The Saga of Curve Finance 2: Curve Ecosystem as a Template for LSDFi
How the ecosystem around Curve has evolved: Curve Wars; L2 Convex; bribes and infrastructure around bribes; protocols to improve yield; comparing the trajectory of the Curve ecosystem with LSDFi.
Disclaimer: The content presented in this article, along with others, is based on opinions developed by the analysts at Dewhales and does not constitute sponsored content. At Dewhales, we firmly adhere to a transparency-first philosophy, making our wallets openly available to the public through our website or DeBank, and our articles serve as vehicles for self-expression, education, and contribution to the ecosystem.
Dewhales Capital does not provide investment advisory services to the public. Any information should not be taken as investment, accounting, tax or legal advice or as a recommendation to purchase, sell or hold or to pursue any investment style or strategy. The accuracy and appropriateness of the information is not guaranteed by Dewhales Capital.
1. Introduction
2. The history of Curve Wars and the process of forming an ecosystem around Curve
3. How the infrastructure around Curve was formed and what it represents
3.1 Curve L2
3.1.1 StakeDAO
3.1.2 Yearn Finance
3.1.3 Convex Finance
3.2 Infrastructure around Curve and Convex for voting and bribes
3.2.1 Bribe.CRV
3.2.2 Votium
3.2.3 Llama Airforce
3.2.4 Pirex
3.3 Optimising Curve and Convex yields
3.3.1 Concentrator
3.3.2 CLever
3.3.3 Warden
3.3.4 Congruent CCRV
3.3.5 Conic Finance
3.3.6 Bent
3.3.7 Badger
4. Conclusion
1. Introduction
Most likely, many of you are aware that Curve is not just a platform for trading stablecoins, but something much greater. But how much greater? And do many users truly grasp that around Curve lies a vast ecosystem? The most pressing question is whether the development scenario of Curve can be replicated, and whether mechanics can be transferred, for instance, in the case of LSDFi Wars, the narrative of which is slowly being propelled by LSDFi projects.
During the peak of activity surrounding Curve in August 2023, the biggest concern within the crypto community was that a drop in the CRV token's value might impact the entire DeFi ecosystem. At present, the situation appears stable, as Michael Egorov has reduced his debt from $110 million to $48 million, and the Health Ratio for current positions lies between 1.8 to 2.2. Hence, the risk of a negative scenario has significantly diminished. However, a question remains open about how problems in one protocol (and furthermore, not even the entire protocol, but the debt positions of one individual) could affect the entire DeFi ecosystem. Thus, Dewhales decided to delve into an exploration of the ecosystem, both built around the Curve protocol and utilizing the Curve token. Spoiler alert: it is indeed a massive realm within the DeFi industry. Moreover, it is intricate, with interconnections among its discrete components, and a complex and dramatic history that unfolded during the Curve Wars while striving for funds and liquidity.
Given that the Curve ecosystem and the number of associated protocols are extensive, this investigation will be divided into several parts.
In the first section, we will examine:
The progression of the Curve Wars.
Key milestones in the development of Curve Finance.
The emergence of L2 Curve - Convex Finance and its functioning.
The ecosystem that formed around Curve and Convex in the battle for CRV, the weight of votes for pool management, and the rewards obtained.
Subsequently, in the following section, we will delve more deeply into other protocols linked to the mechanisms of Curve Finance, as well as those protocols that are dependent on Curve pools in one way or another, addressing topics such as meta-pools, and so on. However, we won't extensively delve into the protocols built around Curve, as the primary objective is the Curve ecosystem itself, rather than each individual project.
2. The History of Curve Wars and the Formation of the Curve Ecosystem
In order to comprehend the emergence of the ecosystem around Curve, it's essential to first understand the conditions that led to its formation. One of the reasons for the proliferation of activity around CRV and the appearance of projects that provided liquidity on Curve, earning CRV, as well as the infrastructure to aid voting through veCRV to attract more veCRV holders and enable further CRV earnings, was the Curve Wars. As mentioned in the previous section, this was one of the driving factors incentivizing the creation of Curve-based pools.
By November 2021, the major protocols that encouraged CRV token holders to lock their $CRV were StakeDAOHQ, ConvexFinance, and YearnFinance. Additionally, as some may have noticed, veCRV holders had the potential to receive substantial rewards in the form of $CVX, $SUSHI, and $SDT. Let's outline how this worked in broad strokes to grasp the incentives that motivated projects vying for liquidity and votes (more detailed processes and projects will be explored in subsequent sections).
To comprehend the overall formation of the ecosystem atop Curve and the triggers for the onset of Curve Wars, it's necessary to delve into the basic mechanics that incentivized the acquisition of CRV and the establishment of a circle of projects around Curve. For users, the process in the base case looked as follows:
Acquire CRV → Lock it in exchange for veCRV → Vote for the distribution of CRV tokens into a specific pool (e.g., one launched on Curve in partnership with the project's token) → Receive even more CRV → Repeat the process.
The only restriction in this case was that the CRV had to be blocked for 4 years to maximise profit. But the limitation was minimised for users (e.g. by Convex), we will look at this in more detail in the research.
For projects/LP, the process looks a little more complicated, but also in a similar way. The point is that in order to create a pool with a gauge so that it can participate in emissions voting, the address that sends the application must have 2500 veCRV. In addition, as we discuss below, liquidity pool owners have the ability to access user votes in veCRV to obtain more votes for directing emissions towards a particular gauge:
As the value of Curve voting rights increased, a competition emerged among Yearn, Convex, and Stake DAO for positions in the pools, the volume of acquired CRV, the weight of votes in veCRV, and for users who also augmented the weight of CRV, liquidity in the pool, and vote influence. While these protocols contested for voting rights and the amount of CRV, both in direct ownership and through vote delegation, the scenarios involving percentage-based tokens quickly took a backseat.
