Latest news about Bitcoin and all cryptocurrencies. Your daily crypto news habit.
Plus and Overview of Curve’s user engagement overlap
Curve Finance was launched in 2020 with the initial purpose of creating an automated market maker (AMM) exchange for assets pegged to one another. By using their efficient algorithms they soon experienced incredible growth, offering some of the lowest fees, slippage and impermanent loss in the DeFi space. Since their focus was on stable assets, fees for liquidity providers tended to be smaller. This created the need for the protocol to offer incentives to its liquidity providers, these incentives were given in the form of CRV which also works as a governance token for the Curve DAO. This article seeks to analyze DeFi’s growth attracting investors wanting to generate yield on their assets, Curve protocol will serve as an example.
In order to analyze this growth, we measured the entire cryptocurrency market cap in relation to DeFi’s Total Value Locked (TVL) going back two years. This indicator allows us to gauge the percentage of the crypto market which has deposited money into DApps in order to generate yield.
The indicator depicts a clear growth in DeFi’s TVL in relation to crypto’s market cap. DeFis’ TVL went from having 0.39% of the market in January 2020 to holding around 13.79% two years later in February 2022. It’s important to keep this trend into account because it depicts the amount of crypto users that are familiar with this emerging DeFi ecosystem and also the ones that are willing to get themselves involved with DApps in order to try and gain yield on their holdings.
Volume traded is an important indicator to understand DEXes, they give an idea of the platform’s usage. IntoTheBlock gathers all daily volume traded on Curve’s pools on Ethereum and aggregates it into a single indicator.
Source: IntoTheBlock DeFi Insights
The indicator shows Curve’s volume traded on the Ethereum blockchain since its inception. User adoption is evidenced by daily volumes reaching as high as $2.5 billions as was the case on January 27th, 2022. Furthermore, volume also gives insight into the fees (revenues) that LPs are generating. On this same date Curve LPs generated around $760k in revenues. This is without counting the additional incentives provided by the protocol in the form of CRV.
One of the major drivers of DeFi’s growth are DEXes. DeFi offers benefits in privacy and security, but besides this, crypto users are also adopting this technology to gain advantage of the yield generating strategies available in the ecosystem. In order to analyze this growth, IntoTheBlock measures the protocol’s total value locked (TVL) of the specific protocol being studied. This indicator allows us to gauge the value deposited into the protocol in order to generate yield.
Source: IntoTheBlock DeFi Insights
The metric depicts the clear growth in TVL that the Curve protocol has experienced. Reaching TVL highs on the Ethereum blockchain of $21.8 billion during January 3rd 2022. This attraction ultimately placed Curve as the top DeFi protocol ranked by TVL and also made Curve pools hold around 10% of DeFi’s entire TVL. By analyzing this indicator it becomes clear that investors seek to generate yield on their assets and liquidity providing has been one of their main strategies.
In addition, another important metric to consider when analyzing Curve’s user engagement is the overlap between addresses that trade and those that provide liquidity on the protocol.
The percent of addresses that provided liquidity to the protocol and also used the swap function during Q4 2021 is approximately 72% Curve’s high user involvement in both the supply- and demand-side involvement could be led by several reasons. First, users probably like to benefit from low fees, low slippage and low impermanent loss. High TVL results in low slippage trading, and with Curve having among the highest TVL in DeFi, users will be attracted to keep trading on the platform as long as the TVL remains high and the slippage low. In addition providing asset pairs with similar behavior, creates the perfect scenario for liquidity providers who do not want to risk impermanent losses. Finally, due to Curve’s low fees, the protocol incentivizes its LP’s with governance tokens, drawing DeFi users to the protocol. Ultimately, this provides a clear view of Curve’s user overlap on the protocol’s two distinct functions.
Deeper liquidity pools bring more stability and increase the adoption of the protocol. The ultimate goal for DEXes is to increment their volume traded and the TVL provided to the protocol. New developments of the protocol should focus solely on this ultimate goal. Removing friction for users involved in the protocol’s both functions is an aspect to take into consideration.
Analyzing DeFi’s Growth From a Liquidity Provider Perspective was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.