The DeFi market boasts an increasing number of yield-generating applications that enable digital asset holders to earn investment income for participating in a DeFi protocol.
In this guide, you will learn about Curve Finance and how you can earn investment income on this popular new platform.
What Is Curve Finance?
Curve Finance is a decentralized exchange (DEX) designed specifically for stablecoins that enables users to earn trading fees for providing liquidity and receive governance tokens as an incentive to interact with the protocol.
Launched in January 2020, Curve Finance’s liquidity pool is structured in a way to make trading more efficient, and, in this way, users can make cheaper trades.
Additionally, Curve Finance has its own token, called the Curve DAO token (CRV), which has been listed since August 14, 2020.
How Does Curve Finance Work?
Most decentralized exchanges are costly for stablecoin exchanges because they typically don’t offer stablecoin-to-stablecoin trading pairs.
On Uniswap, for example, you would have to trade your stablecoin for ETH first, and that incurs a fee. Then, to get the stablecoin you want, you have to make another trade, which will also cost you a fee. In effect, you end up paying two fees when you only wanted to make one trade.
Curve enables the same trade but gives users the power to do direct swaps, token for token. With the middle-trade eliminated, users can exchange tokens for a trading fee of only 0.04%. By removing the obstacle of heavy fees, Curve Finance opens the way for users to make more trades in order to tweak their liquidity portfolio to their liking.
Curve also has an algorithm that minimizes slippage, as opposed to maximizing liquidity. While this may seem like a risky trade-off, for the average trader, it means that they can both make more trades and pay less for each one.
To accomplish this feat, Curve deploys the automated market maker (AMM) protocol. AMMs use mathematical formulas to set prices. They calculate rates for each pair based on the attributes of each token.
In this way, AMMs, like Curve, are much like market makers in the stock market. However, unlike market makers down on Wall Street, they don’t manage buy and sell orders. The transaction is processed using a smart contract, so there are no individuals in-between two traders buying and selling tokens.
How to Use Curve Finance to Earn Investment Income
Curve provides an on-chain liquidity pool that allows a user to deposit tokens in order to become a liquidity provider. Once you deposit tokens in a Curve liquidity pool, you start to earn trading fees.
Additionally, you can earn Curve’s governance token, CRV.
To generate CRV, you have to deposit and stake digital assets on Curve Finance’s platform. As your staked digital assets sit in the liquidity pool, you get rewarded with $CRV.
The amount you earn is dependent on how much you stake, in comparison with the total amount that other users have put in. Your earnings are also dependent on the trading fees generated on Curve’s platform. The more trades made, the more gets dispersed to investors staking on the platform.
For example, if someone were to stake an amount large enough to account for 1% of all funds staked on the platform, they would earn 1% of the trading fees generated on Curve.
In addition to earning staking income, $CRV holders also get to take part in the DAO governance system. The amount of voting power you have depends on the length of time you hold your $CRV. The longer you hold the token, the more voting power in DAO you get.
How to Get Started with Curve
To swap one stablecoin for another the steps are fairly straightforward.
- First, you go to Curve.fi and select your wallet.
2. Sign in to your wallet.
3. Sign in to your account.
4. Choose the pair you want to swap, and enter the amount.
5. Then, exchange the two tokens. That’s it!
How to Stake and Earn with Curve
To get started with staking and earning Curve tokens, you need to follow these steps:
1. Go to curve.fi, log in to your wallet and click on ‘DAO,’ which is next to ‘Home’ at the top of the page.
2. Enter the amount you want to lock in and the lock time, then select Create lock. You can see how the amount you have locked in is divided up according to the ratios represented in the pie chart towards the top of the page.
3. You can then scroll down to see how your funds have been divided up, according to each token’s relative weight.
And that’s it! You will now start earning $CRV tokens.
To stay up-to-date with the latest trends and developments in the world of DeFi and the broader digital asset markets, subscribe to Bitcoin Market Journal.