May 23, 2022
Dopex Essentials: What is Curve Finance and what does Dopex have to do with it?Dopex-EssentialsDopex-Papers
“Curve IRO this, Curve IRO that, can someone for the love of Nu just tell me what Curve is?”
Say less, my beautiful students, allow I, Nutoro, esteemed Chief Education Officer of so-called “Dopex”, to give a whirlwind tour of the intricacies of Curve Finance.
What is Curve Finance?
Curve Finance is an automated market maker (AMM) that specializes in swapping pegged assets (think USDT = USDC = FRAX = USD) at high volume for low slippage. It has consistently been one of the DeFi projects with the highest TVL (according to DefiLlama) due largely to its unique tokenomics to incentivize liquidity providers (LPs).
Incredible. Tell me more about Curve’s tokenomics you cheeky man!
Say no more, my pretty beans.
With such a high TVL, what in Nu’s name sets Curve apart from other AMMs and allows it to attract LPs? The answer to this, of course, is emissions!
Curve has an emission schedule to reward LPs for their liquidity. Every week, roughly 1.8m $CRV is emitted and paid to LPs. This serves a similar role as liquidity mining by boosting actual APY received by LPs and incentivizes TVL that is sticky.
Wow, emissions! Who chooses which pool gets these so-called “$CRV” emissions?
Incredible question, my clever little reader.
The $CRV token can be locked as veCRV to give the token voting rights. veCRV can be locked for up to 4 years to boost voting power. The longer the lock, the greater the voting power. For reference, a single $CRV locked for 4 years gives 1 veCRV whilst it only gives 0.25 veCRV if locked for 1 year.
veCRV voting power is central to how Curve operates. Each Curve pool has something called a “gauge weight”, which is essentially the proportion of total veCRV votes which are directed to that pool. The proportion of total veCRV allocating their votes to a pool determine the proportion of emissions that that pool will receive - if a pool has 10% of veCRV votes, they will receive 10% of total $CRV emissions.
Higher $CRV emissions translates into a higher APY for those specific pools. This high APY is used to attract liquidity who aim to earn these emissions by LPing. Typically, this means that pools with the highest veCRV votes will have the highest APY and thus the highest TVL (note that as TVL increases, APY will be diluted). Deep liquidity is essential for a stablecoin in maintaining peg as it allows holders to swap between USD-pegged assets with ease.
Revolutionary. But high emissions? Tokenomics bad, $CRV bad.
Oh you sweet thing.
For a retail investor, dilutive tokenomics and an obscure 4-year lock mechanism does make buying $CRV a daunting decision. However, for larger investors that actually use the platform, the system works as intended.
From the above discussion, you will note that the recipients of $CRV emissions are LPs themselves - those that actually bring liquidity to the platform and allow it to properly operate. Once received, they can sell their $CRV to realize their boosted APY. However, if instead they choose to lock it, they can create a so-called “flywheel effect”.
LPs that choose to lock rather than sell are able to direct additional veCRV voting power to their pool of choice. Since they are already LPing in those pools, they benefit from even more $CRV emissions since that pool now has more veCRV allocated to its gauge weight. This incentivizes LPs to lock rather than sell, ultimately decreasing supply of the token and offsetting emissions (to an extent).
Wowee, very good, very cool. Now what does this have to do with Dopex?
In DeFi, liquidity is king which makes Curve the king of kings, as they say.
Whilst the boosted APY from Curve emissions is good for LPs, there are clearly a lot of factors that play into what the final APY an LP will actually receive. Dopex’s Curve Interest Rate Options (IRO) changes this.
IROs allow users to write and buy both calls and puts on Curve APYs. For hedgers, this allows them to match their LP amount with a put option to receive a fixed APY they are happy with. It also opens up opportunities for additional speculation and strategic vote allocation which is covered in our retail explainer.
As Curve grows, the utility of IROs will also grow. As the only protocol that currently has IROs, this will allow Dopex to capture a vast share of the interest rate options market.
Let’s pump those numbers up, $DPX holders!
Give model to see APY immediately sir.
“Ask and ye shall receive” said the good book.
There are 5 main variables that determine APY to an LP in a pool:
- Total $CRV emissions
- Proportion of veCRV votes allocated to pool
- Price of $CRV
- TVL in pool
- Trading volume in the pool (variable APY)
The Most Esteemed has provided an excellent spreadsheet where you can input the above variables to project APY. Please make a copy and change the highlighted boxes to your deepest darkest desires.
This model excludes variable APY since this changes based on trading activity. In addition, since the other variables are also constantly changing, use this as a very rough guide.
Your honor, this was NOT financial advice.
Edgar Allen Poe? More like Edgar Allen Go and write the most brilliant poem of your life! What a fine mastery of the English language.
Until next time my loyal students.
CEO (Chief Education Officer)
Dopex is a decentralized options protocol that aims to maximize liquidity, minimize losses for option writers and maximize gains for option buyers — all in a passive manner.
Dopex uses option pools to allow anyone to earn a yield passively. Offering value to both option sellers and buyers by ensuring fair and optimized option prices across all strike prices and expiries. This is thanks to our own innovative and state-of-the-art option pricing model that replicates volatility smiles.
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