In the summer of 2020, the rise of DeFi 1.0 marked the explosion of decentralized exchanges (DEXes) and the maturation of a space where liquidity provisioning was incentivized by attractive annual percentage yields. The Curve Wars began in 2020 and peaked when Terra USD attempted to outmatch the stablecoin MakerDAO DAI. Certain events in the history of the Curve Wars and the post-war period showcased just how profoundly the entire DeFi industry, including even centralized stablecoins like Tether, relied on Curve's products. Let's explore the evolution of Curve and the Curve Wars:
On November 10, 2019, the technical document for Curve was published, and in January 2020, the protocol was launched without its own token. The DAO technical document introduced a system in which users could lock CRV for different durations to acquire veCRV (voting for CRV). The incentive for users to lock their CRV for veCRV was the potential to boost their future CRV rewards up to 2.5 times.
Despite the unexpected launch, the smart contracts were prepared and properly executed. Curve introduced a user interface, and users began locking CRV as early as August 14, 2020. Although the increase was planned for August 26 or 28, as per Curve's documentation, users locked CRV as soon as possible.On July 17, 2020, Andre Cronje launched Yearn Finance, becoming the first participant in the upcoming Curve Wars.
On August 21, 2020, Stake Capital, the parent company of StakeDAO, which played a significant role in the Curve Wars, published an article explaining the impact of CRV tokenomics and the role of veCRV-weighted voting in attracting liquidity.
Following the conclusion of voting on Wednesday, August 19th, APY spiked on August 20th, 2020. As more people deposited into the Compound pool to seize the extremely high APY, yields began to decrease.
On August 23, Andre Cronje, one of the Yearn inspirations, publicly stated that Curve had been captured by its founders, who held over 71% of the votes, rendering "voting meaningless now."
On August 25, 2020, Cronje proposed a solution that would set the stage for what we now call the Curve Wars. He suggested creating a whitelist enabling project smart contracts to interact with Curve.
On August 29, 2020, Curve altered token distribution, ensuring that no participant held more than 27% of the votes at the time.
Early September 2020 marked the launch of the 3Pool Curve (3CRV), enabling any project to link its tokens with 3Pool Curve (USDC, USDT, and DAI) to benefit from the deep pool liquidity. According to contract address data, 3Pool was launched on September 6, 2020.
Integrating with 3Pool also stabilized token prices; the more stablecoin tokens connected with 3Pool, the less their prices moved during significant transactions. 3Pool itself aided in stabilizing the price of DAI after its launch, and this effect was amplified by USDC and USDT, which were also included in 3Pool.In the fall of 2020, the DeFi narrative continued to escalate, yet Yearn's TVL decreased by over half from its peak of 1 billion dollars. In October, Yearn began discussing a CRV vault strategy to benefit all vaults using Curve, leading to the launch of the Backscratcher Vault.
On November 9, 2020, the Backscratcher Vault (yveCRV vault) was announced in Yearn Finance Bulletin No. 10. On the same day, Yearn's management proposal initiated discussions under the name Establish who votes in Curve DAO on behalf of Yearn.
In January 2021, Yearn partnered with Curve to launch factory pools, allowing projects to add pools to Curve without permission.
On January 21, 2021, StakeDAO (founded by the same Julien Bouteloup who announced the CRV Curve debut) was launched, becoming the second smart contract to be whitelisted in history.
Following the launch of StakeDAO, the early phase of the Curve Wars between Yearn and StakeDAO commenced.
Julien Bouteloup was a member of the core Curve team, so he understood the significance of veCRV tokens. When he launched his project, the Yearn team claimed that StakeDAO was actually a fork of Yearn, a competition started between the two teams.
Between January and March 2021, Yearn and Stake DAO competed directly for CRV deposits.
In April 2021, the third protocol successfully got its smart contracts whitelisted - Convex. The proposal to whitelist Convex on Curve was created on April 23, 2021.
On May 17, 2021, Convex Finance was launched on the mainnet.
Subsequently, Convex began accumulating CRV at a rapid pace, incentivizing users with distributions. Its veCRV assets surpassed StakeDAO's in just two days. It took two weeks for Convex to outdo Yearn in veCRV holdings. As of July 13, 2021, Convex held 61 million CRV locked in veCRV, roughly constituting ~25% of all$veCRV.
Convex rendered it mathematically impossible for any individual or protocol to regain majority control over Curve. Since Convex managed Curve, users holding CVX tokens had control over Curve.
Through generous rewards, Convex encouraged $CRV holders to convert $CRV into $cvxCRV and stake it on Convex Finance. This is a pivotal point in understanding the development process of the Curve Wars since December 2021. Furthermore, after Convex's launch, Curve's Total Value Locked (TVL) began to steadily increase.
The era of competition between Yearn and Convex has begun
Yearn essentially represented a Yield Farming optimization protocol and couldn't incentivize users through its YFI token, whereas Convex offered attractive interest rates for veCRV tokens, as mentioned earlier. Although Yearn provided better yield optimization, liquidity mining rewards allowed Convex to outperform Yearn's yield in many Curve pools.
On August 12, 2021, Cronje introduced a bribery mechanism (bribe.crv.finance), which was arguably the final piece that played a crucial role in the Curve Wars. Bribe.crv further complicated the Curve Wars process, enabling protocols to bribe users for their votes.
On September 7, 2021 - launch of Votium, which acted as an improved analog to Bribe.crv - a platform for CVX bribes.
On October 31, 2021 - a successful vote allocated $1 million worth of FXS for the bi-weekly Convex Gauge-Weight Vote. This moment is important to understand the subsequent large-scale processes that began in December 2021, as it shows that Frax was allocating significant funds to capture votes in Curve.
On November 13, 2021 - at this time, the Llama Airforce multisig contract was created. This protocol allows users to consolidate their votes into a single asset without dilution across different token batches. However,
On December 15, 2021 - the launch of the Redacted Cartel, which we'll discuss more in the "Curve Ecosystem" section, played a significant role in the Curve Wars.
Following this, some sources indicate that a new battle in the Curve Wars began in December 2021 - between Terra and Maker DAO. However, this story was rather short-lived - 4Pool didn't last long, and its liquidity was around 500-800 times smaller than that of 3Pool. Nevertheless, this milestone in Curve's history is interesting for how ecosystem participants interacted with each other.
