What is Curve Finance? Earn 25% AND protect against a crash

I now have around two thousand dollars in crypto, earning roughly 25 APY, which is a delicious amount, but it’s not going to stick around forever. I’ll be honest I had about five thousand dollars, but I just cashed out some of it to invest more into other projects.

Welcome to Shavuna, the number one website for crypto education. Here we explain topics of the cryptocurrency world using analogies, stories, and examples so that you can easily understand them.

In this blog post, I will explain what curve finance is, how it works, where all this free money is coming from, and exactly how I have invested in it. 

First, off we’re going to need to go over some new terms.

Curve finance is a dapp or decentralized application in which you can interact using a tool like Metamask. If you’re already confused by the words I’ve said, please go read other articles on this website; they are incredibly helpful for beginners.

What is Curve Finance?

Curve finance is what is called an AMM. AMM is an acronym for Automated Market Maker, which is a fancy way of saying that it is a tool that allows traders to make trades using pools of money instead of trying to connect a buyer and a seller.

We have a specific blog post over automated market makers, and they are very complicated. Still, again I promise if you read our article on that, and then you come back to this post, you’ll completely understand it.

As a quick recap, though, an AMM is a tool that connects investors with traders. Traders get to swap their tokens for other tokens, but they do have to pay a small fee.

Investors earn that fee, but they have to lend out their crypto to do so. Without automated market makers, we would instead have to use the order book method that wall street uses. This is where we directly connect a buyer and a seller.

AMMs are much more efficient and fast because they’re basically immediate, and they don’t require anyone to match with. They are great in the DEFI world.

For example, let’s say you had some USDC and you wanted to trade it for Ethereum; how would you do it?

Well, you’d go to a decentralized exchange that allows you to almost instantly, cheaply, and without asking you for any id to trade your USDC for Ethereum. 

How did Curve Finance Start?

Curve finance started as a stablecoin on a decentralized exchange. They initially called themselves Stableswap, which allowed traders to swap their USDC, DAI, and USDT tokens without much slippage.

It is actually explicitly optimized for stablecoins to reduce this slippage.

If you don’t know what slippage is, to understand how it works, we have first to understand how AMMs work. Basically, you go to an AMM, and you say I have this much USDC but want tether (USDT); how much tether can you give me?

Since USDC and tether are both stable coins and their price is one dollar, they should be the same amount of tokens, but sometimes tether is rarer in the pool than USDC, and because it’s rarer, it’ll cost you more to buy it.

This might be confusing, but the idea is that you may have 10,000 USDC tokens, and the AMM may only give you 9 800 tether tokens, meaning that you lost 200 to slippage because the AMM thought that the 9,800 was a fair price using its algorithm.

I explained the algorithm in our specific automated market makers article.

Curve finance started off as a way for people to pool large amounts of stablecoins together so that they could avoid this slippage.

However, as time went on and investors loved the idea, curve finance started adding other tokens like Ethereum and bitcoin and a few other alternatives.

This gave way for investors to earn even more money by providing their Ethereum and bitcoin tokens as capital to the curve’s pool of money.

How to Earn Money With Curve Finance?

We have to go over two more terms; yield farming and impermanent loss.

Yield Farming

Yield farming is the action of investing your crypto into something, hoping for a decent return.

For example, I said at the beginning I was earning 25%, and I am technically yield farming to earn that. I’m investing in curve finance liquidity pools. Again we have a post that goes over at least five different yield farming opportunities if you’re interested.

Impermanent Loss

The next topic we need to talk about is impermanent loss. Impermanent loss is a challenging idea to understand if you’re a beginner, so you’ll probably have to read our article on that topic to understand it.

In short, when you provide liquidity to curves pools as an investor and the tokens that you invested change prices, the value of those coins changes compared to what you would have had as if you had initially just held them instead of investing.

For example, instead of yield farming your five dollars of Ethereum, if the price goes up, you would have made more money if you just held Ethereum. The more significant the price difference of the assets you are investing in, the greater the impermanent loss.

Right now, yield farmers collect the fees that traders pay to swap their tokens on Curve finance. Over time it adds up to a decent amount. The APY does change throughout time depending on how many tokens are in the pools, the prices of the tokens, how many people are trading, and what the fee schedule is.

You can earn an immediate five percent APY just for supplying your tokens.

However, yield farmers have a unique opportunity on curve finance to earn an extra incentive.

Curve is operational on the Ethereum network and also the polygon or the Matic network. Right now, curve and polygon have actually teamed up to reward early investors in this platform with free money, basically.

That’s right, free money for investing to help get more people interested in the project, but you should know this money will eventually dry up.

For example, in the screenshot below, you are seeing a 19.24% APY of the CRV token and a 0% CRV  of the WMATIC token.

curve finance

These percentages are based on the current value of what you have invested.

The cool thing about these is if you don’t believe in the curve or the Matic token, you can immediately harvest your rewards as often as you would like and then trade them for a token that you do believe in, e.g, you could trade them back into Mthereum or USDC.

Curve finance is actually a DAO or Decentralized Autonomous Organization, which means there’s no corporate board. Still, the owners of the curve tokens do get to vote on changes to the protocol and even hire new developers.

Right now, this is essentially the only use case of owning the curve token unless in the future they find a way to pass the profits from the protocol onto the token holders, but that’s for another article.

Here’s the second part of what the title said. On top of gaining a ton of free coins for investing, I’m also protected against bitcoin or Ethereum crashing by the opposite of impermanent loss.

That’s right; I can use the impermanent loss to protect myself.

For example,  if both bitcoin and Ethereum crash by 50%. In this example, I combine bitcoin and Ethereum as Ethereum and then give them 66% of the pool weight. We will assume they both drop by 50%.

Let’s say in the beginning, I had initially deposited 1 dollars worth of assets, and after this simulated fifty percent price crash, I will have three hundred thirty four dollars of Ethereum and bitcoin and three hundred thirty four dollars of the stablecoins.

This means I should have around $500 if I were only holding Ethereum, but now I have 668 dollars worth of tokens because impermanent loss protected me.

Let’s try another example; let’s say Ethereum and bitcoin drop by 75%, which is a massive crash. In this case, I started with a thousand dollars, and if I only held Ethereum or bitcoin, I should only have $250.

But by investing in curve finance, though, I still actually have 236 dollars of Ethereum and bitcoin and 236 dollars of stablecoin, which means I have 472 dollars instead.

To put this in simplest terms, if the bitcoin and Ethereum market crashes by 75%, I will only lose 53 percent.

This is roughly how impermanent loss works with investors that it buffs the price volatility, especially when a stablecoin is in the payer.

The downside of that is that if the coins double or triple in price, I won’t realize as many profits either.

Essentially, I am locking in my 25% APY as long as bitcoin and Ethereum prices stay the same. If they drop, I am protected, but I won’t see the moon if they skyrocket.

The first thing that you would need to do to invest in curve finance is to move your Ethereum funds to the polygon network, and you can do this using polygons blockchain bridge.

It’s wallet.matic.network/bridge, and then basically this allows you to transfer your Ethereum assets to the polygon network, and it also lets you do it the other way.

As always, thank you guys so much for reading. I hope you’ve enjoyed this article and hope that you’ve learned something most importantly, though I hope to see you in the next blog post.