During the previous crypto bull market, many new projects emerged with exciting narratives such as DeFi Summer and X to Earn. However, the market frenzy has caused people to become overly fixated on token prices and tokenomics, often disregarding the underlying value and long-term sustainability of these projects, leading to a sense of FOMO. The bearish turn of the market has subsequently exposed the true value of many projects, and once-mighty projects like Terra/Luna and FTX have lost their value. It’s time to take a step back, reflect, and focus on the true reasons behind the success and sustainability of those projects that have truly succeeded.

As highlighted in the insightful article “Vitalik Buterin: We must go beyond the concept of tokenomics,”a successful and sustainable project needs to have multiple aspects and not be limited to tokenomics alone. This is because the current crypto market is no longer just a competition of tokenomics, but has evolved into a comprehensive power game, including the aspects of “business, incentives, and governance”.

As more and more projects look to crack the code for success in the Web3.0 world, Curve’s impressive growth journey offers valuable insights and inspiration for others in the space. In this article, we aim to do two things. First, we’ll take a closer look at Curve’s evolution by breaking it down into different stages (as shown in the table below) to gain a more comprehensive and systematic understanding of its development trajectory and road to success. Note that we refer to each stage as “CurveX.0,” with “Curve VX.0” denoting the functional versions of the protocol, such as Curve V1.0.

Second, we’ll explore the key measures and important facts that underlie Curve’s development. While these may be overlooked or not mentioned in other articles, they form the foundation for Curve’s sustainability and success. By identifying the common principles and strategies that have driven Curve’s growth, we hope to provide useful guidance and references for other projects looking to succeed in the competitive world of Web 3.0.

Before we dive in, however, we want to make a special statement. The content and opinions expressed in this article are not intended to promote Curve protocol or any other related protocol. Rather, this article is solely for exploration purposes and should not be construed as investment advice.

Curve 1.0: Achieving Product-Market Fit and Starting the First Growth Phase (November 2019-July 2020)

The background of Curve’s emergence: The Expansion of Stable coins and High Trading Costs in CEX and DEX

During the rise of the cryptocurrency market in 2019, the DeFi ecosystem emerged and brought with it a significant increase in stablecoins such as $USDT and $DAI, as well as other pegged assets like $wBTC and $renBTC. For instance, the trading volume of stablecoins surged by 229%, from $24 billion in Q1 2019 to $79 billion in Q3 2019. This rise in demand led to the development of a new market segment centered around these assets.

However, issuers of stablecoins and other pegged assets faced a significant challenge — ensuring that their asset prices remained close to their pegged values while maintaining deep liquidity with low slippage at the pegged price points. This challenge was compounded by the high transaction fees and significant slippage associated with using mainstream CEX or DEX platforms to trade these assets.

For instance, Uniswap V1, which was popular at the time, mostly contained liquidity pools consisting of $ETH. As a result, users needed to carry out two transactions and pay transaction fees twice when trading a stablecoin pair on the platform. With stablecoin trades often involving large volumes, users were particularly sensitive to trading costs. Consequently, issuers started seeking out better trading solutions to address these issues.

Business Mechanism: A Unique Stablecoin Automated Market Maker (AMM) That Addresses Market Pain Points

Curve’s innovative AMM trading mechanism has been a game-changer for the crypto market, especially for stablecoins and other pegged assets. In November 2019, Michael Egorov, the protocol’s founder, released the “StableSwap” whitepaper with a unique solution, and in January 2020, the V1 version of the product was officially launched.

The StableSwap mechanism is based on a combination of constant sum（x+y=const) and constant product functions (Uniswap xy=const), creating a flat curve near the balance point of the curve to maintain price stability and a more tilted curve on both ends to provide liquidity at every point on the curve.

This mechanism has allowed Curve to optimize its design and achieve low slippage, low transaction fees, and low impermanent loss risk. This has made it possible for the protocol to meet the high-volume trading demands of stablecoins. Compared to mainstream constant-product AMMs like Uniswap, Curve has outperformed with impressive results. For instance, when converting $DAI to $USDC, Uniswap had a slippage of around 0.80%, while Curve’s slippage was only 0.06%.

Protocol Launch Without Token Issuance: Validating Product-Market Fit

Curve protocol didn’t issue tokens during the launch, which was not exactly what people had in mind, and its governance remained centralized. However, this didn’t hinder its growth as it leveraged successful partnerships with other protocols to achieve natural growth.

