Jan. 5, 2022: Risk Rewards 📚👑
Curve's Risk Assessment Team Rightfully Assumes Power over DeFi
If you’ve made your way through the various new Curve resources mentioned in Monday’s post, you might be ready to level up. If so, you really need only the one Substack that rules them all:
Following the Mochi fiasco, the flywheel community agreed adding rewards gauges to Curve needed far more scrutiny.
For the uninitiated, the reward gauges are those juicy “reward tAPR” values listed on the Curve homepage. Anybody can launch a pool using the factory, and these will return trading fees based directly on pool activity. For popular pools this can exceed 1% at times. More commonly, though, it sits somewhere below this marker and above a TradFi savings account.
If the Curve DAO votes to approve rewards, then pools can also have this gauge added, allowing the pool can also earn bonus $CRV yields. Where we sit in the 300 year $CRV emissions window, this amounts to fairly juicy returns. Maximizing these yields is the reason for the fiercely contested Curve Wars. Winners of the Curve Wars can realize returns in the double or sometimes triple digits, which in turn gets a rush of liquidity.
Since DeFi users are so heavily degen, for the longest time Curve DAO votes to approve rewards gauges were largely perfunctory. Who would vote against free money? Most votes passed by lopsided 99%-1% margins with no attention to risks.
USDM changed this calculus a bit though. Upon basic investigation, this Mochi pool was problematic. It could mint fake $MOCHI at will and use the Curve gauge to create a vicious cycle that could quickly cannibalize Curve if it went unchecked.
Curve is a multibillion dollar project, yet it was just one poorly vetted gauge vote away from a total rug. What should Curve do? Give up? Beg governments for help?
The aftermath encouraged a small group to self-organize a Gauge Risk Assessment Team.
The results have been spectacularly effective on nearly any dimension you choose to review it.
For starters, it’s directly affected actual voting patterns. In one example, the FRAX/UST Factory Pool 74 applied for a gauge weight vote. In ordinary circumstances, this probably would have sailed through approvals. FRAX and UST are both long-time Curve participants with an upstanding reputation, piles of $CRV, and passionate communities. Rubber stamp?
Well, a few things happened. For starters, the Gauge Risk Assessment pumped the brakes a bit.
Upon a closer examination, the team identified a few critical issues that should be addressed.
What would previously have been greenlit without a second thought suddenly got flagged for review. Nothing against either protocol, but bridges are dangerous places, and the UST wormhole had relatively little scrutiny.
Suddenly, sentiment quickly shifted towards caution and “no” votes began piling up. Here’s what the ballot box looked like over at Convex, which controls the largest interest of Curve votes. Following the gauge assessment, about a third of the community requested a note of caution.
The gauge risk team clearly provided a dose of caution, but there was one final twist and turn.
Once upon a time, a 2-1 split at Convex would have still yielded the entirety of Convex’s voting rights to a “yes” vote. Just like US presidential races where a candidates wins a state’s entire slate of electors whether they win by 1 vote or unanimity. In all likelihood, this could have meant the scales were tipped toward a “yes” simply from the weight of the Convex core team.
However, at the same time as the gauge risk team was stepping up, the Curve DAO also adjusted its voting mechanism to allow for fractional voting.
This subtle change made a significant difference in this case. Previously, a unanimous Convex yes vote probably would have led to the motion passing. Instead, this motion ended up getting rejected by the slimmest of margins. Every vote truly did count.
In this case, no major harm was done to FRAX or UST. They’ll surely be up for a revote after providing the requested scrutiny. We imagine a FRAX-UST pool could become a very popular hotspot.
For the purposes of protecting Curve users from gauge risks, this is a seminal moment. The voting electorate among the Curve-Convex flywheel is now better represented and well-informed. The dynamics of power have shifted tremendously.
For casual followers of cryptocurrency, this also fills a very important content niche. The nature of this space is that most content is mindless boosterism or pessimistic trolling. Although the median degen is more technically savvy than their grandparents, they are also not commonly heavy coders. Users seldom do the requisite technical research and often rush headfirst into protocols they don’t understand.
The existence of https://cryptorisks.substack.com/ solves this problem. The content is technically astute yet fully accessible to the typical ape. Sort of like the technical manual for your car: even if you don’t take the time to read it cover to cover, it’s the most important document when an emergency pops up.
Nonetheless, every post on the Crypto Risks Substack is worth reading in full. Rich, flavorful, and bursting with nutritional value. It’s a delicacy, like rare cut of filet mignon or whatever vegetarians turn to for a feast. As more upstart projects apply for a Curve gauge, this Substack will round out into a modern day Library of Alexandria, containing rich, accessible documentation on the detailed inner workings of every cryptocurrency project.
Finally, it marks a shift of the balance of power in DeFi. In our burgeoning new form of blockchain-centric self-governance, power should flow to people best capable of harnessing and interpreting the reams of data being generated. As we saw with the delay of this gauge, the Crypto Risks team has accumulated the power to crown kings and queens in this space.
This center of power also exists outside and independent of Curve. The funding comes from the Curve Grants Committee, but otherwise the group is independent. The Risk Assessment team can influence Curve, but they do not necessarily speak for them.
According to the about page, the team consists of Amadeo Brands and bout3fiddy. and was organized, in part or in full, by @WormholeOracle. These accounts are now the epicenter of power in DeFi.
I, for one, welcome our new overlords!
Shoutouts to wormholeOracle & bout3fiddy. I was originally skeptical about the risk assessment committee but it’s value is abundantly clear!