Curve Finance
Is a dapp or decentralized application in which you can interact with using a tool like Metamask. Curve Finance, is what we called AMM(Automated Market Maker) which is a fancy way of saying, it is a tool that allows traders to make trade using pools of money. Instead of trying to connect a buyer and seller.
The word "curve finance" refers to a sort of financing that involves curves.
Curve Finance is a low-cost and low-slippage market maker method for switching between stablecoins. Anyone can contribute their assets to a variety of liquidity pools and collect fees by using this decentralised liquid aggregator.
Instead of using an order book, AMMs use a price algorithm. Curve's pricing model makes it an excellent tool for trading between tokens with similar but disparate prices.
As a result, stablecoins and tokenized versions of a coin can be easily swapped. The Curve Token Swap Platform is one of the finest ways to exchange between several different tokenized Bitcoin kinds, such as WBTC, renBTC, and sBTC.
Yearn Finance's yUSDT, yUSDC, and yTUSD, as well as Curve Finance's yDAI and yTUSD, support yield-bearing tokens like yDAI and yTUSD. The Curve pool's swap/gas fees, as well as the yield from the underlying yield-bearing tokens, are distributed among participants in this pool.
Separate loan pools for DeFi protocols that pay a greater interest rate to liquidity providers are possible, while the platform as a whole provides pools for liquidity providers to split exchange fees. The CRV coin is utilised in the Curve DAO to handle voting rights, bringing the Curve DAO closer to decentralised government.
What exactly is an Automated Market Maker (AMM) and how does it function?
Automated market makers (AMMs) use a mathematical formula to price assets on a decentralised exchange (DEX). Pricing algorithms take the place of order books for calculating asset prices. Instead of buyers and sellers, liquidity pools can be used to exchange digital assets.
To put it another way, AMMs are peer-to-contract (P2C) networks in which users and contracts trade directly. Smart contracts, which encrypt digital tokens, are used to construct liquidity pools. Liquidity pools are funded by users, and the pool's pricing are regulated by a formula. Liquidity pools are optimised as a result of modifying the formula.
In short AMM is a tool that connects investors with traders. Traders get a swap their tokens for the other tokens but they do have to pay a small fee. Well, Investors can earn that fee but to do so they have to lend out their crypto. Without AMM we would have to use the order book method that wall street uses this is where we directly connect a buyer and seller. AMMs are much more efficient and so fast because they are basically immediate and they don't require anyone to match with. So they are great in the DeFi world.
For example, let's say you have some USDC and you wanted to trade it for AVAX how would you do it? Well, you go to the decentralised exchange that allows you to almost instantly, cheaply and without asking you for the any ID to trade your USDC for Avax.
So Curve Finance started as a stablecoin, only decentralized exchange and they actually initially called themselves stable swap and this allowed traders to swap their USDC, Tether, Die tokens without much slippage. It is actually optimized specifically for stablecoins to reduce this slippage.
Now if you don't know what is slippage is, to understand how it works we have to first understand how AMMs work. So basically you go to an AMM and you say I have this much USDC but I want Tether. How much Tether can you give me. Since USDC and Tether are both stablecoins and their price is $1. They should be the same amount of tokens but sometimes Tether is more rare in the pool than USDC and because it's more rare so it will cost you more to buy it.
Now this might be confusing but the idea is you may have $10,000USDC tokens and AMM may only give you $9,800 Tether tokens. Meaning you lost $200 to slippage. Because the AMM thought that the $9,800 was a fair price using its algorithm.
So Curve Finance started off as a way for people to pool large amount of stablecoins together so that they could avoid their slippage. However as time went on and investors loved the idea so the Curve Finance started adding other tokens. This gave the way for investors to earn even more money by proving their tokens as a capital to the curve's pool of money.
How can we earn that money?
We we have to go over two more terms Yield Farming and Impermanent Loss.
Yield Farming
Is the action of investing your crypto into something, hoping for a decent return.
Impermanent Loss
In short when you provide liquidity to curves pool as an investor and the tokens that you invested, change prices the value of those coins changes in comparison to what you would have had as if you had initially just held them instead of investing.
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For example, instead of yield farming your five dollars of Avax if the price goes up you would have made more money. The price difference of the assets, you are investing in the greater impermanent loss. Right now yield farmers collect the fees that traders pay to swap their tokens on Curve Finance. One time it added upto a decent amount. As you can see below the fee APY is around 8.94%. Now this does change throughout. Depending on how many tokens are in the pool, the price of the tokens, how many people are trading and what the fee schedule is.
However, Yield Farmers have a unique opportunity on Curve Finance to earn an extra incentive. Officially Curve is operational on Avalanche network.
Final Thought
Finally, Because it prioritises stability and composability over volatility and speculation, Curve is one of DeFi's most popular platforms. Curve's key justification for staying is because no other DeFi protocol is as tightly linked to the entire DeFi ecosystem as Curve. Money legos are Avalanche-based DeFi apps and protocols that are plug-and-play compatible.