During its early stages, Curve protocol’s collaboration with decentralized exchange (DEX) aggregators, such as 1inch.exchange, played a critical role in attracting early adopters. By integrating with prominent platforms like dYdX, Compound, and Aave, Curve not only facilitated convenient trading for its users but also provided them with significant rewards. Furthermore, Curve partnered with Synthetix and Ren to launch new liquidity incentive pools, providing liquidity incentives for trading pegged assets like $sBTC, $renBTC, and $wBTC. These partnerships proved fruitful as they helped attract more users and led to a steady increase in Curve’s trading volume.

In just half a year since its launch until July 30, 2020, Curve managed to accumulate over 8,000 users and a total trading volume of $1.5 billion. Its trading volume in the first half of the year ranked among the top four in DEX, validating its product-market fit and providing a solid foundation for the platform to attract more users and increase revenue steadily.

Curve 1.0 Review and Insights: Product-Market Fit is the Primary Aspect for Success in Web 3.0 Protocols

Tokenomics design has long been considered a cure-all for Web3.0 protocols, as evidenced by the popularity of Curve’s veToken model, which has been praised for contributing to Curve’s success. However, successful projects like Uniswap and Curve did not even launch with tokens.** It’s crucial to keep in mind that tokenomics should not be the sole focus when it comes to building Web3.0 protocols. The key to success lies in achieving product-market fit (PMF).**

While tokenomics is an important aspect of protocol design and can attract users and incentivize community building, tokenomics design without PMF support, regardless of how perfect it is, is unlikely to generate enough market demand and users to make the project successful. Jesse Walden, former Managing Partner at Andreessen Horowitz, emphasized that the only thing that matters in the early stages of building Web3.0 protocols is Product-Market Fit.

Issuing tokens too early can have negative consequences and offer no benefits. (Note: This discussion does not apply to protocols like Bitcoin and Ethereum, which require a token to function.) Research has found that issuing tokens too early can undermine users’ intrinsic motivation, causing them to focus on benefits and overlook the product’s value and user experience.

So, how can we achieve Product-Market Fit? To achieve Product-Market Fit in Web3.0, we must first identify market opportunities or pain points. This entails diving deep into your target audience, understanding their preferences and needs, and identifying gaps in the market. Next, consider the business: how to build a product that meets the market’s needs. Pay attention to details to ensure that the product can address the pain points in the market and satisfy users’ genuine needs. Finally, verify PMF by focusing on user satisfaction, retention rates, and revenue to confirm whether the protocol can achieve natural growth without relying on tokenomics incentives. It is worth noting that in the Curve 1.0 phase, the protocol was technically decentralized, but it was still relatively centralized in terms of economics and governance. (Note: the “Product” in Product-Market Fit in Web3.0 refers to the “protocol”.)

Curve 2.0: Advancing Decentralization and Fostering a Thriving Ecosystem (August 2020-December 2021)

Unveiling Tokens and Pioneering the veToken Mechanism to Propel Economic Decentralization and Establish Long-Term Consensus

After confirming PMF and achieving organic growth, Curve protocol launched its $CRV token in August 2020 and introduced the pioneering veToken mechanism. The term “veToken” is an abbreviation for “Voting Escrow Token,” which is a voting governance mechanism that enables users to lock their protocol tokens in a smart contract called the “Voting Lock Contract” to obtain a certain number of veTokens, representing the protocol’s governance voting rights. The veToken model is designed to encourage users to hold onto their tokens for the long haul, thereby fostering greater alignment and consistency among participants. This approach improves token supply and demand dynamics, while providing a sustainable governance foundation for the protocol.

— Token Issuance and Distribution: Maintaining Balanced Incentives to Drive Economic Decentralization

With a maximum supply of 3.03 billion, the initial issuance of 1.3 billion tokens (43% of total issuance) was allocated to early liquidity providers, teams and investors, employees, and the community reserve. However, the remaining 57% will be gradually unlocked to incentivize future liquidity providers, with no fixed unlocking schedule until the issuance limit is reached.

Taking a closer look at the distribution of tokens, the design of the protocol considers not only the early contributors but also the future participants. This approach helps to encourage greater participation and drives protocol’s development. As time goes on, the token distribution becomes increasingly decentralized, which in turn prevents economic power from being concentrated in the hands of a select few. This is an essential step towards advancing the decentralization of the economy.