Terra's stablecoin UST surpassed Maker DAO's stablecoin DAI in December 2021. Subsequently, a Maker DAO co-founder called UST a Ponzi scheme (January 4, 2022). On April 2, 2022, Do Kwon, CEO of Terra, promised to launch a new liquidity pool called 4pool, which excluded DAI. 4Pool consisted of $FRAX/$UST/$USDT/$USDC.
The objective of this move was to move funds out of 3pool, the largest Curve pool, thus depriving Maker DAO of access to liquidity. Ultimately, if Terra's plans succeeded, the DAI stablecoin and its Maker (MKR) token would be impacted. MKR is Maker DAO's governance and utility token; it forms the foundation of the entire Maker DAO DeFi ecosystem. However, these plans did not come to fruition.
As we recall from the text above, the key to controlling Curve lies in owning CRV tokens, which allow voting for desired pools. Additionally, CVX from Convex indirectly enables control over CRV. Thus, to gain more control over Curve, Terra teamed up with Frax and the Redacted Cartel to achieve their goal - to topple DAI and Maker DAO. At that time, Frax was the largest decentralized CVX token holder, and the Redacted Cartel held roughly two-thirds of the CVX owned by Frax. Alongside Terra, these three held around 10% of all CVX locked by votes. Later, BadgerDAO, OlympusDAO, and Tokemak joined, resulting in this group controlling 62% of vlCVX owned by all DAOs.
It's worth noting that MakerDAO has two mechanisms that aid in maintaining stability: PSM (Peg Stability Mode), backed by USDC, and 3Pool, which contains USDT and USDC, indirectly supporting the peg.
Accordingly, the logic of this vampire attack was to use CVX to make 4pool receive more CRV rewards than 3Pool, which were bolstered by additional rewards from Terraform Labs (TFL) and FRAX, the largest providers to Votium at the time.
This was done to encourage whales from 3Pool to switch to 4Pool, which would also decrease DAI liquidity. Additionally, the combined TVL of FRAX/3Crv and UST/3Crv constituted 65% of all pooled TVL with 3Crv, posing a threat to the stability of 3Pool.On January 1, 2022, the UST-3Pool pool was introduced with $422 million in liquidity at launch, far exceeding the later-launched 4Pool's maximum liquidity. The TVL of UST-3Pool remained around $1.3 billion for a long time.
On January 5, 2022, Curve's TVL peaked at $24.29 billion.
On January 12, 2023 - the launch of the Llama Airforce Union, a protocol for compounding bribe rewards for Curve (more on this later).
On January 18, 2022 - the MIM depeg event occurred, after which Curve's TVL gradually decreased.
On January 23, 2022 - a successful vote allocated $10 million in FXS for the bi-weekly Convex Gauge-Weight Vote to bribe for the FRAX3CRV gauge on Votium.
On April 2, 2022 - 4Pool was introduced.
On April 21, 2022 - 4Pool was launched on the Fantom network with a daily yield of around 0.5% (182% APY). Later, 4Pool was launched on other networks, but its liquidity was generally much lower than that of 3Pool. Dune Analytics has a history of 4Pool's existence from May 4, 2022, and during the period when 4Pool maintained a proportional ratio of stablecoins at 25%, its liquidity was $4 million. During the same period, 3Pool's liquidity was $3.19 billion.
Therefore, it's evident that 4Pool couldn't compete with 3Pool.The struggle between 4Pool and 3Pool ultimately ended with the UST depeg on May 7, 2022, after which Curve's TVL dropped from $18.51 billion to $8.77 billion by May 14 and gradually continued to decrease.
Even at its peak on May 9, 2022, 4Pool's balance was $6.954 million, with $4 million in UST. This indicates an imbalance due to users selling too much UST.
On May 11, 2022, the UST-3Pool pool had 664 million UST remaining compared to 30 million 3Pool.
On May 19, 2022 - Pirex by Redacted Cartel is introduced.
As of May 2022, only four smart contracts had been whitelisted: Yearn, StakeDAO, Convex, and Abracadabra. Several other protocols attempted but failed to be whitelisted. Inclusion in the whitelist allows participation in Curve's governance.
Next came the stETH depeg on June 10, 2022, causing Curve's TVL to drop from $8.59 billion to $4.94 billion by June 19.
The next event that shook the entire crypto industry was the FTX crash, causing TVL to drop from $5.91 billion on November 7 to $3.7 billion on November 14, 2022.
In June 2023, due to an imbalance in 3Pool, a USDT depeg event occurred, highlighting the importance of Curve products for the entire DeFi ecosystem. This occurred because traders began selling USDT on Curve, causing the balance of USDT/USDC/DAI stablecoins in 3Pool, which should be 33.33% each, to change to 73.2% USDT and 26.79% for the remaining USDC and DAI on June 15, 2023. The depeg wasn't as significant as with USDC earlier, but it still indicates that 3Pool can influence the price of a "heavy" stablecoin like Tether. A similar event happened in June 2022 when USDT's share reached 83% due to its selling.
3. How the Infrastructure Around Curve Formed and What It Represents
Key Takeaways:
To understand how applicable the Curve Wars scenario is to LSDFi Wars, it's important to grasp the components of the Curve ecosystem. In brief, the ecosystem consists of:
The Curve protocol
Curve-based pools
dApps with their interfaces that utilize their own or other Curve-based pools
Protocols built on top of the Curve protocol, such as Yearn, Convex, StakeDAO
Infrastructure for vote-buying (vote weight)
Protocols increasing CRV yields in various ways and allowing its use as collateral, all tied to Curve
The most crucial element that fueled this system was not merely the CRV token itself, but the function of the token, which involves voting, and votes are the primary power.
In other words, we observe a significant number of elements and branches within this ecosystem. Let's delve further into these ecosystem elements.
3.1 Curve Layer 2
3.1.1 Yearn
Despite being a veteran of the Curve Wars, Yearn lacked the technological and token economic incentives like Convex, which led to its relatively swift surrender to the pressure from Convex, which can now be seen as a form of L2 for Curve.
Nevertheless, Yearn remains an important part of the Curve ecosystem. Yearn is an automated DeFi yield aggregator platform that automatically calculates rewards for users. Without Yearn Finance, investors would need to manually shift their liquidity to the highest-yielding protocol.
