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The cryptocurrency market is gaining more and more interest over time and, as a result, more people are considering a professional career in this field. One of the technologies that make the crypto world work is Curve Finance. But what exactly does it consist of? How is it used and what does it offer that makes it so appealing to DeFi users?
In this post, we will answer these questions and help you decide if decentralised finance is a field you are interested in exploring academically. If it is, then a Master in Financial Management at Universidad Europea could be a great option for you.
Curve Finance is a decentralised finance (DeFi) protocol that enables the decentralised exchange (DEX) of stablecoins within Ethereum. Ethereum is, in turn, a programme specifically designed to facilitate an efficient exchange between cryptocurrencies of the same value. In addition, it brings high annual interest returns on cryptocurrency funds deposited with Curve Finance.
The project was launched in 2020 and since then it has become one of the most important DeFi exchange protocols. But… what is DeFi?
DeFi is short for decentralised finance, and is a financial ecosystem built on blockchain technology. Its main characteristic is that the users themselves are the ones who exchange (buy and sell) assets and financial services among themselves, without intermediaries, as a financing or investment mechanism.
Curve Finance uses the AMM protocol to facilitate transactions. AMMs, or Automated Market Makers, employ algorithms to efficiently quote tradable assets into liquidity pools. This technology works based on two components:
These components create a mechanism that makes it very easy to trade stablecoins while also giving investors a way to earn money from their investments. All thanks to the commissions generated by the operations carried out in these liquidity funds.
The system is similar to Uniswap or other DEX protocols that make use of liquidity pools. However, the main difference is in how the prices work here and the impact that this protocol has on the profits of the investors. Curve Finance makes use of a different economic invariant than that used in other AMMs, known as the StableSwap invariant. This bases its operation on a weighted system of curves, prices and dynamic slippage.
The StableSwap system is designed to offer the best price, lowest losses and lowest possible trading fees without giving up profits for your investors. This feature has made Curve a favorite for stablecoin traders and liquidity providers who want minimal slippage. Keep in mind that slippage refers to the difference between the expected price of a trade and the price at which it is actually executed, and it is a recurring source of losses in certain exchanges.
Another point in favour of this DeFi protocol is that it allows you to offer a higher profit margin in the long term, and even reduce the risks of impermanent losses to a minimum, something that other projects such as Uniswap or Compound cannot offer. And what are impermanent losses? A type of loss that occurs when there is a change in the ratio of the money a liquidity provider initially invests in an AMM, such as Uniswap, and the amount of money you receive when you withdraw your investment from the project.
In short, Curve Finance offers users a new cheaper, safer and more direct token exchange alternative. Instead of exchanging Token A for ETH, and then ETH for Token B, Curve Finance eliminates high transaction fees and processes the exchange of Token A for Token B directly in a single transaction.