In order to ensure the trading platform has adequate liquidity, Curve protocol has allocated a significant proportion of the $CRV supply as rewards to liquidity providers, with 62% of the token supply being reserved for this purpose. By offering both $CRV rewards and a 50% share of trading fees, Curve incentivizes liquidity providers to increase liquidity, thus reducing trading slippage, attracting more participants, and driving trading volume growth.

— Token Value Capture: Fostering “Long-Term Consensus” and Laying the Foundation for Decentralized Governance

The Curve protocol’s veToken mechanism is a unique model that necessitates locking a specific amount of $CRV tokens in the Curve DAO for a set period to receive $veCRV. The $CRV/$veCRV serves as an effective value capture mechanism for the Curve protocol, as it facilitates the proportional distribution of trading fees generated by the Curve platform to $veCRV holders (refer to point 3 in the subsequent five rights section), signifying that the token’s value surges as the protocol grows in success. More on the five rights held by $veCRV holders in the following section.

In the Curve protocol, $veCRV tokens come with a handful of advantages for their holders.

1. The first and most critical right is the ability to participate in governance voting regarding the reward distribution weights among liquidity pools in Curve. As such, veCRV holders can have a say in how much $CRV emission rewards each pool receives.

2. Secondly, veCRV holders can also engage in other governance voting activities, such as submitting proposals and voting on proposals related to modifying protocol parameters and adding liquidity pools, among others.

3. Then, apart from governance voting rights, veCRV holders can earn a share of the platform’s trading fees based on their holdings. This share amounts to 50% of the total fees, and it is distributed via 3CRV tokens. Notably, 3CRV is the liquidity pool token of stablecoin exchange pool 3POOL and can be exchanged 1:1 for other stablecoins. 3POOL comprises $DAI, $USDC, and $USDT.

4. Furthermore, veCRV holders can also boost liquidity providers’ market-making returns by locking up $CRV. This move increases the $CRV rewards that LP providers receive for staking LP in Curve pools, up to a maximum of 2.5 times. The number of $CRV required to boost returns depends on the Curve pool in question and the amount of LP. For more information, please check out the link.

5. Finally, locking $CRV in the Curve DAO for a longer period of time brings more benefits to users, as they can earn more $veCRV and corresponding rights. The mechanism is subject to specific rules as follows:

   — The amount of $veCRV tokens a user receives increases as they lock up $CRV for a longer period. For instance, locking up 1 $CRV token for 4 years earns the user 1 $veCRV, while locking up for just 1 year only yields 0.25 $veCRV tokens. The lock-up period can not exceed 4 years.

   — The corresponding $veCRV will decay linearly as the locked $CRV approaches its expiration date. If a user locks up one $CRV token for 4 years, their initial 1 $veCRV will decay to 0.75 after one year.

— Users who lock up $CRV to obtain $veCRV must commit to holding $CRV for the long term, as the process is irreversible. Moreover, during the lock-up period, $veCRV is non-transferable, meaning users cannot transfer their $veCRV to other addresses.

The Curve protocol’s veToken mechanism incentivizes long-term token holding to promote the protocol’s success and establish consensus among token holders. This consensus not only increases the tokens’ value but also sets the foundation for decentralized governance of the protocol. The model ensures fairness and transparency in the governance process, and it’s based on the equal rights and participation of token holders. It’s important to note that “decentralized governance” used in the article is not limited to a narrow definition of direct, first-level governance. Instead, it refers to a broader concept that includes multi-level and multi-type governance structures, as well as various paradigms.

The issuance of the $CRV token and the implementation of the innovative veToken model have propelled Curve’s Total Value Locked (TVL) and trading volume to new heights. From August 2020 to February 2021, the TVL of the protocol surged from $136.96 million to $3.8 billion, and the cumulative trading volume surged from $12.15 billion to $129.46 billion. Despite the high incentives for liquidity providers leading to high inflation of $CRV, which might dilute the interests of token holders, Curve’s rapid business growth has helped to steadily increase the amount of $CRV locked, reducing the circulating supply of newly issued tokens, and stabilizing the price of $CRV.