Several Yearn vaults provide liquidity to Curve pools and deposit liquidity provider (LP) tokens into corresponding gauges, earning CRV rewards. Yearn locks 10% of all earned CRV rewards in the yveCRV-DAO (known as "Backcratcher") to gain additional CRV. The remaining 90% of earned CRV is swapped for corresponding LP tokens and redeposited into the vault.
For instance, in the case of Lido, the crvSTETH vault of Yearn leverages the Curve liquidity mining program to collect CRV, LDO, and trading fees, selling rewards to subsequently redeposit ETH/stETH into the vault.
The only exception is the yvUSDN3Crv vault, which locks 50% of earned CRV in the Backscratcher vault and swaps the remaining 50%.
Moreover, unlike Convex, Yearn allowed users who deposited stablecoins to earn rewards in wrapped versions of yield-bearing vault tokens (yvTokens). For example, for USDC, users receive yvUSDC. It's important to note that besides Curve, Yearn also supports Balancer.
It's also worth noting that the CRV that Yearn received from Egorov in early August, during the time when Mikhail defended his positions, was placed into the yCRV-CRV LP.
3.1.2 StakeDAO
As mentioned earlier, Stake DAO was a direct competitor to Yearn Finance. Both platforms offered users income from various assets, and both platforms used Curve as the underlying layer for their primary vaults. The emergence of Stake DAO went straight into a battle with Yearn. From January to March 2021, Yearn and Stake DAO directly competed for CRV deposits. Each protocol actively promoted its vaults and lobbied for whale CRV placements on their platforms.
When Yearn introduced the yveCRV/ETH pool in early February, allowing users to exit the backscratcher, it improved the conditions on the Yearn platform and intensified competition with Stake DAO. This allowed users to utilize their funds' liquidity without locking them into this strategy. Despite the ability for users to withdraw their CRV, the TVL of the vault continued to grow because Yearn partnered with SushiSwap to incentivize the yveCRV/ETH pool, creating an enhanced APY that, in turn, increased demand for yveCRV.
This improved design forced Stake DAO to launch a competing solution to maintain competitiveness. In May 2021, the sdveCRV pool was launched on Balancer with a sdveCRV/CRV ratio of 90/10. This encouraged users to stake their CRV while providing some exit liquidity. However, while Yearn actively promoted its accumulation strategy, Stake DAO decided to take a different path.
As we recall, in mid-May 2021, Convex was launched, significantly altering the landscape. Convex took just 2 days to surpass Stake DAO and 14 days to surpass Yearn.
So, instead of using veCRV to expand its own vaults, Stake DAO shifted its focus in the battle on the Curve battlefield and moved its Curve pools to operate on top of Convex. This move allowed them to offer a higher APY than Yearn at the time but also essentially meant that Stake DAO transferred its power to Convex, making it even stronger.
3.1.3 Convex
Before moving on to further explore the Curve ecosystem, let's discuss Convex, often referred to as L2 Curve. Some protocols interact with both Curve and Convex, and Convex itself is closely intertwined with Curve. Convex can be seen as a younger sibling that enables Curve users to access liquidity without limiting it. We'll examine this from both the user's and the project's perspectives.
As of now, according to data from defiwars.xyz, the main holders of veCRV are Convex, Yearn, and Stake DAO, with Convex holding a significantly larger amount of veCRV:
A question may arise: Why do so few projects possess veCRV when Curve serves as the foundation for protocols built on it and was popular during the Curve Wars? The answer lies in the fact that during the Curve Wars era, a significant number of projects indeed relied on Curve. However, currently, many projects are based on Convex, which can be considered a kind of L2 on top of Curve. Moreover, unlike Curve, Convex offers a more user-friendly UI/UX.
To understand this, we need to revisit May 2021 when Yearn, Convex, and StakeDAO vied to accumulate veCRV for governance power and influence over voting. Convex established the cvxCRV pool, offering similar benefits to Yearn's yveCRV but with enhanced reward mechanisms to boost end-user APR. This innovation propelled Convex to an impressive TVL of $6.6 billion within the first three months of launch. Within eight months, in January 2021, the TVL peaked at over $21 billion.
Additionally, the more veCRV you hold, the more rewards you receive from staking pools where you deposit tokens. However, the more you invest in these pools, the more veCRV you need to maximize profits by a factor of 2.5. After locking up user CRV, Convex offers cvxCRV in return, which can be swapped back for CRV, staked to receive Curve rewards, or exchanged for CVX, which can be locked into vlCVX to earn Convex rewards. In essence, Convex's major innovation is providing a liquid version for locked CRV (in the form of veCRV), along with additional incentives encouraging users to lock even more CRV, thereby increasing the collective weight of all Convex veCRV.
And even more CRV means, as we'll reiterate, even more voting power and even more CRV rewards. Greater voting power translates to more CRV rewards by voting on emissions direction.
User Experience:
A user deposits their CRV tokens into Convex.
Convex offers cvxCRV tokens in exchange for CRV and stakes the deposited CRV into veCRV (with veCRV owned by Convex).
Users can then stake their cvxCRV to earn a share of all veCRV rewards earned by Convex and the yields from Curve itself.
Users can also sell their cvxCRV for CRV or other tokens anytime, without worrying about a 4-year lockup. cvxCRV can also be exchanged for CVX, which can be locked in vlCVX.
After accumulating a substantial amount of veCRV, Convex introduced vlCVX, allowing users to manage decisions regarding Convex-controlled veCRV and earn yields from other sources. For instance, through bribes where maximum rewards reached $0.87 per 1 vlCVX on December 28, 2021 (at CVX price of $49.2), and as of late August 2023, it's $0.025 per 1 vlCVX (at CVX price of $2.8).
This collectively forms a mechanism for accumulating more CRV. There's even incentive to acquire CVX, giving holders proxy control over Curve.
Assessment is based on voting 100% of your veCRV for a pool, but it's not obligatory; you can allocate your vote as you wish. For example, splitting your vote by 33% SPELL (MIM), 33% FTM (Phantom-fUSDT), and 33% CREAM (ib ~ Iron Bank).
Moreover, the platform doesn't charge withdrawal fees and minimizes performance fees.
