Understand the “messy” pool structure of Curve Finance

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2021-04-02 02:42:08

For many users, Curve Finance is a quite complex platform with many pool structures, even looking at it is very frustrating. However, before considering investing in this platform, the first thing to do is to understand the products they are offering, in order to have the closest reviews to their value. For those who are interested in this token, please follow the article below to learn details about Curve Finance.

General description of the product Curve

Curve Finance is an AMM-based trading platform – a model that many people are familiar with with names like Uniswap, SushiSwap. However, Curve Finance is different in that Curve pools will focus on tokens with less volatility, in order to bring the lowest price slippage experience for users.

Note: Price slippage is the price movement between a trader’s expectation and the real price they pay, usually expressed in%.

Benefits of this approach

This option can help users to trade stablecoins at low cost, not through many transaction pairs, but can directly convert between stablecoin – stablecoin.

In addition, the multi-dimensional analysis related to products, teams and competitive advantage has been mentioned by CHK in the article below, interested readers can learn more:

Curve Finance – The unawakened DeFi giant?

In the scope of today’s article, please only go into the pools on Curve Finance, to help readers interested in analytical technical aspects in order to make further assessment of Curve’s potential.

How pools work

Note, the text below has a lot of numbers, should not be read when the mood is upset !!!

Nearly all AMM platforms will be operated under the following formula:

Number of tokens A * Number of tokens B = constant k in the pool

Example: In the pool, there are 10 ETH x 10000 USDT = 100k. I want to put 1k USDT in the pool to buy ETH -> qUSDT = 11000 -> qETH = 100k / 11000 = 9.09 and I took 0.91 ETH from the pool -> 1 ETH was exchanged for 1098 USDT. Before that 10ETH = 10000 USDT -> 1 ETH = 1k USDT.

From the above formula and example we can draw two things:

  • The larger the amount of tokens A and B in the pool, the more Liquidity Providers provide liquidity -> the greater the constant k -> the price volatility because a trade order will be smaller.
  • Looking at the pool simulation curve of Uniswap and Curve, we easily see the stablecoin trading pair – the stablecoin will be exposed to the 1: 1 ratio line. Meanwhile, the curve of Uniswap is very far from this line of 1: 1 ratio. With Curve, when the amount of USDT is higher, the user will have the need to buy USDT, load USDC into the pool to bring the rate back to 1: 1.

What types of pools are there in Curve Finance?

If divided by features, we have the following types of pools:

  • Pool cooperates with Compound (cPools): When you deport money into Compound, users will create wrapped tokens (you can imagine this as a certificate with assets deposited in Compound). With these cToken, users can deposit to the liquidity pool of Curve. So they will have 2 lines of revenue (1) interest from lending on Compound (2) transaction fees for providing liquidity to the pool on Curve.

  • Pool cooperates with Aave: similar to Compound, but the tokens in the pool will be called aToken.

-> The interest of these pools will be reinvested (compound) after each block, or about 15 seconds, or after transaction fees are collected.

  • Pool partnered with yearn: Like pool Compound, but this time the user uses Yearn’s aggregate protocol to optimize interest rates. Instead of continuing to compound to enjoy compound interest like Compound and Aave, Yearn essentially helped find the optimal lending platform, so this is also an option that helps users increase passive income.

  • Pool does not have lending: includes tokens like (renBTC: cross-chain asset form from Ren, sUSD and sBTC: assets issued from collateral on Synthetix platform). Instead of having an interest rate to attract money, this type of pool will have another incentive to pay with the project’s tokens, namely SNX or REN.

If divided by the number of tokens, we have the following forms:

  • 2 tokens (symmetric): this is a traditional pool form and many readers are familiar with this pool type on popular AMMs today.

  • 3 tokens (asymmetric): For example 3pool (with 3 assets: USDT + USDC + DAI). One thing that’s very special is that when users deposit money into the pool, the platform splits these tokens according to their proportions. Specifically, the current rate is 20-50-30 (assumed rate), when dep 1000 USDT (or USDC, DAI), the pool will divide 1000 USDT into 200 USDT – 500 USDC – 300 DAI. So, what is this pool made for? That is to prevent the 1: 1 ratio problem with pools of 2 tokens. Easy to imagine, just with a large enough amount, one can pump a lot of USDT tokens into the pool, to make this ratio no longer at 1: 1, then benefit from the exchange rate difference. In addition, when participating in 3-token pools, users can receive 3pool tokens, thereby continuing to deposit into these 3pool token support pools.

  • 4 token: Currently, the direction for this pool is unknown. But according to the initial prediction, the goal will still be to try to balance the pool, the most perfect is to bring the rate of each token to 25%.

Look at the pool guess

So we go through the basic identification steps, below will be a few examples to make it easier to understand.

This is a form of pool of 4 tokens, not lending but using SNX in addition to CRV to pay reward to create more motivation for users to provide liquidity.

This is a special form of pool that serves the Iron Bank ecosystem of Andre Cronje. The cyToken will have to be locked in a Curve-Yearn hybrid platform.

Once locked into 3pool, the user will receive 3pool token as a certificate to continue to top up the above pool with GUSD.

summary

In general, the incentive mechanism on the Curve is very complicated. However, the platform still attracts a lot of interest and is evidenced by an impressive increase in TVL. But in order to bring products closer to the masses, in my personal opinion, Curve needs to minimize pools, how to still bring the highest incentive, attract the most liquidity, but still easy and convenient. more convenient for users.

So we have taken a look at the pools on Curve Finance, hopefully the above article will be useful and help you to understand more about Curve as well as give your own objective assessment of the real value of product.

Note, the above article is for information only and is not considered investment advice.

CHK aggregated

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