Fostering a Thriving Ecosystem through Economic Decentralization and Transitioning towards Decentralized Governance

The consistent surge in Curve’s total value locked and trading volume, along with the diverse advantages that the veToken model offers to $veCRV holders, has raised awareness among stakeholders that owning $veCRV, especially with the governance voting authority that accompanies $CRV rewards allocation, could potentially yield higher liquidity and returns for their own ventures, playing a significant role in the success of their projects. This has resulted in Curve War, with $CRV/$veCRV becoming the focal point of attention for all parties involved.

Representative projects such as Convex, Votium, yBribe, Redacted, and others have recently emerged to vie for governance rights in the Curve ecosystem. These projects have been successful in incentivizing more people to participate in governance by improving the actual returns of governance voting power and promoting decentralized governance. In this article, we’ll focus on the key events and representative projects that occurred during the Curve 2.0 stage. It’s important to note that the Curve ecosystem is constantly evolving and includes many other projects. For those seeking more information about the ecosystem, the Curve ecosystem chart and related explanations created by 區塊先生 Mr.Block in November 2022 provide a useful resource.

Yearn versus Convex: The War for Curve Governance Voting Rights

Curve’s rise as a top income-generator for yield aggregators like Yearn and Harvest Finance has been nothing short of impressive, and it’s not difficult to understand why. The stable earning potential, high capital capacity, and robust security features of Curve make it a prime destination for aggregators looking to help users maximize their returns. By pooling crypto assets into Curve, these yield aggregators are able to tap into economies of scale and provide greater earning potential for their users. However, it’s important to note that the possession of sufficient $veCRV tokens can grant one control over Curve’s governance voting rights, which in turn enhances rewards distribution and income. As a result, we’ve seen a surge in yield aggregators competing for Curve’s governance voting rights, all in an effort to provide even higher returns for their users and expand their businesses.

— Yearn’s $CRV Accumulation Poses a Threat to Curve Protocol Governance

In the early days of $CRV, Yearn Finance employed various tactics to accumulate large amounts of $CRV tokens, seeking to increase returns and influence Curve’s decision-making process. Among these tactics was the introduction of the Backscratcher vault, which pooled assets from liquidity providers and $CRV holders and deposited them into Curve to boost yields. In addition, Yearn launched the $yveCRV/$ETH liquidity pool on Sushiswap, which enabled $CRV holders to enjoy $veCRV benefits without the restrictions of $veCRV lockups. Working alongside SushiSwap, Yearn was able to increase liquidity for the $yveCRV/$ETH pool, which in turn raised the demand for $yveCRV.

However, in the early stages of token issuance, with limited circulation and insufficient distribution, Yearn’s significant holdings of $CRV resulted in governance concentration, which could have a detrimental impact on the future development of the Curve protocol.

— Convex’s Control of Curve Voting Rights: Advancing Decentralized Governance and Liquidity Aggregation

Convex’s emergence as a major player in accumulating $CRV/$veCRV disrupted Yearn’s dominant position. As a yield aggregator based on Curve, Convex’s primary objective is to maximize returns for Curve liquidity providers and $CRV holders. Shortly after its launch, Convex outpaced its competitors and amassed more $CRV than any other yield aggregator. This success can be attributed to Convex’s unique protocol token $CVX, which features a distinctive token incentive mechanism and an equitable distribution for the community.

The issuance of $CVX is linked to the amount of $CRV earned by Convex on Curve. The total supply cap is set at 100 million tokens, with 10% reserved for the Convex team, 3.3% allocated to investors, and the remaining 86.7% designated for community rewards. In terms of governance, Convex employs the veToken voting mechanism, and $CVX holders must lock their tokens for at least 16 weeks to acquire $vlCVX, which represents governance voting rights. Due to its extensive holdings of $veCRV tokens and inclusion in the Curve governance whitelist, Convex can partake in Curve’s voting process and pass governance voting power onto $vlCVX holders.

Convex’s $CVX token mechanism has proven to be a successful strategy in attracting Curve liquidity providers and $CRV holders, as well as competing yield aggregators like Yearn and Stakedao, to invest in its platform. As of January 2022, Convex has amassed nearly half of the total $veCRV supply, which gives it significant influence over the distribution of $CRV rewards. Despite concerns about the centralization of Curve governance due to Convex’s substantial holdings of $CRV, in reality, Convex’s tokenomics model promotes decentralization of Convex both economically and in governance aspects.* **Control of voting rights by Convex has become another effective way to encourage Curve governance decentralization while ensuring the overall benefits of the Curve protocol.*****The competition for governance rights between Convex, Yearn, and other protocols has created a massive buzz, drawing even more liquidity to Curve. **Ultimately, Convex succeeded in gaining control of Curve’s governance voting rights, driving the formation of a liquidity ecosystem around Curve.

