which means that the more adoption we see, the more deflation there is.
Over time, I believe this is going to be a huge catalyst — not only for Ethereum, but for crypto as a whole. For a quick overview, watch the video below, or continue reading for a detailed update:
$ETH Merge Finally Complete
The merge is complete! Ethereum is now fully proof of stake, meaning that the blockchain data is verified by validators who hold at least 32 ETH rather than miners solving complex algorithms.
There’s a lot of debate over which is a better form of consensus, but I’ll leave that to the maxis as each one has its own pros and cons.
One thing I’d argue is that this is the most impressive moment in crypto outside of the creation of the bitcoin network. This is equivalent to changing the engine of an airplane mid-flight, and it’s great to see all the developers’ hard work pay off with a successful mission.
Of course, the feature of the merge that most people have been looking forward to is the “triple halvening” effect, which describes the significant (about 90%) reduction of additional ETH being put into circulation.
This is expected to have an overall deflationary effect on ETH, which, of course, tilts the supply/demand dynamics largely in favor of ETH holders.
If you’re interested in tracking the change in the total supply of ETH, you can do so here. Since the merge, which happened about six hours ago (from the time of writing), 87.74 ETH have been taken out of circulation:
Source: Ultrasound.Money
Considering that activity on Ethereum is very low right now (as it tends to be in the middle of a bear market), the fact that it’s still deflationary is very bullish for the future. Looking back, we can see that fees are at their lowest point since May 2020:
Source: Glassnode
Keep in mind that in May 2020, DeFi barely even existed, and NFT mania was still about a year away — meaning that there was almost nothing to spend ETH fees on.
When we’re once again in a bull market, the amount of burned ETH will likely be much higher, as transactions on the network will generate more fees in terms of quantity as well as price.
Curve: King of DeFi
This week, I want to focus the rest of the update on Curve Finance (CRV). Curve is a DeFi exchange that mostly focuses on stablecoin trading.
As a refresher, stablecoins are cryptocurrencies that are pegged to the dollar or some other fiat currency. They’re extremely important because they serve as a way to have your money within the crypto world without being exposed to the risk of any cryptocurrency in particular.
Stablecoins are a very hot topic right now in the crypto world because the big ones are centralized.
With the whole Tornado Cash ordeal and Circle (parent company of USDC) freezing people’s USDC at the request of the U.S. Treasury, people are understandably more wary than ever of centralization in stablecoins.
According to CoinGecko, there are currently $154.4 billion worth of stablecoins in circulation.
The top three, which are all fully centralized, comprise over $140 billion (almost 91%):
Source: CoinGecko
To make matters worse, the smaller stablecoins are heavily reliant on the big ones. DAI is 52.6% backed by USDC, and FRAX is exposed to centralized stablecoins, but in a more indirect way.
Obviously, if DeFi aspires to be decentralized someday, truly decentralized stablecoins are a must.
Curve’s role in this is by optimizing the world of stablecoins not only by serving as a good stablecoin exchange, but also incentivizing people to buy newer stablecoins through depositing them into their platform.
Incentivization: Lifeblood of DeFi
To make DeFi work in these early stages (and yes, we’re still in the early stages), you need adoption. To get adoption, you need incentivization.
With Curve, anyone can deposit stablecoins like USDT, USDC, DAI, and many more, and earn CRV tokens as incentive to keep their stablecoins in Curve’s system.
This is sort of like earning interest on your stablecoins — except instead of being paid in stablecoins, you’re paid in CRV. Another name for the paid-out CRV tokens is “CRV emissions.”
I think the easiest way to explain a lot of this stuff is with visuals, so here’s an example of what you’d see if you were to go to Curve.fi:
Source: Curve.fi
Here’s a quick rundown of what each column means:
Each group of assets on Curve is sorted into pools, which is shown in the first column.
For example, the most popular stablecoin pool in Curve is the “3pool,” which is second on the list above. Anyone can go and deposit the stablecoins, DAI, USDC, and USDT — or any combination of the 3 — into the 3pool.
In return, they’re paid 0.19% in interest in whatever coin they deposit. So, if you deposit USDC, you’re paid 0.19% interest in USDC.
The real value comes with the Base vAPY, which is the amount of interest that you’re paid in CRV. In the example, you can see that you’re paid anywhere between 0.37% and 0.92% in CRV interest for any deposit you make in the 3pool.
