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DEX Upgrade Battle (3) : Is CRV Pardonian Economics?

DeFi之道

23-01-30 15:48

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Original title: Curve vs. Uniswap Debate Continues, Is CRV Pond Economics?

Written by @DeFi_Cheetah

The DeFi way

This article is written by crypto analyst and former hedge fund trader @DeFi_Cheetah Released as Part 3 of the Curve vs. Uniswap series. The debate over Curve vs. Uniswap has generated a lot of debate recently. Who is better, Curve or Uniswap? This article responds to the views of encrypted OG @WinterSoldierxz.

Opinion: Curve Finance is a better fit for core DeFi infrastructure than Uniswap.

TLDR:

1. Is $CRV Pond Economics? This is a misnomer.

- How is inflation a scheme in game theory

- Decode the $CRV release formula

2. Uniswap V3 requires stack = Worse cost structure

This article is in response to a response from a respected DeFi OG @WinterSoldierxz, who regularly publishes institutionally level research. People who haven't been paying attention should.

For he gave the counterargument, please refer to his post: https://twitter.com/WinterSoldierxz/status/1619054919058857984

Let's take a closer look.

"$CRV is Ponzi economics" is a common argument by critics: CRV's 28% inflation rate is insane, while $UNI doesn't have that problem. I think the $CRV release is not a cost because it is prepaid by the project and then released as a project cost to maintain liquidity on the chain!

@WinterSoldierxz trying to show the cost of release. Profit.

First of all, it's not what it costs.

Second, the following calculation misses a key aspect: The $veCRV holder must continuously accumulate $CRV and lock in for 4 years to maximize voting power on the gauges!

Thus, in addition to bribes and transaction fees, projects prepay $CRV releases by buying and locking in more $CRV. Convex Finance StakeDAO and other whitelist projects continue to lock in $CRV; Frax finance and other projects are trying to whitelist to buy and lock in $CRVS. This is their liquidity cost.

Obviously, the capital cost of buying $CRV and the time value of locking in $CRV are not taken into account. Statistics show that 46.7 percent of $CRVS are locked up, mostly permanently. Thus, this constitutes a non-negligible component of $CRV Token economics.

What incentive does the project have to do this?

简而言之：通货膨胀。在 Token 经济学中，通货膨胀总是被描绘成负面的东西；对于 $CRV，它是必要的而不是邪恶的，没有它博弈论就很难发挥作用。在深入探讨之前，让我解释一下我对经济学通货膨胀的看法。

Inflation is a gradual process of redistribution of social wealth. Imagine if there was deflation and every dollar bill was worth more than it was a year ago. Does that sound good? Everyone is lying around earning dollars!

That means people have no incentive to work hard!

Inflation drives consumption, otherwise you wouldn't be able to afford the things you can afford now, and people are working hard to make more money.

In the process, wealth always flows to more productive people or businesses that manage to meet/create an increase in aggregate demand.

Back to cryptocurrencies: What does this mean for the inflation of $CRV token economics?

This is a gradual redistribution of governance power in favor of those who are more loyal and committed to the community!

Loyalty and commitment is demonstrated by (i) continuous accumulation of $CRV + (ii) locking in $CRV for a longer period.

With inflation, #CurveWars players cannot simply sit around and do nothing while still maintaining their governing power and influence in the community.

Moreover, the bribes quoted below are only for $vlCVX: 289 million of $567 million in $VecrVs, with 49 percent of $VecrVs yet to be counted.

In summary, most people don't take into account the time value of (a) all the bribes + (b) buying $$+ (c) locking in $CRV

To me, whether a project is a Ponzi scheme depends on whether the business behind it is sustainable and actually creates value for the industry. As said, Curve Finance absolutely creates value with its "liquidity as a service" feature!

So far, I haven't mentioned how $crvUSD improves Curve Finance's revenue stream. I've explained this in an earlier post. Essentially, $crvUSD raises a lot of revenue and creates another flywheel to make it sustainable. Check it out below:

$CRV Release Formula against any monopoly! How about that?

To revisit the formula: The boost mechanism takes the smaller of two values to calculate its earned weight. The "minimum" that prevents any $veCRV holder from being too dominant to emit most of the $CRV is often neglected.

In short, one party's income weight is limited by the liquidity it provides. After the $CRV release is guided by the vote metering weight, how much can be earned from the $CRV portion released into a particular pool depends on one's income weight/gross income weight in that pool.

Examples:

Imagine a pool of $50,000 with $10,000 coming from X, $10,000 from Y, and $30,000 from Z, with X accounting for 40% of $VecrVs, Y for 1% of $VecrVs, and Z for 1% of $VecrVs.

If we release $100 of $CRV to it, we first calculate how much $CRV each side gets

Total income weight:

X = min (10 k*0.4+50 k*0.4*0.6, 10 k) = 10 k

Y = min (10 k*0.4+50 k*0.01*0.6, 10 k) = 4.3k

Z = min (30 k*0.4, 30 k) = 12 k

Total revenue weight = 26.3k

Thus, at $100, $CRV:

X gets $100 * 10/26.3 = $38

Y gets $100 * 4.3/26.3 = $16.3

Z gets $100 * 12/26.3 = $45.6

Although X holds 40% of the $veCRV share, it can't get most of the $CRV release: For example, without the 40% $veCRV cap, X could get $57.4 instead! This shows how the formula prevents monopolies. Curve Finance strives to strike a balance between rewarding loyalty and decentralizing $CRV holdings.

As for the relationship between TVL and release in Curve, correlation does not mean causation, and the decline of TVL in Curve is hardly dependent solely on release.

I prefer to think the main reason is the decline in TVL across the industry.

The logical flow of @WinterSoldierxz is that as the $CRV release is cut each August, the TVL will get lower and not return to ATH.

This can't be true! And I am convinced that Curve Finance's TVL in the next bull market must be higher than its previous ATH. Time will tell.

Next, Uniswap V3 proponents always argue that the stack built on top of it makes it more composable and a better user experience.

But they do not think this means a worse cost structure: these stacks are not free, they each charge a fee to provide the service.

Unlike Curve V2 LP, which enjoys seamless integration, UniV3 LP needs to pay @ArrakisFinance and @xtokenterminal for Curve V2 LP's free service. Going against the trend of VERTICAL INTEGRATION.

What does vertical integration mean for the cost structure? Take CEX, for example

Cryptocurrency trading platforms like binance are vertically integrated platforms that combine brokerage and trading platform functions and therefore have a superior business model compared to traditional trading platforms and brokers. Why?

Traditional trading platforms must split fees with other parties responsible for brokerage, margin, risk, clearing, custody, GUI, API, etc. As a result, the acceptance rate of the transaction is much lower because other middlemen lose more in fees.

Cryptocurrency trading platforms with front-end brokerage operations can improve margins through vertical integration, direct access to customers as a sales channel, and have user data that can inform product launch and monetization strategies.

All of this is driving higher adoption rates.

Going back to DEX, offering a multi-in-one service for LP means that there is no loss to other middlemen and LP gets more incentive. This explains why Curve Finance's TVL is much higher even though 50% of transaction fees are taken by the platform. As a result, Uniswap cost conversion is more difficult to implement.

In addition, Uniswap V3 is designed to benefit whales doing LP.