Stablecoin Protocols Join the War for Governance Voting Power

Stablecoin issuers, as well as those who deal in pegged assets like Frax and Lido, are in need of substantial liquidity to facilitate the trading and exchange of their issued assets. When compared to other centralized exchanges (CEX) and decentralized exchanges (DEX) such as Uniswap, Curve’s benefits are manifold — low slippage, nominal fees, and the capability to secure vast amounts of liquidity with $CRV rewards. Additionally, there are low barriers to entry with no need for permission and a high degree of composability.

As a result, stablecoin and pegged asset issuers opted to establish their liquidity pools on Curve to acquire more liquidity and attract more participants. This led to an upsurge in demand for Curve voting rights. Holding a considerable amount of voting rights is crucial to enter the core liquidity pool of Curve, which is obtained through community voting. As the total circulation of $CRV rises, this threshold is bound to increase as well. Once successfully entering the pool, issuers must acquire more voting rights to vie for better liquidity depth.

The advent of stablecoin and pegged asset projects has triggered a liquidity war in the Curve ecosystem, driving up the demand for Curve governance voting rights.

Bribery Platforms Empower Retail Investors and Accelerate Decentralized Governance

Since the inception of $CRV, Curve’s voting power has been instrumental in the success of many projects, including yield aggregators and stablecoin issuers. Nonetheless, the lack of direct incentives for individual voters with voting power to participate in large numbers, coupled with project teams’ need for sufficient voting power to influence $CRV rewards distribution, has created a market challenge. This challenge led to the emergence of bribery platforms like Votium and Bribe.crv.finance in August 2021.

These platforms encourage CRV holders with voting power to provide their votes in exchange for financial incentives, thereby promoting their participation in protocol governance. This approach ensures that the direction of the protocol and reward distribution is not dictated by a small group of large holders, promoting governance decentralization. Furthermore, it enhances the governance utility of $CRV/$veCRV and increases the tokens’ demand. Additionally, stablecoin projects can access liquidity at a reduced cost, enhancing the Curve ecosystem’s appeal but increasing competition among projects.

The proliferation of bribery platforms has given project teams more ways to obtain liquidity, escalating the liquidity war.

Redacted Enhances Voting Rewards to Maximize Decentralized Governance

The rise of bribery platforms has certainly incentivized more people to participate in Curve governance, but it also raises concerns of potential unfairness and lack of transparency, which could lead to malicious voting and improper behavior. To tackle this issue, Redacted, a fork of Olympus DAO, emerged in December 2021, with a focus on providing governance services for the Curve ecosystem, thus offering a potential solution to these challenges.

Redacted has attracted a large number of participants by issuing protocol $BTRFLY tokens as incentives, which has enabled it to obtain a significant amount of Curve voting power. Its first product, Hidden Hand, is a platform in which users delegate their voting power to Hidden Hand, which then sells these voting rights to external protocols that require them. The bribery rewards of these external protocols are then redistributed to users, the protocol treasury, and $BTRFLY stakers. Hidden Hand is responsible for all voting processes and maximizing revenue.

Redacted’s emergence has not only increased the benefits of holding Curve voting power, but also incentivized more people to participate in Curve protocol governance, further advancing decentralization. However, effective decentralized governance is not a one-size-fits-all solution. Different projects need to choose governance methods and mechanisms that suit their own needs and situations. Curve’s decentralized governance is just one example of this, and this article does not intend to take Curve’s governance paradigm as an industry benchmark, but rather to provide specific cases to deepen readers’ understanding of the practice and application of decentralized governance. When evaluating decentralized governance, it can be analyzed and evaluated from five dimensions: governance processes and mechanisms, degree of decentralization, community participation and governance efficiency, transparency and security, and innovation and sustainability.

