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A Brainlet's Dive into Curve Finance - Silo Edition

Updated: Mar 8, 2022

Please view governance proposal to add SILO:FRAX to Curve Gauge Controller here

What is Curve Finance?

Anyone who has delved into Defi would have come across Curve Finance. With its iconic 1980s UI and RGB color scheme, it is the AMM of choice for individuals and protocols that want to switch between pegged assets at high volume with extremely low slippage.

A $1b swap of DAI will net you $999,569,864.43 USDC, equating to slippage of just 0.04% (Courtesy of Curve.Fi)

Whilst other AMMs such as Uniswap are competitors (broadly speaking), there is no true substitute for Curve’s swap efficiency.

What does this have to do with Silo?

Discussions on Silo’s discord recently have revolved around liquidity issues of our $SILO token - admittedly, TVL on Uniswap for $SILO has been low which has translated to high slippage for large transactions which is a turn off for investors. Whilst Curve previously focused on being an exchange for pegged assets, its recent Curve v2 upgrade allows for permission-less liquidity pools for any token pairing which Silo aims to make use of.

How does this address our liquidity problems?

As per Defipulse, Curve has the second highest TVL out of all defi projects with $10b value locked.

Number 3 looking ripe for the picking (courtesy of Defipulse)

Curve’s success in attracting liquidity is due to its unique tokenomics. $CRV holders can lock up their tokens to vote on gauges. Gauges determine $CRV emissions of a liquidity pool which boosts effective APY providing additional incentive for users to provide liquidity. Increased gauge weights means increased CRV rewards to incentivize liquidity providers - higher APY means higher TVL which means lower slippage which is exactly what we want for our precious $SILO.

How do we get votes on a Silo Curve v2 gauge?

Those that follow the Curve Wars may be aware that there are several protocols that aim to amass $CRV in order to bolster their voting rights so they can direct emissions to select Curve pools. Of these protocols, Convex Finance has reigned supreme and has been able to amass over 45% of the circulating supply of CRV, granting them a significant say in which pools receive CRV emissions. Convex also owns about 40% of the circulating supply of FXS (of Frax Finance), which some Silo followers may recognise as being the project of our lovely advisor Sam Kazemian.

Holders of CVX can lock their tokens to effectively direct their share of the underlying veCRV and veFXS in the Convex treasury. This has led to the creation of Votium, a protocol that allows other projects to pay ‘bribes’ to CVX holders in exchange for voting on specific pools.

Bribes paid to CVX voters in the last voting period (courtesy of Llama Airforce)

Subsequently, there are 3 primary ways that protocols can earn CRV voting rights:

  1. Own CRV directly, lock it up for 4 years (for maximum voting power), and vote

  2. Own CVX, lock it up for 16 weeks, and vote using Convex’s underlying CRV

  3. Pay bribes to CVX holders in return for their votes

CVX: Silo’s Choice

The decision for Silo to purchase CVX over CRV or paying fortnightly bribes was based on its flexibility and sustainability.

Whilst owning CRV directly is possible, the locking period of 4 years provides little flexibility if we wish to consider other options during this time frame. In addition, Votium currently only supports CVX holders so owning CRV directly does not provide us with bribe income

Bribing is a flexible option that will require paying $SILO to CVX holders via Votium every 2 weeks. Whilst this can be effective in incentivizing short-term liquidity, over the longer term the costs will add up and result in an unsustainable dilution of $SILO holders.

Owning CVX will allow us to direct CRV emissions to our own $SILO pool on Curve v2 to incentivize liquidity without needing to pay fortnightly bribes and only needs to be locked for 16 weeks at a time. If Silo chooses to deploy its own liquidity from the community treasury it can grow its CRV stake on top of any transaction fees. In addition, if our CVX voting power exceeds our liquidity demands, we can direct excess voting power to other pools to earn our own bribe income.

...I want more ser

Creating a $SILO pool on Curve v2 is just the tip of the iceberg for Curve and Convex’s utility for Silo. Those that have been following Silo’s recent developments may have seen the proposition for a Silo stablecoin ($USDs) which aims to be a second bridge asset alongside $ETH. In the absence of external liquidity, $USDs would have been an internal unit of account for the Silo protocol.

Having CVX means that we can create a pool not just for $SILO, but also $USDs allowing it to be used outside of our platform. This will allow builders to develop capital efficient lending strategies on top of our silos which are competitive with the rest of the lending space. Allowing $USDs to be traded externally also opens the doors for its integration with further defi projects, creating a more robust Silo ecosystem.

This post aims to provide a brief outline and rough logic for Silo’s recent acquisition of $CVX. A technical post will follow that provides figures to back this decision.

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