Quietly Conquering DeFi: Yield Farming on the Curve

The two protocols are undeniably competing on some level, but their combined presence seems to grow the Curve pie as a whole.

Yearn is likely one of the largest depositors in certain convex strategies, with $724 million deposited in Convex’s sETH strategy and $586 million deposited in the usdn3crv strategy.

While Convex supporters have been pitching that the protocol now owns a much larger portion of veCRV than Yearn does, Yearn developer @bantg suggests that Yearn’s responsibility for a large portion of Convex’s CRV holdings and total value locked, or TVL, makes simple metrics less valuable for comparing the two products.

Over time, Yearn and Convex appear to be symbiotic and a net positive for each other. Clearer, however, is the positive effect they both have on Curve and CRV.

Decentralized finance (DeFi) systems and their related returns have a reputation for being dangerous, unsustainable, and even Ponzi-like in traditional finance and the larger crypto market.

Where does the yield come from, and how is it 100 times greater than the yields available on bonds, CDs, and savings accounts?

Several protocols-built peer-to-peer lending, trading, and insurance protocols that allow smaller users to take the position of a middleman such as a bank, exchange, or insurance business.

DeFi protocols have been liberal in giving away their "governance tokens" in addition to offering minimal trading and lending costs. These native tokens often have rights to a tiny part of the protocol's revenues, similar to how a firm may pay dividends to shareholders.

Furthermore, several of the most well-known protocols have given token holders a portion of the influence over the project's future ambitions, updates, and services.

Curve DAO and its native token CRV are instances of this governance paradigm, with the token playing an important part in the protocol and the DeFi universe.

Curve had been largely overlooked until recently, despite its critical significance in DeFi across blockchains.

Due to recent changes in tokenomics, the native token, CRV, has turned net deflationary; as a result, the price has increased by 122 percent since the token became deflationary. It's almost necessary to grasp Curve's inner workings to comprehend DeFi yields. So, what exactly does Curve accomplish, and how does it go about doing it?

The curve is a decentralized exchange that specializes in pegged asset swaps such as fiat-pegged stable coins and assets that trade at a 1:1 ratio. Curve's largest pool, 3pool, has approximately $3 billion in deposits and includes DAI, USDC, and USDT.

Because Curve utilizes its native currency to reward liquidity providers instead of increasing exchange costs, stable coin pools have gained popularity by delivering high liquidity and cheap fees (0.004%).

To determine their voting weight, CRV holders can "stake" their tokens on the platform and lock them in for periods ranging from one week to four years. Stakers are awarded a modified quantity of vote-escrowed Curve based on the amount of Curve locked and the duration of time locked (veCRV).

By allocating weight to the "pool gauge" consistent with their financial interests, veCRV holders may vote on how CRV awards are divided throughout Curve's pools.

A gauge is a tool for determining which reward pool is the most heavily weighted, and it is voted on fortnightly through Snapshot. As a result, a scheme to bribe veCRV owners into voting in favor of certain gauge weightings has emerged.

Abracadabra, for example, pays veCRV holders monthly bribes in their native token to enhance the return on their decentralized stable coins, hence promoting demand for their product.

In the last two weeks alone, Abracadabra has paid the equivalent of $1.9 million to veCRV holders willing to vote for its stablecoin pool, providing their pool 32.5 percent of the relative gauge weight.

Swap fees reward holders of veCRV a part of the protocol's earnings. "A community-led proposal included a 50% admin fee on all trading costs," according to Curve's materials.

These fees are collected and used to purchase 3CRV, the TriPool's LP token, which is subsequently distributed to holders of veCRV." Even with inflation, the dynamic features of veCRV have kept demand for CRV high, matching the need for optimal yield and low-fee swaps.

However, due to the loss of early user benefits, the emission timetable has slowed, as seen below. The demand for locking CRV has risen as well, making the asset "deflationary" on the whole.

The CRV coin and ecosystem's dynamic features have made it an appealing building component for various other DeFi projects, including Yearn and Convex. The two initiatives may be seen as "yield optimizers," since they rotate assets amongst Curve pools and simplify the process of spending the CRV token effectively.

Users can deposit Curve liquidity positions (LPs) or CRV into their vaults, which then harvest benefits by compounding the LP position and reinvesting in CRV to maximize returns.

Yearn sprang from the "DeFi summer" and soon accumulated significant veCRV ownership, controlling about 10% of the supply when Convex was introduced. Convex, on the other hand, was able to absorb nearly 35% of the veCRV supply in just a few months.

On certain levels, the two procedures are competitors, yet their combined existence appears to enlarge the Curve pie as a whole. In fact, with $724 million put in Covex's sETH strategy and $586 million invested in the usdn3crv strategy, Yearn is likely one of the greatest depositors in some Convex strategies.

While proponents of Convex claim that the protocol currently controls a significantly higher share of veCRV than Yearn, Yearn creator @bantg claims that Yearn's ownership of a substantial chunk of Convex's CRV holdings and total value locked, or TVL, makes basic metrics less useful for comparing the two systems.

Yearn and Convex appear to be symbiotic and mutually beneficial over time. However, the favorable impact they both have on Curve and CRV is more obvious.