In the end, Convex had drastically changed the game, offering a straightforward strategy to attain precious veCRV. By incentivizing veCRV holders to delegate directly, Convex now controls around 48% of Curve votes in veCRV, even reaching 68% at some point.
Convex also added the FRAX category; just like cvxCRV, users can lock FXS into cvxFXS to get a liquid version of veFXS. The incentive to lock FXS in Convex, rather than FRAX, is that it can be staked for additional CVX rewards. This further solidified Convex's position and attracted more users.
From a project perspective, especially DAOs, CVX was found to be a more advantageous compromise compared to CRV, since it:
Boosts Curve LP: Enables increasing liquidity via Curve gauge voting.
Yields: Offers 4-5% in cvxCRV + potential bribes income if capacity isn't used (or the protocol uses bribes too).
Flexibility: CVX can be fully utilized, with 16 weeks + 3 days (vlCVX) locking period, while CRV requires up to 4 years for full token allocation (1 CRV = veCRV).
As a result, numerous protocols within the Curve ecosystem were, in fact, based on Convex, while still retaining proxy access to veCRV. The list of such protocols is extensive:
Pirex (pxCVX)
CLever (cleCVX)
JPEGd
Redacted Cartel
Mochi Inu
Resrve
kp3r
Bent Finance (bentCVX)
Badger DAO (bveCVX)
Origin
From the perspective of a project dealing with liquidity on Curve, the idea is that the more veCRV they have, the more rewards they can earn, and the more liquidity they can acquire because users are incentivized to provide liquidity to that specific pool. Therefore, the interaction works as follows:
For example, Alchemix wants to obtain more liquidity for their stablecoin alUSD in the alUSD-3 pool. To achieve this, they need to acquire more veCRV to increase CRV emissions towards their pool and boost the incentive for LPs to provide liquidity. However, purchasing CRV to lock up veCRV might be too expensive, so they can obtain proxy control through CVX. The saved funds can also be redirected, for instance, towards liquidity. Or on bribes, which can further improve the liquidity of the pool by attracting even more participants to both vote and provide liquidity. But what makes it so that it is cheaper through CVX than through CRV?
Firstly, Convex naturally holds the highest veCRV volume, giving its votes greater influence.
Secondly, LPs must lock CRV for 4 years to maximize profits, while CVX only requires a 16-week + 3-day lockup.
Thirdly, proxy-voting through CVX is cheaper than through CRV. The parameter “Convex CRV locked per CVX locked” shows that 1 CVX currently controls $5.15 in CRV; given the current CVX price of $2.85, 1 CVX controls 30 CRV.
Moreover, projects not only get cheaper access to strong veCRV voting power but can make it even cheaper and more attractive to users through bribes. By paying CVX holders to vote for the project, this also increases token distribution akin to an airdrop. To understand how beneficial this was for projects: Instead of spending $27 to purchase one CVX for voting, protocols could pay CVX owners $0.40–0.80 per vote. This gave users an APR of 47% according to Llama Airforce data in February 2022 and 25% APR by August 2023.
It was the bribery technology, first introduced for CRV in August 2021 (bribe.crv), and launched for CVX on September 7, 2021, via Votium.app, that significantly boosted the profitability of owning CVX and increased user and project interest in Convex.
3.2 Infrastructure around Curve and Convex for Voting and Bribes
In the previous section, we've already touched upon the topic of bribes and outlined a general understanding of this phenomenon. It can be said that bribes and the development of even more complex mechanics around them became the final note before the collapse of Terra and the beginning of a bear market. Projects allocated significant sums to buy votes and expand their pools, which is clearly visible in the graphs below:
But are these bribes really that complex? And is there any way to scale them in the future, perhaps to LSDFi? Let's examine each of the bribery protocols and their mechanics for that purpose.
3.2.1 Bribe.crv
The first protocol for bribes was Bribe.crv by Andre Cronje, launched in early August 2021. As we mentioned earlier, the essence of bribes (user incentives) is to encourage users to vote for a specific pool by rewarding them directly in the project's tokens if they vote for the desired pool. This allowed veCRV holders to increase their earnings by receiving additional tokens on top of the rewards from Curve itself. Projects also gained a new method of obtaining veCRV voting power and an additional tool to enhance competition.
The issue was that, for instance, in the Curve ecosystem, there existed a FRAX-USDC pool with a veCRV holder providing liquidity to it. Naturally, this holder would always vote for this pool to increase its liquidity and profits. This pattern needed to be disrupted, as it posed a challenge for new protocols. Essentially, the first mover would gain all the votes and liquidity. For new projects, there were only two paths:
Offer their tokens as rewards for incentivization.
Accumulate veCRV, which requires earning more profits.
Both approaches were resource-intensive, and the second method became costlier as the price of CRV increased, further diminishing opportunities for new projects to develop. Therefore, the launch of Bribe.crv provided a significant boost to the further development of the Curve ecosystem and the growth of TVL.
Yearn and Stake DAO had previously demonstrated that, with the right strategy, Curve was ideal for increasing TVL, distributing more income to users, and gaining higher returns. All of this could be achieved without any subsidization by utilizing the protocol's native token. The introduction of the bribery platform reinforced this trend.
Protocols began offering substantial APYs for bribes. For instance, MIM (Abracadabra) offered a 90% APY for votes through its SPELL token, which stacked with CRV rewards from their pool, as of September 2:
But in itself, Bribe.crv had relatively simple mechanics and UI/UX. Nevertheless, it played a significant role in fostering the more extensive development of the Curve Wars and ushering in next-generation bribery protocol projects.
3.2.2 Votium
About a month after the launch of Bribe.crv, on September 7, 2021, a more complex bribery protocol for Convex was launched under the name Votium. It was more intricate than Bribe and garnered more attention due to Convex's attractiveness to both projects and users. Additionally, users could delegate their locked CVX to Votium, enabling users to choose which projects to vote for and what rewards to receive. From the projects' perspective, Votium allowed any project to allocate a budget to support a specific Curve pool.