Curve 2.0 Review and Insights: Decentralized Economy and Governance Driving Ecosystem Growth

In the fast-changing landscape of the cryptocurrency industry, Curve has been a standout performer. Its monthly trading volume has exceeded $6 billion since March 2021, largely due to the soaring trend of the crypto market and the record-high market capitalization of digital assets at that time. Curve 2.0, a critical milestone in the development of the Curve protocol, demonstrates how decentralized economics and governance can foster self-organization and growth in the Web3.0 environment, and promote network effects.

The unique $CRV and veToken model of the Curve protocol closely connects multiple stakeholders, such as token holders, liquidity providers, and protocol developers, to achieve a more fair distribution of benefits and promote decentralization. By establishing long-term “consensus,” only participants who hold tokens for a long time have governance voting rights, which helps decentralize governance. This approach encourages numerous stakeholders to actively participate in the Curve ecosystem, collaborate rationally, and inject strong momentum into ecosystem construction. As the Curve ecosystem thrives, liquidity and market trading volume continue to rise, reciprocally stimulating and forming a positive feedback loop. This loop further promotes the efficiency and scale growth of the entire ecosystem, and network effects begin to emerge.

In the era of Web3.0, the importance of ecosystem to a protocol cannot be overstated. A thriving ecosystem can attract more users and capital liquidity, enhance the protocol’s market share and competitiveness, provide more functions and application scenarios, create a better user experience for participants, bring more opportunities for innovation and growth, and further strengthen the protocol’s competitive advantage. Decentralization in economics and governance is considered the foundation and critical means for promoting a rich ecosystem and enhancing protocol value.

However, when building a healthy and sustainable ecosystem, we must also pay attention to its positive externality. Tokemak, a liquidity management protocol that emerged in 2021, attempted to learn from the Curve ecosystem to build a liquidity management market. However, it was difficult to maintain this model in the long run because its business model was limited to the purchase and distribution of liquidity, without generating cash flow from trading activities. We must recognize that** relying solely on decentralized designs of technology, economics, and governance to attract ecosystem participants is not enough. Without continuous value creation, the ecosystem will not be able to sustain itself in the long term.**

Curve 3.0: Enters a New Growth Phase: Confronting New Competitions and Challenges (June 2021-Present)

Curve has achieved significant milestones in its growth trajectory by successfully implementing network effects through its token and veToken model. However, the protocol still faces numerous challenges and uncertainties that need to be addressed to ensure sustained growth.

Intense DeFi Competition: Curve Confronts Challenges from Homogeneous and Heterogeneous Competitors

The DEFI space is highly competitive, and Curve’s revenue growth is at risk due to competition from rivals offering similar services and striving to capture market share through technological innovations. Uniswap, for instance, launched the V3 version of its protocol in May 2021, which introduced a concentrated liquidity algorithm mechanism to improve capital utilization efficiency for stablecoin liquidity providers, reduce transaction fees and slippage for traders, and thereby challenge Curve’s dominance in the stablecoin trading market. The chart below compares the stablecoin trading volumes of Curve and Uniswap, demonstrating Uniswap’s growing market share in stablecoin trading volume since the launch of V3.

Furthermore, Curve faces competition from non-homogeneous players who are expanding their product and service lines to appeal to a broader user base and generate more business revenue. Aave, a lending protocol, plans to introduce its native stablecoin, while stablecoin issuer Frax has launched a trading and lending platform to enhance its full-stack DEFI business and attract more user funds. The TVL trend chart below shows that Curve has lost its once-dominant position to Aave, and the gap between Curve and Frax is gradually narrowing.

The Sustainability Challenge of Curve’s Tokenomics: Diminishing Marginal Returns and Bubble Risks

Curve’s tokenomics have indeed done a commendable job of drawing liquidity and fueling ecosystem growth. However, the question of long-term sustainability still lingers. Despite the fact that incentives have boosted liquidity, data indicates that Curve’s capital utilization efficiency (trading volume/total locked value) is comparatively low. As such, when liquidity hits a specific critical point, the impact of rising protocol trading volume and business revenue begins to considerably diminish, a phenomenon commonly known as “diminishing marginal returns.” This implies that** high inflation cannot always translate to an increase in trading volume, and it is crucial to take the diminishing marginal benefits seriously.**

It is even more critical to note that persisting with high inflation incentives after reaching the critical point of liquidity might cause token overvaluation and bubble formation, stalling the protocol’s future development. Specifically, there are three key points: 1) some participants may get excessively optimistic about the protocol due to high liquidity incentivized by high inflation, which results in token overvaluation. However, high inflation does not correspondingly increase trading volume, thereby creating bubbles; 2) excessive token supply growth can compromise the protocol’s future value. Should the token supply expand too fast and surpass the actual demand, the bubble in token price might burst, causing a decline in token value and undermining the future value of the protocol. 3) High inflation might lead to increased entry costs for new users into the protocol, who must purchase more tokens to receive the same rewards amount. This may cause new users to miss out on opportunities to participate in the ecosystem’s growth, limiting the potential for ecosystem expansion.

