Terraform Labs CEO Do Kwon shared a series of tweets that raised questions amongst his followers. Kwon announced the formation of a new stablecoin alliance with Frax Finance and Redacted Cartel. The Terra guru went on to declare the “Curve Wars” over. Kwon took his boast a step further, adding that the DAI stablecoin would die by his hands.
Do Kwon’s tweet opened up a new layer of conversation, exposing the intense battle between the DeFi projects on Curve Finance. Before diving into Kwon’s threat against DAI, let’s look at the Curve War and what it’s all about.
What Is the Curve War?
The crypto market is more than a game of chess. You can liken it to a game of thrones. But calling it a battle for incentive would paint a better picture. In a bid to gain more influence and power, all DeFi projects try to outdo each other. They cook up the best incentive model to do this, hoping to lure users to their platforms. Furthermore, projects with flawed incentives will have their tokens devalued. The market is almost in a state of “survival of the fittest.”
DeFi protocols offer incentives to prevent their users from selling their tokens and encourage users to add liquidity to the token. Usually, projects would offer users a steady supply of tokens for the liquidity they have created for the token. But, things have changed. There are now liquidity markets where top DeFi projects can combine multiple options for investors to earn yield income by supplying liquidity. Furthermore, these protocols also utilize these marketplaces to compensate investors for assisting them in increasing the liquidity of their tokens.
This situation has led to an intense struggle for liquidity on most DeFi platforms, but the fight is at its peak on Curve Finance. As a result, this hustle for liquidity is commonly termed “The Curve War.” Many experts believe that this fierce competition could be the defining moment in DeFi history.
The Curve Wars are essentially a battle for deep liquidity. This means that DeFi platforms want to dominate markets with a huge volume of trades between numerous market participants.
Why Curve?
Curve is a decentralized exchange (DEX). It is similar to Uniswap or Sushiswap. However, it has one crucial difference: it possesses peculiar swapping mathematics. This makes it stand out amongst other DEXes. Curve is a top-tier DeFi protocol intended for exchanging like-pegged assets such as USDT for USDC and WBTC for RenBTC. The DEX has one of the most liquid markets in the crypto space – hence the rush.
Liquidity, or the amount of volume for a certain asset, is a big deal for crypto users. For example, if liquidity for a token pair or a single token is low, users will suffer slippage while attempting to purchase or sell that token.
Slippage refers to the difference between an order’s predicted price and the price at which the order executes. Additionally, the price of an asset can fluctuate often. This is due to the volatility of cryptocurrency based on transaction volume and activity. The relationship between liquidity and slippage is especially unpleasant for those who retain big amounts of crypto. However, Curve improves slippage for stablecoin conversion. This is one of the project’s key attractions.
The Battle for the CRV Token
Curve’s native token, CRV, is another key aspect of the protocol. Users can obtain this token by purchasing it on an exchange or contributing their liquidity to any Curve pools. Furthermore, the CRV token has a capped supply of 3.03 billion. Like Bitcoin, the CRV distribution will decrease with time.
Holding the CRV token gives users certain influences within the Curve ecosystem. For instance, it entitles users to vote on proposals, liquidity gauges, and their ability to earn trading fees. Also, users only have to vote lock to access these perks, after which they will receive veCRV, a voting token. Users will receive more veCRV by locking up more CRV for a longer time. The Curve War is basically a game of controlling the votes and getting more tokens.
What’s Kwon’s 4pool All About?
Kwon shared a tweet, hinting at a new alliance that would put the Curve War to an early rest. He wrote “Introducing the 4pool – between @fraxfinance, TFL and @redactedcartel. we pretty much own all the cvx. UST-FRAX-USDC-USDT. Curve wars are over, all emissions are going to the 4pool.”
1/ Introducing the 4pool – between @fraxfinance, TFL and @redactedcartel we pretty much own all the cvx
UST-FRAX-USDC-USDT
Curve wars are over, all emissions are going to the 4pool https://t.co/LNJs7CAfcV
— Do Kwon 🌕 (@stablekwon) April 1, 2022
Kwon later added that OlympusDAO, a DeFi platform, will join the newly-formed 4pool alliance. 4pool is a new four-token liquidity pool on Curve. It consists of USDC and USDT stablecoins and Terra’s UST and Frax Finance’s FRAX decentralized stablecoins. With more than $21 billion in assets under control, the new alliance hopes to monopolize Curve’s stablecoin industry.
In order to achieve this goal, Kwon aims to entice customers away from 3pool, an existing stablecoin pool on Curve. The Terraform Labs CEO intends to offer incentives to push more liquidity to his new alliance.
Kwon boldly claimed, “In the future, we will also direct emissions to other stablecoins that pair against the 4pool, not just the 4pool itself. Goal is to starve the 3pool.” Kwon anticipates that the new coalition pool would use their substantial holdings of Convex’s CVX to provide more liquidity to the pool. The CVX token allows holders to vote on crucial decisions within the Curve ecosystem. Also, Convex enables users to gain access to liquidity while also earning fees on Curve. Kwon’s clarion call for CVX holders gives Convex Finance tremendous power. The protocol is in the pole position in determining which pool receives the most liquidity and, thus, the higher payout on Curve.
Can 4pool Dethrone DAI?
So far, 3pool has garnered approximately $3.3 billion, with DAI dominating the market. Nevertheless, many experts believe that the 4pool alliance can alter the current standings. Several analysts took to their Twitter platforms to share their thoughts on Kwon’s campaign. One user feared that UST and FRAX could become more liquid than DAI. As a result, they will have an increased utility as stablecoins over the DAI token. Others feared that DAI could lose its dollar peg if liquidity flows into 4pool from 3pool.
Kwon’s dislike for DAI is an open truth. In one of his tweets, he wrote, “By my hand, $DAI will die.” Also, Frax Finance founder Sam Kazemian has plans to snuff out DAI. He intends to offer further incentives to attract liquidity providers to 4pool while depriving DAI-related pools.
By my hand $DAI will die.
— Do Kwon 🌕 (@stablekwon) March 23, 2022
However, some people doubt the possibility of the DAI token losing its dollar peg. Some DeFi analysts, such as Korpi, believe DAI has what it takes to survive this attack. Korpi argued that DAI might become more volatile due to reduced liquidity. However, the DeFi analyst strongly opposes the possibility of DAI losing its peg.
If UST and Frax become more liquid than DAI, it means their utility as stablecoins increase over DAI’s. Each of these coins still have their own native stabilizing mechanisms but being able to run size through @CurveFinance is a big deal.
— Erica Wall (@ercwl) April 2, 2022
The DeFi community might be in for another round of drama that could define its future.
The consensus on Crypto Twitter seems to be that $LUNA + $OHM + $BTFLY + $FXS have already won the "Curve wars" and 4Pool is going to have the deepest liquidity on Curve. While it's a nice narrative and it pumps my bags, it's also an extremely simplified perspective.
🧵👇
— korpi (@korpi87) April 2, 2022
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