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July 21, 2022

The Curve Wars Explained

The Curve Wars can be described as the competition amongst several DeFi protocols to get a share of the enormous liquidity in the Curve Finance ecosystem; the hustle to accumulate veCRV, Curve‘s governance token, and decide which pool gets Curve’s reward boost. According to DeFillama, Curve has one of the largest Total Value Locked (TVL) across DeFi and enjoys high interest amongst investors. The War is a battle for liquidity among protocols in the super-competitive DeFi industry. 

Let’s dive a little deeper!

What is the cause of Curve Wars?

At the center of these wars are the fights to acquire more veCRV tokens that protocols can use to influence the allocation of CRV rewards to pools that provide liquidity. veCRV holders hold a weekly draw to decide how rewards are distributed across Curve pools. Generally, projects want to influence rewards for their pool on Curve, and Stablecoin Projects are eager to sustain their Curve’s liquidity and high yield to keep liquidity providers. With Convex Finance controlling a majority of veCRV tokens already, projects are opting for a faster route by acquiring CVX tokens instead of CRV and even bribing vlCRV(vote-locked CRV) holders to get a favorable decision. 

What is Curve?

Curve Finance is a decentralized exchange facilitating the efficient trading of stablecoins through low slippage and fees. Unlike Uniswap, impermanent losses are eliminated as Curve focuses on stablecoins and less volatile assets. An AMM governs the platform with several liquidity pools, eliminating the need for an intermediary. It is the largest market for stablecoins, incentivizing users to lock their CRV (Curve’s native token) for at least a year to earn veCRV - its governance token. 

How do Curve Wars play out?

Although Convex Finance, Yearn protocol, and StakeDAO are protagonists in the Curve wars incentivizing users to deposit their CRV tokens into their platform, the Curve Wars play out essentially on Convex protocol, which offers one of the highest ROI on CRV. The competing protocols utilize these deposited CRV tokens to stake on Curve Finance; unlike the CRV holders, they can stake for longer periods, unlocking more veCRV - a governance token that gives holders voting and decision-making rights in the Curve ecosystem. 

veCRV holders determine the amount of CRV rewards allotted to each pool on Curve Finance- the ability to change Guage weights. The longer a holder stakes his CRV tokens on the Curve protocol, the higher voting power or veCRV (vote-escrowed CRV) they get. Users get the maximum 1 veCRV token when they lock 1 CRV for four years but only 0.25 veCRV token when they lock for one year. However, not every investor can hold for that long, so that's where Convex Finance and Yearn protocols come in. 

Convex finance commands the majority or more than 40% of veCRV tokens, hence holding the most decision-making power in the Curve ecosystem and deciding how Curve’s rewards are distributed. How does Convex do this? Users stake the CRV tokens and get crvCVX tokens in return, as well as earn additional CRV tokens and Curve trading fees. So platforms participate in the Curve ecosystem through Convex and receive crvCVX tokens instead of CRV, which takes longer to unlock the maximum benefits.

Also, CVX holders receive tradable crvCVX, unlike veCRV, which is non-transferable. CVX is the governance token of Convex Finance. As Convex is poaching Curve token holders, another protocol, Votium, is feeding off Convex enticing users to deposit their CVX token as vlCVX to earn rewards and higher voting power on Convex. In addition, several DAOs like Terra, Frax, and Badger have accumulated enormous Convex token, CVX, in a bid to control its Curve’s voting power.

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