Sept. 29, 2022: Race to the Bottom
Does Curve's Focus on Quality Hamper Its Growth?
We know the Crypto Risks team is good. Very good. Arguably the most influential and highest quality Substack in all of DeFi. Their work protects billions of dollars from falling victim to the worst ponzis and scams. On top of this, they author exhaustive research reports on cutting-edge DeFi protocols. These reports would be a bargain at a price tag in the six-figures if they were commissioned through blue chip consulting firms.
While this is not generally a post about the Crypto Risk Team, we have to open with the question. Is the Crypto Risk Team too good at their job?
That is, would Curve make more money if Curve welcomed in more scams?
Should the Curve community stop worrying and embrace the 💩-coin?
Purveyors of Fine Stablecoins
Historically, Curve has insisted on very high quality control standards. Curve users have also enjoyed a greater degree of safety than so many other DeFi. Coincidence?
Curve today is quite decentralized, but when it launched the core team had a heavier footprint. The first version of Curve was practically permissioned relative to today’s standards. In the beginning, only the OG Curve team could launch a pool. They had strict guidelines for what pools they would deploy: audits, minimum market cap, etc.
It’s hard to believe now, but today’s fan favorite Frax was once added with a note of skepticism. It once carried an “Innovation Zone” warning, like a scarlet letter to ward people away.
At the time, no other algorithmic stablecoin had succeeded, so sounding a note of caution was a prudent way to warn users, much like suggesting the Wright Brothers wear a helmet on their maiden voyage.
If the intent was to dissuade, it would fail: the Frax pools would grow in popularity, today achieving utter dominance within Curve. It’s a basic lesson in human nature: a warning label can make the underlying product more highly coveted. It’s a variant of the “Streisand Effect,” at least some degens will see “higher risk” and immediately smell higher reward. This effect demonstrates immediately why scams always have been, and likely always will be, popular within cryptocurrency.
Fortunately for everybody, despite the early precautions, Frax has an exemplary track record. Their concept of an algorithmic stablecoin has sailed through many market crashes. Even so, the Crypto Risks team is not afraid of slaughtering sacred cows. This week’s report by Dan Smith investigates the role of Frax multisigs, and advises keeping an eye on their own transition toward decentralization.
When Curve was making a similar transition toward decentralization, they moved away from permissioned pool launches by the team in favor of allowing anybody to deploy their own factory pool.
This was great for increasing the number of Curve pools, but it meant some terrible depeg events. Notable factory pools that would severely depeg and cause massive losses included Mochi’s USDM and Terra’s UST, the latter of which would collapse all of cryptocurrency in the process.
The explosion of factory pools, and the desire to keep any given pool from exploding, is the origin of the Crypto Risks team. It was embarrassing watching the UST drama play out, where the main source of liquidity on Ethereum was the Curve factory pool. The community was interested in self-policing to make sure these kinds of incidents would not happen again.
If you’re unfamiliar with the mechanics, anybody may permissionlessly deploy a Curve pool through the factory. The pool itself can never be killed. However, the DAO has permission to decide where it would like to stream its firehose of $CRV token rewards. If you want such a rewards gauge, you must ask the DAO for permission first.
Once upon a time, the governance process used to be a rubber stamp, as users skipped over due diligence while salivating over rewards. Nowadays, in order to get approval from the DAO, the norms have shifted. Asking the Crypto Risk team to investigate can go a long way towards procuring a favorable community vote. In this way the process remains fully permissionless, but in practice the community very much relies on the Crypto Risks team to do the due diligence and keep the obvious scams away.
The team is lately going through and revisiting even the pools which had been “grandfathered in” on Curve. The team’s latest work has led such actionable items as recommending to kill the long-standing USDN pool.
Purveyors of Fine Ponzis
Compare and contrast other AMMs.
For one example, this level of scrutiny and quality control would be unthinkable at Uniswap. Take a quick look at their leaderboards at any given moment. Outside of major assets, the volume comes from a long tail of tokens you’d never see on Curve.
$HEX? $SHIBA? One imagines the Crypto Risks team report on these projects would be entertaining. At least if you’re a fan of the true crime genre, because reading their report would amount to witnessing a murder.
In another example, this past week Ease.org described how easy it was to LARP as trillionaires on Uniswap.
Thankfully they were white hat hackers, but scammers could easily replicate these mechanics to social engineer their way into major losses.
In this way, Uniswap is a good representation of the actual state of crypto. Open up the front page of CoinGecko and you’ll see it’s filled with trash tokens. It’s easy to assume everybody in crypto is brilliant when you only hang out within the Curve community, but the sad fact is there are a ton of idiots in this space.
Hence the title question. Should Curve be profiting off of the dumb money instead of protecting LPs? Pump and dumps only mean more trading fees, right?
It occasionally feels as though there’s two audiences within cryptocurrency. There are a small group of users who are truly dedicated to the mission of building a global, open, decentralized financial system, and there are the speculators seeking to cash-in on the get-rich-quick schemes.
The latter category drives the worst elements of the space. The scams… the hacks… the rug pulls. Yet for every 99 people who lose everything, we occasionally see a rare “rags to riches” story that begets another generation of thrill-seekers. Most NFT projects will fail, but they keep getting fueled by the rare project that breaks through to blue chip status. The story of the once impoverished artist whose story fuels a hundred imitations spawn dozens of new projects.
Human greed being what it is, we’ll likely always see more action among the get-rich-quick crowd than the builders dedicated to quality. After all, who doesn’t dream of winning the lottery?
One might hope that cultivating a reputation for scamcoins might eventually turn off users, but sadly human nature doesn’t seem to work this way. The public has a seemingly bottomless appetite for fraud. When users want the latest scam doggy token, they know to check in the sewer before they check on Curve.
All this said, as a matter of personal taste I prefer the paradigm where Curve has strict quality control. I feel more comfortable as an LP if the pool has received a thorough review. I happen to believe the handful of builders trying to create quality projects will eventually succeed in building a robust and decentralized financial system, and I’d like to tie myself to such a community.
Yet personal taste to the wind, would Curve make more money if it catered to bad actors? The UST saga was traumatic, but it did lead to good Curve fees. Is there more money in dumb money than in smart money?
Maybe, maybe not. We know one reason Curve cares about quality is the thought that higher quality might lead to higher TVL. The experience on Uniswap is one where the typical LP loses money. Yet degens keep going back to the casino, either unaware or unmotivated by the fact that you can also LP and generally be profitable elsewhere.
Curve’s focus on LP experience has had tangible results. Curve generally runs ahead of Uniswap in terms of TVL, where Uniswap has the edge on trading fees.
Having the most TVL is a good problem to have — you can do a lot with a hefty TVL. High TVL means more capacity for large trades with low slippage. Better still if these are quality assets. The future of Curve as the best trading hub for the most important tokens is a nice positions.
On top of it, high TVL means more composability. Grab your LP token from entering a Curve pool, and you can do whatever you like. There’s a growing ecosystem of apps building on Curve LP tokens, and Curve can support this ecosystem because its size is size. It’s not just the Curve TVL that enables this ecosystem, but also that users want exposure to the higher quality tokens listed on Curve.
Therefore, the advantages that can come from TVL and composability lead me to prefer Curve’s focus on quality. But what do you think? Should Curve throw caution to the wind and start whitelisting scams? Or do you think the focus on quality will lead to better fortunes down the road? Let us know in the comments!