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How DeFi Bribes are Funding the Curve.fi Wars
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As the DeFi spaces enter a new era of expansion and protocols grow thirsty for liquidity, many eyes have turned to the ‘Curve Wars,’ in which several leading DeFi projects are scooping up as much of the native $CRV token as possible. These projects are either purchasing $CRV outright or bribing holders with other tokens in exchange for their exclusive voting rights to allocate more significant portions of $CRV rewards to their liquidity pools.
Emerging fully into the mainstream during 2020, Decentralized Finance remains a relatively young industry that eliminates the role of banks, financial institutions, and other third parties via the use of smart contracts. In DeFi systems, individuals are in full custody of their financial assets. They can connect to applications to match with and engage in P2P transactions without an intermediary organization. DeFi applications run based on pre-programmed rules or ‘protocols’ and require significant levels of liquidity to facilitate their operation. Liquidity is the name of the game in the world of DeFi, and many protocols resort to innovative ways to attract and retain more than their competitors.
The success of a DeFi protocol is often represented as the Total Value Locked (TVL) of all assets. Protocols generate revenue for their liquidity providers (LPs) by offering their native governance tokens rewards. The protocols often enable holders to vote on critical decisions about the development of the protocol. Investors usually pair TVL with governance token market cap to determine the value of these platforms.
Curve Finance is a leading DeFi protocol for trading stablecoins on Ethereum. Operating according to a different algorithm to other Automated Market Makers (AMM) such as uniswap and Sushiswap, Curve offers much lower trading fees and slippage, with no impermanent loss due to only dealing with stablecoins. Curve is essentially decentralized forex for low-cost currency conversion and an integral building block in the DeFi world.
Protocols often encourage individuals and organizations to lock their tokens up with Curve by offering a percentage of trading fees earned on the platform via rewards in native $CRV governance tokens. $CRV tokens can be locked in to make ‘vote-escrowed CRV’ ($veCRV), which gives holders the right to vote on protocol changes and initiatives. The more significant the amount and the prolonged time $CRV is locked, the more $veCRV generated.
One of the primary use cases of $veCRV is determining how many rewards are given to liquidity providers in different pools. As liquidity is the name of the game for protocols, many have been scrambling to acquire as much CRV as possible to attract liquidity providers. Protocols first purchase CRV, lock up in exchange for veCRV, vote to allocate more rewards to their pool, earn more CRV from that pool, and repeat. Short of initial capital or CRV, protocols have also sought to bribe CRV whales by offering them additional tokens in exchange for their support in reward allocation.
This concept of ‘renting’ liquidity by paying additional tokens has been a feature of DeFi since the beginning, with yield farmers moving between high APY yields to maximize returns on their staked assets. However, with Curve, protocols can leverage the enormous global pool of stablecoins (Approx. $21 billion) to offer high APY, attract new money, and make their new cryptocurrencies liquid in a brief period. Critics have labeled the process as being against the principles of decentralization as the system enables an increasingly centralized distribution of wealth.
With currently 1/3 of Curve rewards being distributed to Magic Internet Money (MIM) token pools, the supporting protocol Abracadabra has been dramatically successful in developing its ecosystem. The protocol allows users to deposit any interest-bearing crypto asset for its MIM stablecoin. To retain the stablecoin’s peg and amidst large volumes of buying and selling, MIM relies on the support provided by liquidity providers on Curve. The issue, however, arises in the dilution of the protocol’s market cap, which sees it continuously printing new MIM to pay lenders. Eventually, this imbalance could lead to selling pressure, reducing the APY offered and resulting in liquidity providers switching pools.
With so much money sloshing around in DeFi, innovative teams are constantly designing new ways to maximize yield and suck in liquidity to their corner of the market. Convex intends to allow users to earn even more from their $CRV assets and reclaim their liquidity from multi-year $CRV lock-ups. As a result, Convex is the single largest holder of $CRV with over 50% of all tokens – 10x more than the second-largest holder – and enjoys virtually unmatched dominance in voting power. Convex has also created its own native $CVX token to distribute rewards to liquidity providers further using their protocol and attract more $CRV.
$CRV holders can lock up their tokens via Convex to receive $cvxCRV, which are liquid and able to be traded without having to unlock the underlying asset. In addition, $cvxCRV holders earn income from the original locked $CRV in exchange for delegating voting rights to Convex. For liquidity providers, depositing Curve LP tokens into Convex makes additional $CRV rewards as Convex uses a ‘group boost’ to boost staked tokens and allow for claiming whenever. $CVX holders can also vote and transfer voting power regarding liquidity pool rewards allocation, resulting in an even easier mechanism to enable DeFi bribes.
As the wealth abstracts further and further, mechanisms to efficiently distribute it also act to siphon off substantial portions to those with large initial stakes in the game. The result is a considerable concentration of wealth in the hands of protocols, while individual holders and liquidity providers race to maximize their capital efficiency by moving into assets that are increasingly abstracted from the underlying assets. With each progressive level, the inherent risk of asset devaluation increases exponentially at any point in the chain.
Rushing in to support growing demand for DeFi bribes, Yearn Finance creator and industry-renowned innovator Andre Cronje built a matchmaking platform that allows bribers (protocols) to create offers and bribees ($CRV holders) claim offers. Bribe.crv.finance is a support service that facilitates the allocation of voting rights and rewards for a central DeFi pillar transparently and straightforwardly.
Often compared to the Wild West of finance, the DeFi space is rife with innovative tricks and traps that paint a different picture to whatever is going on beneath the surface. Protocols entice liquidity providers by offering higher APY than their competitors but negate to mention how the creation of those rewards tokens acts to dilute the market cap and negatively impact token price. The result is a balancing act to ensure capital ‘efficiency’ while reducing the risk of impermanent loss; often, this more closely resembles a game of musical chairs.
During the governance of CURVE Finance, Mochi is definitely a project to remember. Mochi minted its native MOCHI tokens in exchange for USDM stablecoin. According to CURVE's governance report, 99.5% of the circulating supply is owned by MOCHI team, meaning USDM is undercollaterized. Mochi used USDM to vote in a gauge and received CRV, until its liquidity pool reached over $100 million TVL, formed a "governance attack."
After finding this loophole in hybrid liquidity activities, CURVE urgently called off USDM guage and eventually $46 Million USDM has been swapped to DAI, leaving the USDM exchange rate to fall to $0 and causing tremendous loss on USDM liquidity providers.
With more and more money flowing into and around DeFi, the entire industry is gaining increasing attention from traditional finance. This attention has led to more capital inflows and the cycle of inevitable growth continuing. Proponents claim that DeFi has created a more open and democratic financial system that uses decentralized solutions to solve the issue of liquidity imbalances. Critics, however, argue that increasing levels of abstraction are reminiscent of mistakes made in traditional finance that led to the 2008 GFC and that the constant repackaging of underlying assets increases the risk of systemic collapse.