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DEX Upgrade Battle (2): Who will become the king between Curve and Uniswap?

JamesX

2023-01-30 11:11

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Original Title: "Long Push: Who Will Be the King Between Curve and Uniswap?"

Original Author: WinterSoldierxz

Original Translation: JamesX, MarsBit

@DeFi_Cheetah is one of my most respected DeFi analysts. However, in the spirit of productive discussion, I respectfully disagree with some of his views on @CurveFinance V2 and @Uniswap V3 in his analysis.

See details: "DEX Upgrade Battle (1): Why CurveFinance is more likely to become the core protocol of DeFi than Uniswap?"

The following is a specific refutation statement.

Viewpoint Summary Pt.1

( 1) The Ponzi Token economics of Curve is unsustainable.

- The ve-tokenomics of Curve, delayed and mitigated Token selling pressure, cannot solve this problem.

- CRV Token releases value > Curve's revenue + bribes.- Curve+ protocol rented liquidity using released tokens.- Ve-tokenomics is not favorable for latecomers.

Viewpoint Summary Pt.2

( 2) Uniswap has a better business model.

- Lower liquidity costs

- The protocol ecosystem provides more flexibility and innovation.

- Uniswap ecosystem projects create new products based on the Uniswap mechanism.，通过引入新的资产和策略来增加收益和流动性。

Translation:

- The Curve ecosystem project aims to expand the Ponzi economics of CRV by introducing new assets and strategies to increase yield and liquidity.

The utility and value proposition of Curve for Ethereum and cryptocurrency are undeniable, and the protocol is often praised. Additionally, the innovation of ve-tokenomics has given rise to new DeFi mechanisms such as gauges, bribes, and curve wars.

However, the ve-tokenomics of Curve is ultimately a Ponzi scheme that incentivizes liquidity through delaying sell pressure (locking) or unloading selling pressure onto symbiotic protocols' tokens (such as Convex, Yearn).

This method of generating liquidity has been successful in attracting profit-seeking capital and temporary capital inflows, but it does not necessarily indicate the sustainability or recoverability of TVL.

The following is a chart of Curve's TVL (in green) and its token release (in light purple).

Apart from the initial emission peak that appeared to guide liquidity, Curve's release schedule closely follows its TVL.

Why is this?

In simple terms, liquidity mining = renting liquidity using tokens to release value. It was initially cost-effective and efficient, however, if rent payments stop or decrease, liquidity is no longer sufficiently incentivized and it will leave. (as shown in the above figure)

The same situation applies to $CRV. When the release amount is too low (or exhausted), only transaction fees can still serve as incentives. Therefore, the benefits of LP continuing to provide liquidity and the benefits of the protocol competing in the Curve ecosystem are weakened.

This practice of selling tokens at a discounted price in exchange for unstable liquidity is unsustainable and not an effective use of capital. Curve is well aware of this situation.

This is why Curve uses the ve (delay) locking mechanism and unloads its selling pressure onto participating LPs and symbiotic protocols such as @ConvexFinance and @yearnfinance, thus supporting the value of $CRV with its native token.

Even so, the cost of emitting CRV by "renting" liquidity on Curve far exceeds the value of income and bribes related to renting liquidity, resulting in a huge operational deficit for the protocol.

@DeFi_Cheetah believes that $CRV emissions, although often considered a cost of the protocol, are actually fees paid by the project to Curve to obtain liquidity.

In other words, the emission of $CRV has been "prepaid" by the protocol to ensure liquidity on the chain, thereby offsetting the inflationary pressure of $CRV.

Let's assume this is true.

So, the total operating profit/loss of Curve = (total expenses + total bribes) - total emissions.

( 1.01 million dollars+ 2.34 million dollars)-12 million dollars=-8.65 million dollars

This highlighted text is extremely destructive for $CRV and its holders.

In addition, according to data from LlamaAirforce, spending $1 on bribery can bring $1.42 in returns to CVX holders. This means that the protocol pays $1 of CRV for every $1 over $1, refuting the idea that bribery can serve as a "prepayment" to offset CRV inflationary pressure.

In fact, all of Curve's liquidity is rented.

Its ve-model is a "house of cards".

( 1) The agreement borrows liquidity from Curve (exchanging bribes for CRV).

( 2) Curve borrows liquidity from LPs (using CRV to exchange for liquidity).

( 3) LP can mint liquidity (liquidity exchange CRV) from Protocols.

Curve takes on the operating costs in this mode, and adopts Ponzi economics to delay the inevitable impact of continued deficit $CRV emissions, but this is unsustainable.

Another important point is that Curve's ve-tokenomics disproportionately favor early adopters and hinder new entrants. For new protocols that are often constrained by capital and resources, bribery and $CRV accumulation are not viable liquidity strategies.

Establishing deep liquidity for any new (potentially game-changing) protocol on Curve will only become increasingly difficult, as early adopters have expanded their CRV lead on the platform.

Now, let's talk about the advantages of Uniswap.

First of all, I want to point out that the operation of DeFi protocols is similar to that of early-stage tech startups. They burn cash to acquire users, drive top-line growth, and reach critical mass, upon which they can become self-sustaining.

Cost-effective customer acquisition and retention are necessary conditions for long-term sustainability and growth. In the context of DeFi, this means obtaining and retaining liquidity at the lowest possible cost.

Uniswap relies entirely on transaction fees, but still manages to attract and maintain liquidity on its platform.

This indicates a self-sustaining low-cost business model, which will experience explosive growth and success once DeFi achieves widespread adoption.

Uniswap also has a growing ecosystem of innovative symbiotic projects that drive the adoption of V3 by improving user experience and options.

@izumi_Finance's LiquidBox provides three Uni V3 LP NFT liquidity mining models that adapt to different similar assets for projects that want to accumulate deep liquidity through liquidity mining on Uniswap V3. Compared to the liquidity mining in V2 and Curve ecosystems, the cost and effectiveness of liquidity mining have been greatly improved.

@xtokenterminal has eliminated the need for manual input and active management of LP key parameters, solving one of the biggest pain points of Uni V3.

@ArrakisFinance provides trustless algorithmic market-making strategies, creating deep liquidity on Uni V3 through automated strategies.

@Panoptic_xyz and @GammaSwapLabs are innovative examples of #OpFisymbiotes, expanding the use cases of Uni V3 by fundamentally changing the liquidity provision mechanism as DeFi infrastructure.

@Panoptic_xyz provides trustless and permissionless options trading with instant settlement by enabling execution on any underlying asset pool within the @Uniswap v3 ecosystem. @Slappjakke's article delves into the architecture of the protocol.

The innovation of GammaSwapLabs enables the use of LP Tokens as assets representing volatility in gamma long shorts. Gammaswap Uni V3 LPs (short positions) receive a premium in advance from traders of the underlying Token (long positions) representing volatility that is pledged.

You can refer to my research report for a deeper understanding of Gammaswap.

The key point is that the ecosystem of Uniswap is more complex, as their advantage does not come from $UNI, but from the enhancement of the V3 mechanism, which provides more convincing and useful products than the protocol built to expand the behemoth of $CRV.

Innovation is the driving force behind the advancement of DeFi, while sustainability is the force that keeps DeFi going. In the long run, I believe that Uniswap is better suited as the foundational driver for both of these factors.