Ethereum keeps hosting more DeFi and some projects have been a worthwhile investment. This is precisely why you may have this question in mind: “Is CRV token a good investment?” Well, we are about to find out if, in this article, whether the CRV token is among the winners or not.
How about a little background story? CRV is the native token for Curve Finance, which also serves as an engine for the popular yield accumulator Yearn Finance. The Curve Finance protocol is the creation of Michael Egorov, a crypto veteran, and a physicist. In his search for a decentralized exchange, Egorov decided to create a new DEX after being left unimpressed by the ones in the market. With this came the idea of StableSwap that will later be released as Curve Finance.
Half a billion daily trading volume… And the day didn't end yet! pic.twitter.com/V3LszMH1Lk
— Curve Finance (@CurveFinance) January 2, 2021
A Brief Introduction to Curve Finance
Curve finance serves as a liquidity accumulator or, in other words, it rewards users for providing liquidity to the market. The Curve Finance protocol took off on the Ethereum platform in January 2020. Since then it has blossomed into a top Ethereum-based DeFi protocol, which allows users to farm yields and get interesting ROIs. The decentralized exchange enables the trading of altcoins and has quickly turn out to be among the biggest DeFi protocol we have in the market.
At launch, the Curve Finance protocol was not decentralized. Instead, it was run by a team of 5, headed by Curve Finance’s founder Egorov. The team operated from their base in Switzerland working on solving any legal or technical bottlenecks and improving the protocol. A hint was dropped in May 2020 about the introduction of the protocol native token CRV that will also serve as its governance token. This was a step necessary for full decentralization of the Curve Finance protocol. Finally, CRV was released on 13 August to the crypto community.
The Mechanism of the Curve Finance Swap Protocol
With the focus on stable coins in the DeFi market, swap protocols are trying to fill the gap by providing a means of exchange for stablecoins. The rise of yield farming has seen this demand go up further. Curve Finance allows you to trade stablecoins directly at lower fees compared to other swap protocol like Uniswap. On Uniswap, to exchange a stable coin for another, you will need to first convert to ETH then buy the target stable coin leading to double charges in transaction fees. That is not the case with Curve Finance as you can directly swap these stable coins eliminating the double charges on the transaction. Curve Finance is an Automated Market Maker and relies on liquidity providers to provide the funds needed for the DEX to thrive. In return, it rewards the liquidity providers.
How to Earn From the Liquidity Pool
We talked about liquidity providers providing funds and these funds are added into the liquidity pool in the form of acceptable tokens recorded in smart contracts. Now there are various means of rewarding the providers on the Curve Finance protocol. The first way to earn is through trading fees, where liquidity providers get a percentage of the transaction fees every time there is a stablecoin exchange on the protocol. All the known liquidity pools get a percentage of the transaction fees so you are not left out no matter which pool you deposit your funds.
The second way is through interest, which is available on certain pools in the form of interest earned from lending out stablecoin. The third way is incentives, which are the rewards offered by certain liquidity pools. Finally, we have bonuses, which reward you with a bonus for providing liquidity to pools with low funds. The same thing goes for withdrawing your deposit from an overpopulated liquidity pool.
Let’s follow a simple explanation of what earning from the liquidity pool looks like. Imagine we have two liquidity pools of BUSD and sBTC of the same amount of tokens in the tune of 500. Once trading commences between the two tokens, the liquidity providers start earning interest on trading fees. Now if the user swaps 50 sBTC for 50 BUSD, the pool balance changes and we now have 550 sBTC and 450 BUSD. Further exchanges along this same line will create a lopsided liquidity pool, which is not ideal as the pool must maintain equilibrium. Thus, a reward in the form of incentives is written into a smart contract to motivate the users to buy more BUSD to increase the supply of sBTC and get back to equilibrium.
The number of liquidity pools on Curve Finance stands at seven now. The founder has indicated more will come over time. We have PAX, BUSD, Compound, and Y liquidity pools which are under lending platforms. That means contributing to these pools earns you interest on lending as well as trading fees. We have another two called sBTC and sUSD that provides incentives to liquidity providers. Then the tokenized BTC pool is called ren. Irrespective of the liquidity pool you deposit, earning interest from transaction fees is constant.
The CRV Token – Power and Potential
Since Curve Finance is an Ethereum-based DeFi protocol, expectedly its native coin is an ERC-20 token. The CRV is the governance token in the protocol ecosystem and it allows holders to make key decisions concerning the protocol. Token holders can vote when they lock their token and they can make decisions on token burning schedules, changing current transaction fee structure, etc. The longer you lock your CRV token, the more voting power you acquire. The highest duration for locking your token is four years and that gives you 2.5 times voting power.
With a minimum of 2500 locked tokens, you have the power to forward a proposal to the governance forum, and a minimum of 33% of the currently locked token have to vote for the proposal consideration. The voting threshold is 50%, which means for an affirmative decision on the proposal, it must gather over 50% vote.