Therefore, instead of relying solely on high inflation to stimulate liquidity, the protocol should concentrate on boosting trading volume. Curve may have realized the significance of trading volume and value creation, particularly in the face of competitive pressure, bubble formation, and suspicions of being a Ponzi scheme, and is consequently embarking on a new growth phase. This exploration involves two business directions: 1) expanding “volatile asset” trading business and 2) launching its own stablecoin.

Curve Launches V2, Expands Trading Pairs, Competes for Income from Volatility Assets

In the ever-evolving world of DeFi, innovation and adaptation are key to staying competitive. In May 2021, Uniswap V3 made its debut and, following suit, Curve launched its V2 version a month later. With this technological upgrade, Curve expanded its business scope beyond stablecoins and pegged assets, venturing into the trading of “volatile assets”.

The V2 curve, represented by the orange line, sits between the constant product curve (dashed line) and the V1 curve (blue line), gradually converging towards the constant product curve towards the tail end. This breakthrough not only retains the benefits of low slippage and high liquidity in the V1 curve’s smooth region but also overcomes the shortcomings of inadequate liquidity and delayed price change response at the tail end. Additionally, V2 introduced an internal oracle EMA mechanism that mitigates external risks, enhances liquidity concentration, and reduces impermanent loss. These dynamic features have significantly enhanced Curve’s capital efficiency.

Since its launch, Uniswap V3 has undoubtedly attracted a portion of the stablecoin trading volume. However, Curve V2 has also started to capture trading volume for volatile assets, thus expanding its user base. At present, tricrypto2 ($USDT/$WBTC/$ETH) is the largest liquidity pool for Curve V2 on Ethereum, with a daily trading volume of up to $66 million. Despite the competition, there hasn’t been a significant change in the gap between Uniswap V3 and Curve V2 in terms of market share. Check out the chart below for more details.

Curve Unveils Plan to Issue Own Stablecoins, Aims to Diversify Revenue Sources

In May 2022, the crypto market was rattled by the sudden collapse of the stablecoin $UST, which sent shockwaves throughout the industry and impacted similar assets. Even Curve’s stablecoin trading business was not immune to the fallout. In the face of this challenge, Curve responded by announcing its plan to launch Curve overcollateralized stablecoins in June of that year, followed by a white paper release in November. This strategic move aimed to not only create new revenue streams for the Curve protocol but also attract more liquidity and boost the value of $CRV.

To achieve these objectives, Curve has proposed an innovative Lending-Liquidating AMM Algorithm (LLAMMA) and PegKeeper in the white paper. LLAMMA represents a new liquidation mechanism that employs continuous liquidation and deleveraging via AMM algorithms to mitigate bad debt risks and user losses. Meanwhile, PegKeeper will be used to maintain the anchor value of the protocol’s stablecoins.

The release of the Curve stablecoin white paper has been met with optimism in the market, as reflected in the recent sharp rise in the price of $CRV. This release has reignited the confidence of the market and created high expectations for Curve’s future business expansion. However, we must wait until the launch of Curve’s stablecoins to assess their actual performance.

Curve 3.0 Review and Insights: Continuous Value Creation is the Core Objective of Web3.0 Projects

The Web3.0 field is still in its early stages of development, but it’s changing rapidly with an external environment that’s always evolving. Competition in the DEX space, in particular, is incredibly intense. While network effects play an important role, Web3.0 is markedly different from the monopolistic features of Web2.0. Decentralization, openness, and interoperability are key characteristics that define the former. Additionally, token incentives, community-driven initiatives, and innovative technology all play significant roles in driving Web3.0’s development. These features also make it easier for users to migrate quickly between different protocols and DApps, which leads to even more intense competition.