Through an instant snapshot, users could directly mobilize their voting rights on the chosen Curve pool. At that time, the most lucrative bribes were in SPELL (mim-ust) and FXS (Frax). It was logical to split voting power between them, and considering the token growth during that period, the rewards could be substantially increased:
As we can see, users could earn attractive returns in the moment. This collective effort increased the buzz around bribes. Overall, the development of the bribery infrastructure on Convex became more scalable due to the unique multipliers and the spread of the bribery race to Convex itself:
Rewards from other projects enhanced the appeal of CRV bribes.
Users found it more economical to purchase CVX instead of CRV.
Users could distribute their CVX votes across multiple protocols and balance between reward quantity and token price.
Projects saved on CVX purchases by offering bribes.
Projects could offer more funds in bribes.
The competition between CRV and CVX escalated further.
Another innovation that emerged in the "second tier" of Curve governance with Votium was that DAOs and organizations could not only accumulate CVX but also "rent" votes every two weeks using mechanisms like Votium. For instance, people who didn't want to participate in governance but had locked CVX could delegate their voting rights for a fee and passively receive rewards.
However, Votium had one drawback: fragmented rewards, often costing much less than Ethereum network transaction fees, especially when considering relatively small wallet balances. This led to the anticipation of the creation of the next product - Llama Airforce Union.
3.2.3 Llama Airforce
Llama Airforce marked the next stage of development, working in conjunction with Votium. Aside from joint management of vlCVX, Llama Airforce introduced the ability to compound rewards from bribes. The bribes offered on Votium were quite appealing, even now they enable returns of around 26% annually, with a significant portion attributed to bribes. In Q4 2021, the yield was even higher, nearly over 50% at times. However, autonomous management of one's vlCVX position had certain limitations:
Users incurred considerable gas fees at that time, which were not only required for working with vlCVX but also for collecting bribes.
When delegating votes, rewards were heavily dispersed, and individual rewards could end up significantly cheaper than the gas cost needed for their transfer. Due to this, smaller and medium-sized vlCVX holders preferred to fully concentrate their votes on a single project. Additionally, they needed to vote in each round to accumulate more tokens, making gas fees more economically feasible.
The goal of Llama Airforce was straightforward: to enhance the efficiency of bribes for both users and projects by eliminating these constraints. This was achieved by having users, upon joining the Union (signing a transaction), transfer their vlCVX voting rights and Votium-obtained rewards to the Llama Airforce contract. The Llama protocol automatically aggregated user rewards and credited them back in the chosen token (uCRV, uCVX, uFXS). Furthermore, due to the Rollover feature, unused rewards continued to generate more profits for users.
In each round, the Union handles the collection of all received bribes and sells them for cvxCRV (= exchange/marked reduction in transaction fees).
The acquired cvxCRV is then placed in Pounder, which combines it with Convex and automatically generates income (uCRV).
Another aspect that bolstered economic efficiency was that gas fees were pooled and distributed among all Union users. Additionally, a 2% fee of the total received bribes was charged in each round.
Furthermore, uCRV, uCVX, and uFXS tokens are reward-bearing, meaning they accrue value, and their price increases compared to the native versions of these tokens. This serves as a reminder that everything new has roots in the past, and part of the technologies in modern LSDFi are built upon long-standing foundations.
3.2.4 Pirex
Pirex is a product from Redacted Cartel that can be considered an add-on to Convex. Pirex offers a liquid version of locked CVX - pxCVX similar to how Convex does for Curve with cvxCRV. The profits generated by the bribes are auto-compounded with Llama into pxCVX, which can be put into collateral (via Rari Capital's Fuse) to buy more CVX with borrowed funds and generate even more bribes. The bribery period in this case is 17 weeks.
It looks pretty simple at first glance, but Pirex actually offers 3 strategies:
- Standard mode: the user loads a CVX into Pirex and receives a pxCVX. This is similar to how in Convex the user loads a CRV indefinitely and receives a cvxCRV in return, with the difference that Pirex permanently re-locked CVX into vlCVX until the user wants to unlock it. Every fortnight (one pxCVX epoch), pxCVX owners can claim bribes that Pirex claims, such as from Votium or other sources.
- Easy Mode: A user can lock pxCVX into the ERC-4626 Pounder (Llama Airforce) vault. The user then receives uCVX, which continuously accumulates when Pirex receives bribe rewards.
- Advanced Mode: A user can lock pxCVX in the advanced mode vault and receive spxCVX, whose mechanism is similar to veCRV: the longer the lock period, the greater the voting power. With this mechanism, users can receive future bribes and platforms can "pre-buy'' future votes. Thus, users can bid on their pxCVX, choose how many rounds of calibration votes they want to tokenize, and receive in return spxCVX and Futures Notes for each of the future calibration votes.
3.3 Curve and Convex yield optimization protocols
3.3.1 Concentrator
Concentrator by Aladdin DAO, submitted on 13 April 2022, is similar to the Llama Airforce as it allows users to automatically aggregate yields from Convex positions. However, the key distinction is that it is geared towards liquidity providers rather than token holders. Consequently, the Concentrator offers management of LP Curve for its depositors: rewards (CRV, CVX, and potential other tokens) are automatically converted into cvxCRV and seamlessly staked on Convex via the aCRV wrapper.
Therefore, the service provided by the Concentrator is particularly relevant for small and medium-sized Liquidity Providers seeking to maximize the efficiency of their CRV tokens. Additionally, apart from the convenience it offers, this product also proves beneficial in terms of cost savings during periods of high transaction fees on the Ethereum chain.
3.3.2 CLever
This is another product from Aladdin DAO introduced on April 27, 2022. Unlike Warden, it is not oriented towards LPs but rather targets CVX holders, granting them the ability to take loans against the future yield earned from Convex and Frax positions.
When CVX owners deposit their funds into CLever, their CVX gets locked on Convex and is used for voting on calibration weights and proposals on their behalf. Subsequently, users can take loans of up to 50% of the locked CVX amount in a synthetic token called clevCVX. ClevCVX can be exchanged for regular CVX through two methods (Curve pool and clevCVX Furnace), and the obtained CVX can even be redeposited as additional collateral, increasing the stakes and rewards for users.
