I have not seen Star wars which was a raging popular program at some point in time, and now in crypto I am hearing about Curve wars of which I am not much aware of as well. Still, it’s pretty interesting and the hot news is that Terra is launching a Curve war attack on MakerDao’s Dai with the mission to vanquish Dai for good!!
Sounds crazy, can you imagine violence in crypto with ‘Curve wars’ and bold powerful attacking statements like this from Terraform Labs CEO and founder Do Kwon -:
Tweet of Do Kwon, saying he will vanquish Dai!!
It’s weird, anyway, because this is not Star Wars you know(: Still, I suppose there is a kick in devising Curve war strategies to eliminate Defi’s first and the once most popular decentralised stablecoin Dai.
Curve Finance provided deep liquidity to Dai with 3pool’s support
Let me get back to logic, instead of picturing this Terra CEO in an alluring NFT avatar(wearing some hyped warrior suit) and vanquishing Dai by his hands (sworded or unsworded?) as this is too much imagination which won’t do for a practical crypto post will it?.
Decentralised Stablecoin, Dai has deep liquidity in Curve Finance protocol, with a pool called 3pool, incentivizing liquidity providers to provide liquidity to Dai, USDT, USDC by getting rewarded with CRV tokens of course.
Curve Finance's 3pool providing liquidity to -: Dai, USDT, USDC, screen shot is from Curve Finance
3pool is the largest stablecoin liquidity Pool in Curve Finance till date. Therefore whenever investors wanted to swap Dai for USDT, USDC it was possible without Dai losing its peg.
Terra’s 4pool to suck out liquidity from 3pool that will harm Dai swap trades in Curve
Now, Terra’s CEO, Do Kwon has announced plans for launching 4pool in Curve Finance. The pairs in the pool will comprise of - UST, Frax, USDT, USDC and exclude Dai. 4pool can divert liquidity from 3pool because Terra plans to vote in Governance and control the emission rate and allocation of CRV.
Here, Terra will vote for CRV emissions to be flowing to 4pool preventing 3pool from receiving enough CRV emissions which is essential to reward liquidity providers.
Do's Tweet with his plans to divert all CRV emissions to 4pool!!
This means that Terra holds a majority of Curve Finance’s CRV tokens thanks to its partnership with Frax, BadgerDAO, OlympusDAO, Tokemak. Now, Curve’s Governance has the power to influence CRV emissions and allocations to 4Pool. So, with 4pool having more incentives, it’s natural that existing liquidity providers of 3Pool would shift to 4pool.
Do Kwon's strategies to starve 3pool of liquidity and kill Dai!!
MakerDao, the protocol that makes Dai stablecoin has no Curve in its treasury reserves, so it has no power to influence CRV emission and allocation.
Way out for Dai to not get eliminated in Terra’s Curve War attack
MakerDao, has the option still to participate in the Curve wars by buying loads of CRV tokens and out voting Terra. Or else, MakerDao has to reward LP providers in DEXs like Sushiswap and Uniswap with MRK tokens to survive.
Low liquidity for a pool will make trades unprofitable making the pool unpopular
When liquidity dries, trading will get costly with slippages in price occurring, that is the coin’s price in the protocol will deviate from the market price and trading will get unprofitable. Consequently that liquidity pool will not be used by traders and liquidity providers would therefore not feel motivated to provide liquidity as they receive no profitable rewards for being liquidity providers.
Dai use as a stablecoin has declined with everyone opting to use UST instead
Already after the arrival of UST, the market capitalization of Dai has come down. UST is further strengthening its peg retention capacity by its moves of using BTC as reserve currency to stabilise UST’s peg during emergencies, like a market crash.
Dai's Market Cap is 8.8 Billion while TerraUST's is - 17 billion and this is before Terra's 4pool attack
So, will Dai survive this Curve attack by UST?. It certainly looks like UST is the more adopted stable coin and there is no stopping UST from getting more popular in the future.