DeFi Tokens Continue To Disappoint — Curve Rises Against The Odds. What's Behind CRV's Rise?

For example, the price of the DeFi Pulse Index (DPI), an index token that tracks the price of the top Ethereum-based DeFi tokens continues to make new bottoms against ETH as evident from the following chart.

(Source: TradingView)

Additionally, several other so-called DeFi ‘blue chip’ tokens such as Aave (AAVE), Maker (MKR), Uniswap (UNI), Sushi (SUSHI), Bancor (BNT), and Compound (COMP), among others gave meager returns to holders throughout the year compared to the returns offered by the layer-1 blockchain tokens such as Solana (SOL), Avalanche (AVAX), Fantom (FTM), and metaverse plays such as Decentraland (MANA) and The Sandbox (SAND).

Clearly, data suggests that the market makers currently have no interest in rotating capital into DeFi projects when metaverse projects seems to be all the rage propelled by Facebook’s rebranding to Meta and the rising popularity of NFT collections such as CryptoPunks, Bored Ape Yacht Club, and others.

However, among the pool of underwhelming DeFi tokens, there has been one clear outlier — Curve (CRV).

In the past three months, CRV, the governing token of Curve Finance, has increased more than 3x, rising from $1.89 on September 8, 2021, to $6.24 on November 24, 2021.

The impulsive price action begs the question, what’s behind the rapid increase in CRV’s price?

In this article, we look at DeFi’s silent juggernaut Curve Finance and explore the reason behind the enviable price action displayed by CRV over the past 3 months.

Curve Wars Behind CRV’s Price Surge

If you’ve been keeping track of the latest developments in the DeFi space, chances are that you might have come across the term ‘Curve wars.’

So, what exactly are Curve wars and how is it leading to CRV’s price appreciation?

To begin, we must first understand that Curve Finance is arguably the most important DeFi protocol in existence today not only because it holds the highest TVL of more than $21 billion but also because it is a protocol that is largely focused on stablecoin swaps.

While stablecoins might not sound too exciting at first, definitely not from a price volatility perspective, they do function as the backbone of the wider crypto market in terms of providing liquidity to enable seamless token swaps.

The so-called Curve wars originated with the launch of a Curve Finance-focused yield optimization platform called Convex Finance that essentially boosts rewards for CRV liquidity providers.

What Does Convex Finance Really Do?

Essentially, Convex Finance allows users to deposit CRV tokens to its platform for which they receive an equivalent amount of cvxCRV tokens. Next, Convex stakes the incoming CRV tokens in Curve Finance and receives vote-escrowed CRV (veCRV) which is the governance token of the protocol.

Now that Convex Finance has a higher say in the governance of Curve, it uses the voting power to boost CRV rewards to liquidity pools to which it is providing liquidity via CRV tokens.

Users who choose to stake their cvxCRV tokens on Convex receive the platform’s staking rewards in the form of CVX tokens. In addition, they also receive a part of CRV rewards from Curve through Convex.

According to the latest data by crypto and blockchain analytics website Dune Analytics, Convex now controls almost 40% of the power in Curve’s governance.

(Source: Dune Analytics)

Per Convex Finance’s documents, the platform makes it far simpler for Curve token holders to earn trading fees and claim boosted CRV without locking CRV themselves.

Further, Convex charges no withdrawal fees and minuscule performance fees which are used to pay for gas and distributed to CVX stakers.

The Danger of Centralized Governance

The rising governance power, while beneficial for Convex users, could be a cause of concern for other CRV stakers who might not always necessarily agree with Convex Finance’s governance decisions.

Further, the fact that cvxCRV tokens cannot be exchanged back for CRV once deposited into Convex Finance is also worrisome for users who might want their CRV back to vote on governance proposals without Convex’s interference.

Regardless, the market seems to be liking the so-called ‘Curve Wars’ which is evident from CRV’s impressive price action in contrast to the minimal movements displayed by other DeFi tokens.

At the time of writing, CRV is trading at $4.70 with a market cap of more than $1.8 billion, according to data from CoinGecko.

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