Users, however, do not lose their rights to the deposited CVX. It remains locked in vlCVX and earns yields because CLever uses it for voting, and users receive rewards from the voting process. These rewards, if a user has taken a loan, can be used to partially repay the loan, reducing the user's debt.
Additionally, Furnace, which allows the exchange of clevCVX for CVX and vice versa, helps maintain the value of ClevCVX close to that of CVX. This creates arbitrage opportunities whenever the value of 1 clevCVX falls below that of 1 CVX, as well as providing an alternative to the Curve pool for trading.
3.3.3 Warden
Warden is a product from Paladin DAO, which also aimed at Curve liquidity providers, helping them maximize their profits and potentially earn a desired bonus of 2.5 times by borrowing veCRV tokens (provided by others). This bonus is paid directly in CRV. In other words, Warden doesn't directly control veCRV but offers to lease LP Curve boosting power using veCRV owned by other users. Compared to Convex, where most pools could be boosted by 1.5 to 1.7 times thanks to the bulk of veCRV controlled directly by Convex, Warden achieves an increase in rewards of 2 to 2.5 times, both through its own veCRV liquidity provision and by borrowing veCRV from other users via Warden, thus enhancing the liquidity provider's strength.
3.3.4 Congruent CCRV
The CCRV product from Congruent DAO is intriguing due to its rather specific mechanism designed for niche purposes. One of the drawbacks (or conversely, advantages for some) of Convex is that despite deep liquidity in the cvxCRV/CRV Curve pool, it often becomes unbalanced. CvxCRV has liquidity to CRV, but its price ratio to 1:1 is rarely stable, even though cvxCRV is a wrapped version of CRV.
So, the operation principle of Congruent is actually quite straightforward:
Create a token called cCRV backed by 1 cvxCRV. The protocol places all cvxCRV deposited to support cCRV into Convex to generate income.
Create a Curve pool 3CRV: CRV, cvxCRV, and cCRV.
Utilize bribes within the 3CRV pool to help it grow.
CCRV by Congruent can be seen as a project that identified inefficiencies in one of the many pools and started utilizing them with the added benefit of generating income, all implemented through bribery mechanisms. Once again, this is a result of ecosystem development and the proliferation of various mechanisms and protocols within it, giving rise to new products.
3.3.5 Conic Finance
Perhaps one of the youngest protocols built on top of Curve and Convex, Conic Finance, was launched on March 1, 2023. Additionally, they received $1m directly from the founder of Curve, Michael Egorov, as mentioned in their tweet.
Conic Finance offers investors the opportunity to diversify their yield across multiple Curve pools using a single asset. Conic introduces the concept of "omnipools," simplifying the process for Curve LPs, reverting to a primitive level where tokens (e.g., USDC or DAI) are directly deposited. Then Conic's omnipools allocate tokens to various Curve LP positions, which are then placed on Convex.
As a result, depositors receive their yield in CRV, CVX, and CNC tokens from Conic. Similar to CVX, CNC can be "locked" for use cases similar to CVX and Bent:
Participate in bi-weekly voting sessions that determine the allocation of Curve pools to assets available on Conic.
Locking CNC also enables voting for whitelisting and blacklisting of accepted Curve pools (thus granting them access to gauges).
Another parameter that Conic users can vote on is the addition of assets supported by Conic.
Therefore, Conic can also be considered a sort of L3 above CRV and L2 above Convex. If the protocol were able to accumulate a large amount of liquidity, it could become a significant player in the Curve Wars, as voting for control in Conic could lead to significant shifts in liquidity across various Curve pools. This would happen semi-automatically, significantly impacting liquidity management processes through the automation of many actions. Theoretically, Conic's bribery system could breathe new life into the Curve Wars.
Unfortunately, on July 21, the ETH Omnipool on Conic was hacked, resulting in TVL dropping from $156.6 million to $3 million at the current moment, according to DeFiLlama data.
3.3.6 Bent
Bent is yet another good example of how an ecosystem can expand. If projects like Concentrator, Warden, and CLever are aimed at utilizing the effects of core products, and Congruent focuses on exploiting inefficiencies, Bent can be considered a sort of L3 on top of Curve or L2 above Convex. Some even refer to the Bent as a CVX clone.
Here's how Bent operated: LP Curve tokens were placed in Convex from Bent, and users received additional income in BENT tokens in exchange for fees. Just as Convex created its own representation of CRV (cvxCRV), Bent created its representation of CVX, known as BentCVX. BENT can also be locked in weBENT, similar to CVX in vlCVX, but for 8 weeks instead of 16+ weeks, to earn additional income through bribes.
According to the documentation, Bent initially started by supporting pools such as mimCRV, alusdCRV, 3crvCrypto, FraxCRV, cvxcrvCRV. In other words, initially, fairly liquid pools in pairs with CRV were selected.
Every two weeks (Curve's gauge round), weBENT holders voted on Snapshot to distribute their voting rights to gauges of their choice. The votes of weBENT holders are reflected through CVX owned by BentFinance and also reflected in CRV voting from Convex. That is, in fact, it turns out to be even two levels in the governance structure.
3.3.7 Badger
Badger is interesting because it offers something completely different from the other protocols mentioned above. Badger was originally launched as a protocol to optimise farming with BTC on Ethereum at the expense of storage. Badger then worked with Yearn until the advent of Convex. Badger is similar to Pirex in the context that it runs on top of Convex and allows you to block CVX, but beyond that it allows you to block cvxCRV and the difference is that Badger does this by using vaults associated with crvBTC.
In addition, Badger still allows for synthetic BTC but optimises the vault experience for users. For example, users can deposit crvBTC directly into Convex to result in CRV and CVX rewards. Then for example, the user can then stack the resulting CRV and CVX to increase the resulting rewards. And the point of Badger is that it allows you to automate all these actions by doing them instead of the user.
So with the new auxiliary vaults CVX and cvxCRV, Badger automatically takes user rewards from the CRV vaults and places them in the auxiliary vaults, creating a higher base revenue along with additional Badger rewards. And already the auxiliary vaults distribute reward bearing tokens (accumulating value by increasing price) in the form of bcvxCRV and bCVX.