The mystery that surrounds the launch of the CRV token gave it an aura of immense potential. The token was released all of a sudden on 13 of August by a user that goes by 0xc4ad on Twitter. This user pre-mined more than 80000 tokens that sold for 3.1 ETH, which is about $1.275 taking the CRV market capitalization to an astonishing level of $3.8T at that time. As the total supply of CRV increased, the price gradually stabilized. Now the total supply sits at around 3 billion with 151 million of the tokens going to the early liquidity provider before the token was launched as per the amount of liquidity supplied. The Curve Finance DAO reserves will take another 151 million tokens.
Around 1.86 billion tokens are available to present and future liquidity providers on the swap protocol. There are plenty of CRV token rewards to go around for investors on the platform.
Investing in CRV – Is It a Worthy Investment?
For a coin ranking 113 on Coinmarketcap, CRV has been making waves since it was launched. This is mostly due to the fact that the Curve Finance protocol was already gaining ground in the DeFi market before the token was released. CRV has performed considerably well in general. The price has currently settled at around $0.615668 as of December 8, 2020, and in the last seven days, the price has reached as high as $0.834309.
The DeFi hype has also played a good part in keeping Curve Finance around investors’ view, the introduction of curve DAO and token CRV has ensured extra profits for the protocol users and investors. Curve covers a diverse range of profit bearing crypto segments like liquidity mining, yield farming, and trading.
Where and How to Buy CRV
Several reputable exchanges now have the CRV token available for trading. You will find the token on well-known exchanges like OKEx, Uniswap, Huobi, Binance, and many more. Such is the potential of the token that Binance had it listed a day after the surprise launch back in August. Apart from trading for the token on these exchanges, you can also farm it on the Curve Finance protocol when you inject funds into the liquidity pools. You can easily trade the token against fiat currencies, stablecoins, and cryptos on exchanges where it is listed.
The top three exchanges as of September 2020 that hold the majority of the market share of the CRV token in terms of trading are Huobi, Binance, and OKEx.
Buying the CRV token on these exchanges is not that hard, the first thing is to create an account with any exchange of your choice if you don’t have one before. Then complete the KYC process to allow you to transact without limitations. You can now navigate to trading the CRV token by making acceptable payment on the exchange platforms.
There are different payment methods for different exchanges. Some exchanges accept fiat currencies, stablecoins, and major cryptos like BTC, in exchange for the CRV token. So, if you have any of the payment options available to you then you can proceed to trade them.
If you don’t have any acceptable major crypto or stable coin to trade for CRV, you can either choose to buy any of the major cryptos like BTC or eth first using fiat currency, then trading it for the CRV token. Or, you can make use of a decentralized swap protocol that allows you to swap directly for the CRV token.
What Are the Pros of Buying The CRV Token?
Did we get DeFi summer back or something? pic.twitter.com/0mii93d9Nd
— Curve Finance (@CurveFinance) December 23, 2020
CRV has grown a lot since it was introduced and the various ways through which you can earn from the token, which we have mentioned above, can help you profit from the DeFi hype. Yield farmers looking for good profit have been embracing the token contributing to its increased popularity in the market.
Recently, the Curve Finance founder said the protocol is starting a fresh dividend package for CRV holders as they move towards a cash flow-based protocol. So from September 19, CRV token holders that locked their tokens have been receiving 50% of every staking fee on the protocol.
The Potential Risks in Providing Liquidity to Curve
Just like every other automated market maker (AMM), Curve Finance is exposed to the risk of impermanent loss (IL). This risk is common with AMM protocols when users fund the liquidity pool. So, how do you incur IL? It occurs when you provide liquidity to AMM like Curve instead of storing your funds in a wallet where they provide no return. The IL occurs if there is a shift in the token price deposited in the liquidity pool. The loss is mostly little and temporary, which is why it is called impermanent loss. However, it can be permanent if you withdraw your funds during that shift in the price of the affected token. Or, if the liquidity pool is rebalanced to reflect the price of the tokens on exchanges.
Nevertheless, as Curve deals in stablecoins, the risk of IL is greatly reduced as the market is unlikely to move too swiftly. As such, the IL is very low.
The high yield rate on CRV is what most find appealing about Curve Finance, which has coincided with its meteoric rise to prominence. It has found favor among DeFi enthusiasts and traders alike and the interest will likely keep growing. Particularly, after the founder, Egorov mentioned the idea of toying with the further addition of new cryptocurrency to the Curve Finance protocol.
Since Curve is audited, the protocol has a minimized risk for traders and investors alike. Curve’s DEX was audited twice and Curve’s DAO and CRV smart contract were done three times. To emphasize the issue of security, the Curve Finance protocol even has a bug bounties program with a reward of up to $50,000. Nevertheless, this doesn’t mean all the risks are gone. Users can still be exposed to phishing attacks. It is on you to trade and invest with care and with security at the back of your mind. Always.
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