In today’s fierce competition, Web3.0 protocols must remain committed to the pursuit of continuous value creation, instead of solely focusing on the escalation of token prices. This will ensure the sustainable growth of protocols over the long haul. It is significant for protocols to establish reliable mechanisms to prevent shortsighted behavior from impeding the growth of the ecosystem. According to Eddy Lazzarin, the CTO of a16zcrypto, token design should be called as protocol design, which is a really early field. This is because “token design” which is part of the protocol design is only one of the auxiliary means for the protocol to create value, and the real value comes from “Protocol design” which includes various elements such as the logic of business construction, token incentive mechanisms, and community governance strategies.

Examining Curve as a case in point, the protocol has been relentless in its pursuit of product innovation, token design, and ecosystem development, all aimed at fostering sustainable growth through constant renewal. Nevertheless, it is crucial to guard against the formation of bubbles resulting from excessive incentives, which have the potential to raise questions about Ponzi and impede the protocol’s progress. Incentive mechanisms, when thoughtfully designed and utilized, can effectively drive business growth; however, if misused, they may only lead to superficial buzz and the sale of unproven promises, without creating any tangible value.

Designing a token-based economic system is no easy feat, especially in today’s rapidly evolving landscape. In fact, such systems represent a complex open game system, one that is on par with Nobel Prize-level research. Therefore, we must consider design from the perspectives of token dynamics and token engineering to ensure the protocol’s long-term viability. Additionally, in order to optimize the design process, we can leverage Agent-Based simulation technology, enabling us to gain deeper insights and refine the protocol design, ultimately strengthening its inherent competitiveness.

Conclusion

This piece of writing provides a comprehensive analysis of the evolution of the Curve protocol, highlighting the patterns and experiences that can be applied to successful Web3.0 projects.

The ultimate goal of Web3.0 projects is to continuously create value, which can only be achieved by attaining Product-Market Fit (PMF) early on. A well-designed tokenomics model can raise startup capital and incentivize active user participation, but project teams need to be cautious not to overuse tokenomics, which could lead to bubbles and threaten the protocol’s sustainability. Therefore, project teams need to ensure that tokenomics provides strong support for the protocol’s long-term and stable development, rather than becoming an obstacle on the road to success.

In the Web3.0 ecosystem, the transition from a centralized team to a decentralized community is crucial. During this process, it is important for the protocol to ensure technical decentralization and prevent the emergence of centralized nodes or institutions. Token issuance and distribution should also aim to achieve economic decentralization and avoid excessive concentration. Decentralized governance should be empowered as much as possible, allowing the community to participate in the protocol’s governance process.

However, in the rapidly evolving landscape of Web3.0, the cryptocurrency market experiences tumultuous ups and downs, with unpredictable transitions between bull and bear markets. Yet, while the Web3.0 arena remains in its infancy, users are prone to churn and competition is fierce. Therefore, protocols must focus on sustainable success, rather than short-lived achievements. Sustainable success is a newfangled proposition for Web3.0 protocols, and it requires continuous exploration and innovation.

For instance, in the pursuit of sustained success, should the protocol governance be completely decentralized, or should the core team’s role and influence be appropriately retained based on decentralization? Is it reasonable and necessary to strive for the perfect decentralized governance? These are some of the critical questions that require thorough discussion and reflection.

How can we overcome the challenges posed by the high level of “uncertainty” both internally and externally when dealing with protocols? Although it is impossible to eliminate uncertainty entirely, we can iteratively optimize protocols by utilizing the right tools. Unfortunately, there are currently no tools on the market that are user-friendly, visually intuitive, and both scalable and adaptable to handle complex systems for aiding in protocol design. The highly customizable and expandable cadCAD lacks user-friendliness and intuitiveness, while Machination is not designed for Agent-Based modeling, making it unsuitable for complex situations. Some new entrants have emerged, such as the startup HoloBit which is reportedly the first no-code, visual, Agent-Based modeling and simulation platform aimed at protocol design and optimization. The platform has not yet officially launched, but it is worth keeping an eye on.

To succeed in Web3.0 projects, achieving PMF, establishing appropriate incentive mechanisms, transitioning to decentralization, and being able to adapt to changes are key. Although there is no universal method that applies to all Web3.0 projects, the patterns and experiences outlined in this article can provide valuable insights and suggestions for the creation of healthier and more sustainable protocols.

This article was written by 0xjereme