4. Conclusion:
Based on the history of Curve Wars and the sequence of protocol developments, an unexpected insight emerges:
Despite the fact that the core of the ecosystem, responsible for fundamental functionality, was established before the bull run, the most intensive infrastructure development for Wars and the emergence of more sophisticated protocols occurred before the bear market. This suggests that the highest intensity and excitement took place at the peak of ecosystem growth.
Regarding the potential for a Curve Wars scenario in the LSDFi sector, one aspect must be considered: Curve Wars were a battle for liquidity and rewards, involving CRV and CVX to a significant extent. Projects had a direct interest in Wars because Curve, from the user's perspective, offered a low-slippage AMM that allowed projects to provide deeper liquidity. To attain more votes, they incentivized veCRV holders directly and indirectly through Convex. This created a certain synergy and a sort of feedback loop: more veCRV (including via Convex) led to more rewards, more votes, more rewards, more votes…
The key element here is liquidity. Lt is an integral part of any financial system, as inadequate liquidity amidst high demand leads to chaos and pronounced volatility. Certain processes, like token exchange, might become impractical without sufficient liquidity—think stablecoin swapping on Curve. An interesting point arises: the most active players with the largest bribes in Curve Wars were protocols representing stablecoins—Frax, MIM (Abracadabra), and Terra.
Curve also emerged during the inception of a vast DeFi ecosystem, amidst the bear market of 2019-2020 (let's not mention the IDO phase, followed by 2020), when sophisticated protocols were scarce, and AMM DEXs were innovative compared to p2p exchanges like Etherdelta and Idex. Crypto markets had relatively limited liquidity back then. Curve was among the pioneers. This also played a role as a kind of multiplier.
Several LSDFi protocols find themselves in a similar starting position, with some even adopting the Curve bribes model, like Lybra. On the horizon, however, an LSDFi protocol named Prisma Finance emerges. Its stablecoin will be incentivized by Curve and Convex to create an economic feedback loop, allowing users to earn trading fees and rewards in CRV, CVX, and PRISMA, in addition to their Ethereum staking rewards.
During our exploration of the ecosystem built around Curve, we've noticed a significant number of products whose functionality, in theory, could be adapted into LSDFi. Especially now that protocols aiming to enhance the yield of LSDFi protocols are emerging. LSDFi protocols have a distinct evolutionary feature: rewards are distributed not in the native token but in stablecoins backed by LST themselves (as discussed in the article "A Comparative Overview of LST-Backed CDP Stablecoin Protocols"). Drawing parallels based on the Curve ecosystem structure, we can make the following analogies:
veCRV serves as the foundation for the entire ecosystem. In the case of LSDFi, analogs of veCRV could be either the LST tokens themselves (such as stETH, rETH, cbETH, and others), or an analogy can be drawn between LSDFi protocol tokens like LBR, unshETH, PRISMA.
CVX acts as a multiplier wrapper for veCRV. In the future, there might be a protocol that indirectly influences the control of liquidity for LST tokens in LSDFi protocols. It could be these LSDFi protocols themselves, such as LBR, unshETH, PRISMA, or even an enhancement layer over LSDFi protocols, stimulating the competition for LST provisioning to a specific protocol using various incentivization methods.
Bribes - unshETH and Lybra have already proposed bribe mechanisms, and PrismaFi will enable LST providers to stimulate the issuance of the mkUSD stablecoin using their own LST. This sets the stage for competition not among pools as in Curve but among protocols issuing LST tokens for stablecoin emissions and attracting users to lock ETH specifically in their protocol. The management of this will be handled by the second layer, LSDFi protocols.
Efficiency-improving products, similar to Pirex, Warden, CLever, Conic and others, also have a place in the LSDFi space.
As bribes and the battle for LST liquidity in LSDFi scale up, we can expect the emergence of protocols akin to Bribe.crv, Votium, Llama Airforce.
As we have explored the ecosystem around Curve and Convex, a rather remarkable pattern has emerged: the further a protocol is from the baseline (Curve), the lower its TVL. For example, in the case of Bent, the maximum TVL was $64.5m, and currently, according to DefiLlama TVL is $16.3k, according to bentfinance - $159k in the case of liquidity providing in Curve.
In addition, exotic strategies and protocols such as Badger may emerge for LSDFi protocols, which may "glue" one mechanism to some completely different strategy. And it is precisely as DeFi evolves that more and more sophisticated protocols emerge due to the linkability of some protocols and strategies with others.
Furthermore, DAOs might start shifting their focus toward LSDFi and projects in this sphere for treasury accumulation for various purposes. Additionally, the current state of LSDFi can be likened to Curve before the launch of Convex. The emergence of players resembling Yearn, StakeDAO, and Convex and the formation of an active phase of competition for LSDFi are likely ahead. This implies that we need to delve deeper into the Curve ecosystem in the next section to project Curve Wars processes and ecosystem mechanics onto LSDFi and make a more detailed comparison with what LSDFi protocols offer.
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Glossary:
Gauges - Determine where CRV inflation (emissions) will go, this allows veCRV holders to control the direction of liquidity. This is a powerful tool for token holders, including protocols, and it starts what is known as the "curve wars".
Omnipool - a basket of assets (pool), from which these assets are automatically allocated to different pools based on predetermined weights. Or the user can invest some single asset, which will be placed in the form of several other assets in different pools and generate returns from them.
Metapool - is a pool that consists of tokens from a base pool of two assets (e.g. FRAX/USDT, which is called FRAXBP, Frax Base Pool) and a third token that trades relative to the base pool (e.g. LUSD). This results in a LUSD/FRAXBP pool. Such a pool accepts LUSD and LP FRAXBPI tokens, respectively.
yveCRV is a wrapped version of Yearn Finance's CRV that users receive in exchange for their CRV, which is blocked indefinitely on behalf of Yearn.
yCRV - a wrapped version of CRVs.
sdveCRV - the veCRV representation obtained instead of the CRV from StakeDAO.
sdCRV - wrapped version of CRV from StakeDAO.
cvxCRV - wrapped version of CRV from Convex.
uCRV - wrapped CRV from Llama Airforce Union.
pxCVX - CVX tokens locked in Pirex.
vlCVX - Convex governance token received when CVX is locked in Pirex.