At the time that screenshot was taken, the 3pool had $41.1 million in volume within the past 24 hours, and the total amount of stablecoins sitting in the pool was a whopping $813.9 million.
Another thing to point out about that screenshot is that the “tricrypto2” pool and “steth” pool hold various forms of BTC and ETH. This is a result of Curve branching out from stablecoins a bit over the past year or so.
The emissions for these are a little different as well. The tricrypto2 pool offers way higher CRV emissions, ranging from 4.97% to 12.43%. In the steth pool, you can also see that you earn LDO tokens instead of CRV. There are pros and cons to this, but for simplicity’s sake, we won’t get into them in this article.
CRV’s Incentivization Features
Here’s where CRV tokens get their value:
When you buy or receive CRV, you can “lock it” for up to four years. As you may have guessed, this means you can’t move it for a set amount of time.
There are three benefits of doing this:
1) You earn interest on your deposit.
2) You earn higher CRV emissions when you deposit assets into a pool (for example, if you lock your CRV for the full four years, you earn the max 12.43% rate in the tricrypto2 pool).
3) The longer you lock it up, the more voting power, or “governance,” you have over what happens in the CRV exchange.
Benefit No. 3 has become a huge deal in DeFi, as we’ll see in just a minute.
The locking feature also adds a huge element of scarcity. The more people that want to lock up their CRV, the less CRV there is in circulation.
So, why do people want to have voting power on Curve?
The short answer is because they can use that voting power to increase emissions in their own Curve pool.
What does that mean?
For example, say you have huge ambitions in DeFi and are creating an entire ecosystem of products (sort of like the Synthetix ecosystem I mentioned in this article).
Along with these products, you’ve created a stablecoin with the ticker symbol STBL. After all, if you can get people to hold your stablecoin, they’re more likely to use your services.
Believe it or not, in this sort of venture, building the DeFi projects is the easy part … the hard part is actually getting people to use them.
So, how do you get people to use your stablecoin?
Side note: Yes, when it comes to crypto, most questions lead to more questions. However, I’m hoping that this will all tie together nicely at the end!
This is where Curve comes in…
Remember, your No. 1 goal right now is to get people to use your DeFi projects. One of the easiest ways to do this is to garner attention around your stablecoin (STBL) — and what better way to garner attention than by paying people to buy it?
To get people to buy STBL, you create a pool on Curve where people can deposit it. Now, if people deposit STBL into the Curve exchange, they’ll be paid in CRV. But let’s not stop there!
If you own a sizable amount of CRV, you can then vote for higher CRV emissions in the STBL pool.
Higher CRV emissions incentivize more people to buy STBL and deposit it into Curve, and raises awareness of STBL in general, which is great for adoption.
If lots of people buy STBL and deposit it into Curve, it increases the size of the STBL pool (the liquidity), which means bigger players can buy large amounts of it. Then, they’ll take STBL and use it in your exchange, your lending/borrowing product, etc.
The Curve Wars
This incentivization loop has actually resulted in what’s been dubbed the “Curve Wars.” More and more projects that want liquidity are buying CRV so they can vote in favor of incentives to buy their tokens.
I won’t get into the full details of the Curve Wars in this article, but the major player in the whole ordeal has been Convex Finance (CVX).
Right now, about 522 million CRV tokens have been locked up for voting rights. As you can see here, Convex blows everyone else out of the water in terms of ownership. They have over 53%, while no other player has more than 5%.
It’s safe to say that Convex has won the Curve Wars, seeing that it’s now become the Convex Wars. It’s gotten to the point where different DeFi projects are buying Convex’s token (CVX) in order to vote in its proposals so that Convex will vote favorably in Curve’s governance.
The rabbit hole goes even deeper than this, but I think that’s enough for now!
Conclusion
When the Curve Finance team released the CRV token back in August 2020, whether they saw this much potential in the project just over two years later is hard to say. But to me, it’s unquestionable that Curve has created the best mechanism in DeFi in terms of incentivization.
There’s really no other altcoin in crypto that’s attracted this much attention and demand from bigger players. I’m very surprised that it’s currently not even in the top 100 market caps in crypto, sitting at No. 103 at the time of writing.
Of course, I can’t offer you financial advice — but, to me, this seems like one of the best deals in crypto from a proven project, and what I’d even call the reigning King of DeFi.
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