Curve, one of the lesser-known players outside of the crypto market, holds an outsized influence in the industry and operates through a wild-seeming system of “bribes” where new DeFi protocols compete to become the next big token.
Where Wall Street has its market makers and banks, cryptocurrency has services like Curve that provide liquidity for tokens. It’s an essential part of any financial market.
Unlike its traditional-finance predecessors, Curve is decentralized and ostensibly overseen by holders of governance tokens, a specific kind of cryptocurrency analogous to shares in a company. Those holders can be swayed with monetary incentives, which is how pay-per-vote bribes have become an accepted part of using Curve. There’s an entire bribe industry that has cropped up around Curve.
Understanding the financial politics of Curve bribes in turn gives insight into the stablecoin market, a part of crypto that has drawn increasing scrutiny of late. Curve is a key player that new tokens rely on for growth but is also central to stable swaps — trading pairs of stablecoins that account for a large swath of crypto trading. This creates a systemic risk, some analysts believe.
The bribe economy
“If everybody is using Curve as their base layer for stable swaps, and something happens to Curve, everything built on top of it also collapses, right?” said Austin Campbell, director of Growth, Cash and DeFi partnerships at Paxos.
Terra’s UST and staked ether, or stETH, have had liquidity problems with major reverberations throughout the industry — with Curve playing a major role in both. Because many protocols rely on Curve, any problems could have a domino effect on the market.
Curve is critical to DeFi and the broader crypto industry because new crypto tokens depend on Curve liquidity. Curve is a decentralized exchange like Uniswap, operating on the blockchain and overseen by a DAO. Curve specializes in stablecoins or other tokens of equal value, and has a highly touted algorithm that limits slippage, or trading losses. This is particularly important for stablecoins because traders want very little deviation from the $1 price.
Curve’s prowess in fighting slippage has made its liquidity pools very popular. It’s the largest decentralized exchange by total value locked, or deposited, even during the crypto winter, according to DefiLlama.
In addition to low slippage, Curve distributes CRV tokens as a reward to people who provide liquidity on Curve. Those who stake their CRV tokens get vote-escrowed CRV, or veCRV, tokens, which enable people to vote on where Curve allocates its CRV rewards.
Crypto protocols want to steer rewards to their own token’s Curve liquidity pools. If those pools have high rewards, more people will participate in those pools and fuel growth.
One successful Curve Wars protocol is Convex, which started offering its own CVX token to CRV holders in exchange for letting Convex decide where to allocate Curve votes. With this strategy, Convex became the largest Curve holder, claiming about 55% of Curve’s voting power.
That has all led to a multilayered “bribe” economy, where new protocols furiously compete to bribe Convex holders to vote for their protocols, in turn controlling the Curve voting. It’s a Russian doll of crypto governance.
The bribe economy is active. New protocols like Redacted Cartel, Fantom, Cream Finance and Abracadabra have offered various incentives for voting or staking their CRV or CVX tokens.
Terra gets thrown a Curve
The power of Curve was on display in the recent UST depeg and subsequent implosion. One of the first sparks that started the depegging of UST was the draining of the UST-3pool on Curve, which includes UST, DAI, USDC and USDT, according to an analysis by Nansen. Before the depegging, the pool had about $1.2 billion in liquidity.
From May 7 to 8, the top 18 wallets accounted for $751 million, or 77% of total inflows of UST into the Curve pool. In other words, those wallets were selling UST for USDC or other coins, according to Nansen.
When liquidity in the Curve pool started to dry up — that is, there was no USDC, DAI or USDT left to trade for those seeking to sell UST — the price started to drop below $1 and traders began arbitraging between the Curve pool and other exchanges, starting the spiral downward.
Could the liquidity problems facing Terra happen to others in crypto? The 3pool on Curve, a major liquidity pool that many crypto applications and traders rely on, holds about $665 million USDT, $185 million USDC and $183 million DAI.
“You saw what just happened with UST: When that happens, the pool becomes almost entirely UST and all the other coins get depleted. Or imagine that happening with 3Pool on Curve, which everything else is built off of,” Campbell said.
But draining 3pool is possible, he said.
Circle’s USDC and MakerDAO’s DAI stablecoins have maintained their stability throughout the UST collapse. But USDT, also known as Tether, has lost its peg recently. “If I were Circle or DAI, I would be very concerned about Tether being in that pool,” Campbell said.
Circle declined to comment beyond citing a statement from last week noting that USDC is backed by U.S. Treasuries and cash, and that “USDC is always redeemable 1 for 1 for US dollars.”
Some investors and analysts believe that Curve itself as an automated service isn’t the problem — it’s more how each cryptocurrency involved is designed.
“I don't see this analogous collapse happening unless someone creates another [stablecoin] that's very similar in nature” to UST, said Anand Iyer, founder at Canonical Crypto.
The “bribe” term may sound ugly to outsiders. But the crypto community has subversively embraced them as a way of tweaking a traditional finance system they view as rigged and rebuilding it in a more transparent fashion. The backers of new cryptocurrencies rely on this complex system of financial incentives to break through the noise to build successful token projects.
The tools that underlie them are also complex, decentralized and unregulated, adding risk along the way. Curve, though ostensibly decentralized, has become a single point of failure with little backup, as the UST episode showed. When stresses hit the crypto ecosystem, the brittleness of a system that’s decentralized in name but centralized in practice suddenly comes to light.
Tomio Geron ( @tomiogeron) is a San Francisco-based reporter covering fintech. He was previously a reporter and editor at The Wall Street Journal, covering venture capital and startups. Before that, he worked as a staff writer at Forbes, covering social media and venture capital, and also edited the Midas List of top tech investors. He has also worked at newspapers covering crime, courts, health and other topics. He can be reached at email@example.com or firstname.lastname@example.org.