DeFi Unlocked: How to Earn Crypto Investment Income on Curve Finance
DeFi continues to cement its spot as this year’s hottest trend in crypto, with numerous new platforms launching to capitalize on the hype.
In this article, we will explore Curve Finance (CRV), how it works, and how it can be used to earn crypto investment income.
What is Curve Finance?
Curve is a relatively new entrant to the DeFi space, having launched in January 2020. Like many other DeFi protocols, Curve is a decentralized exchange (DEX), designed to provide immediate liquidity to its users.
Its architecture is based on the Automated Market Maker (AMM) protocol, which was initially outlined by Ethereum (ETH) frontrunner Vitalik Buterin. A number of the DEXs within the DeFi space leverage Buterin’s initial design. As a result, there are similarities between decentralized exchanges like UniSwap and Curve.
However, Curve possesses features that differentiate it from the rest of its counterparts.
Curve defines itself as an “exchange liquidity pool on Ethereum designed for extremely efficient stablecoin trading and low risk, supplemental fee income for liquidity providers, without an opportunity cost.”
Through its platform, parties can trade their stablecoins in a decentralized manner. Curve can be used both by individuals or other smart contracts to support trades. The protocol that created this feature was designed by Curve creator Michael Egorov in 2019 and was released to the public in a whitepaper called “StableSwap - efficient mechanism for Stablecoin liquidity.”
Trades on Curve are charged 0.04% of the trade, which liquidity providers collect. The fees levied on the trades provide a powerful incentive to participate as a liquidity provider.
Moreover, the funds deposited by the parties who provide liquidity are sent to either the Compound (COMP) protocol or yearn.finance (YFI) where they garner more income. These earnings are then shared amongst the liquidity providers in proportion to their contribution to the pool.
The CRV token
Curve recently launched its own governance token, CRV, with the intention of supporting decentralization and ease of trading. For CRV users who are less interested in the protocol’s governance and more interested in making money, the token allows for liquidity mining.
What that means is that users who deposit in the protocol’s trading pools will receive CRV tokens as an incentive. The more you contribute to the pool, the more CRV tokens you will receive. And that is on top of the 0.04% trading fees.
How to make money on Curve
You can make money by earning fees and through liquidity mining CRV. The process to do that goes as follows:
- To begin trading or to provide liquidity, go to Curve.
Next, you will need to choose the wallet you use.
- Then, approve Curve on your wallet.
Now, you will see the Curve dashboard and can start interacting with the protocol.
Curve’s UI looks like it’s from the 90s. That might be a turn-off for newbies and a challenge for users who are used to user-friendly platforms, such as Uniswap. But that again, most of DeFi is currently for crypto experts and not for retail investors.
The next step will be to choose a pool. Let’s go with “y” and then click “Deposit.”
- There, you will see which stablecoins you can deposit. In the case of this example, we have 100 USDC that we can deposit in the AMM. Then, click deposit and approve the transaction using your Ethereum wallet. At this point, you will start earning fees for providing liquidity.
But that’s not all. Next you need to stake your liquidity token using the “Minter” function under https://dao.curve.fi/minter/gauges and deposit again to start earning CRV tokens.
- The final step is to “Claim” your CRV tokens to enjoy the benefits of liquidity mining on Curve.
Important things to consider
Curve currently supports DAI, USDC, USDT, TUSD, BUSD and sUSD, as well as BTC pairs. The platform works best for stablecoins as Egorov recently explained: “it’s an exchange expressly designed for stablecoins and bitcoin tokens on Ethereum.”
The ability to trade directly between pairs without having to trade against ETH provides savings in trading fees for Curve users. Traders who use other DEXs will find this to be an advantage.
Additionally, for parties who hold large amounts, Curve provides another important advantage. Due to its StableSwap design, there is minimal slippage even for large orders. This is different from the most popular DEX Uniswap, where larger orders pay more in fees.
Lastly, Curve performs better than its counterparts when it comes to impermanent loss. Impermanent loss refers to the phenomenon where assets held in AMMs lose more value than the same assets held in a wallet. However, on Curve due to slippage-minimising StableSwap design, impermanent loss is not as much of a problem.
Unlike many of its peers in the DeFi space, Curve highlights the risks of using the protocol on its dashboard.
“Providing liquidity on Curve doesn't come without risks. Before making a deposit, it is best to research and understand the risks involved,” the developers state on the platform.
The main risks of using Curve are:
- Code risk (although the protocol has been audited by Trail of Bits)
- There are admin keys that can allow for the pausing of the contract in the case of emergencies (but there are plans to move to a fully decentralized autonomous organization (DAO) model in the future)
- A stablecoin could lose its peg (which means it will no longer be 1:1 to the fiat currency it is linked to)
- Staking risk
The bottom line
Investing in DeFi protocols is not for the faint-hearted or tech newbies but for those who understand how smart contracts work in action and are comfortable navigating the Ethereum blockchain, Curve may offer some interesting (and risky) crypto investment income opportunities.