In today's decentralized finance (DeFi) world, Curve, as a liquidity pool platform focused on stablecoin trading, has attracted a large number of investors and liquidity providers. This article will take an in-depth look at how to make money on Curve, and introduce how it works and potential risks.
Basic concepts of Curve
There are six fund pools on Curve, including four stable fund pools and two Bitcoin-pegged token fund pools. The existence of these fund pools makes it easy for anyone to become a liquidity provider and profit from them.
Operation of the capital pool: Curve’s capital pool is mainly composed of tokens pegged to the same price, which minimizes the risk of permanent capital loss faced by liquidity providers. Therefore, liquidity providers do not need to worry about the entry and exit of funds, and there will be no economic burden if stablecoins are kept in the Curve capital pool for a long time.
The income of each fund pool is directly related to the trading volume of the asset. The income of liquidity providers comes from the handling fees charged for each transaction. The larger the transaction volume, the higher the income will naturally be. However, as the size of the pool grows, so does the trading volume required to maintain returns to liquidity providers.
The emergence of yCRV token
With the launch of yEarn, liquidity providers became keen on acquiring yCRV tokens in order to obtain YFI tokens. When liquidity providers provide liquidity to the capital pool, they receive yCRV tokens, which are equivalent to receipts of the liquidity provider's deposits. Liquidity providers can put yCRV tokens into the yEarn protocol to further obtain YFI.
In the early days of yPool's launch, the annualized income once reached more than 1,000%. Although it is difficult to predict the return trend, liquidity providers will be able to make considerable profits if they can enter pools with higher expected returns early. With the distribution of YFI completed, although yPool's income has dropped significantly, there is still the possibility of recovery in future income.
External incentives and revenue mechanisms
In addition to Curve's own revenue mechanism, some fund pools also have additional incentive mechanisms. For example, the sUSD pool and sBTC pool are external incentives provided by Synthetix and Ren protocols.
In the sUSD pool, in addition to earning revenue from transaction fees, liquidity providers can also receive 32,000 SNX weekly rewards by using their LP tokens on Synthetix. The sBTC pool contains three assets: sBTC, RenBTC and WBTC. Users holding LP tokens can receive rewards of 10,000 SNX and 25,000 REN every week.
Issuance of Curve Governance Token
With the upcoming issuance of Curve governance tokens, the community is looking forward to it. According to estimates, the initial valuation at launch will be very high as many believe it will become the most valuable token in DeFi. The total issuance of Curve tokens is 3.03 billion, of which 61% is allocated to liquidity providers, 31% to shareholders, and 3% to employees. 1.3 billion tokens will be issued initially, and 2 million tokens will be issued daily. These tokens will be distributed to past and current liquidity providers, investors, employees, and the Curve DAO reserve vault.
Risks and Disadvantages of Curve
Although Curve offers relatively stable returns, its pool still presents unique risks. Since the Curve fund pool is composed of tokens pegged to the same price, if a token cannot maintain its pegged price, liquidity provider deposits will be affected.
For example, if the U.S. Securities and Exchange Commission (SEC) imposes restrictions on the redemption of USDC, or if hackers attack the Maker protocol and undermine confidence in DAI, these situations may lead to the decoupling of stablecoins. Although the likelihood of these situations occurring is unlikely, as an investor, you still need to remain alert to these potential risks.
in conclusion
All in all, Curve provides liquidity providers with a relatively safe platform with huge profit potential. By understanding how capital pools work, external incentives, and the issuance of governance tokens, liquidity providers can earn considerable profits in this decentralized financial ecosystem. However, investors still need to be cautious when entering and remain alert to potential risks to ensure the safety of their own funds.