In our most recent article focusing on Curve, we looked at how the protocol introduced a game-changing and adjustable algorithm for swapping stable assets on a decentralized exchange (DEX).
In this article, we'll look at how Curve's 3Pool rose to prominence and became the de facto savings account in decentralized finance (DeFi). We will also examine how the winds have begun shifting against the 3Pool, and why it will most likely end up becoming a deprecated pool.
What is Curve's 3Pool?
Curve's 3Pool, also known as the Tri-Pool, holds a massive amount of liquidity (around $3.4 billion) for three of the top stablecoins in DeFi. The combination of this deep liquidity and Curve's optimizations means the 3Pool usually provides the most capital-efficient route for swapping USDT, USDC, and DAI.
The 3Pool also brings liquidity to newer projects through Curve metapools. By pairing less established tokens with the battle-tested 3Pool, Curve increases their swap efficiency and reduces system-wide effects if those assets lose their peg.
As can be seen in the image above, the 3Pool accounts for the second highest TVL on Curve. The 3Pool is also associated with a sizeable portion of Curve's trade volume, which means there are not only a lot of people adding stablecoins to the pool, but there are a lot of people taking them out, as well.
3Pool Became DeFi's Version of a Savings Account
Curve's Stable Swap whitepaper first predicted what would happen when its services synergized supply and demand:
On the demand side, it offers a Uniswap-like automated exchange with very low price slippage (typically 100 times smaller). On the supply side, it offers a multi-stablecoin “savings account” which, according to simulation, can bring 300% APR.
The APR on Curve today might not be as high as 300%, but the idea of Curve as a "savings account" really did catch on.
One DeFi user, @Cryptoidealist, explained the Curve-as-savings-account phenomena around the seven-minute mark in an August 2021 episode of the crypto podcast Wasabi Boat Research.
According to @Cryptoidealist, he did well day-trading and especially by calling Chainlink and Yearn early. Once he had increased the dollar value of his position in the market, the next step was finding stable returns on Curve:
I knew I had my targets, and I knew to get there, I needed to play risky. But, now that I've gotten a bit further down the road...I always knew Curve would be my backup plan; as I made money, I'd take more and more out into Curve, and farm safely on Curve. So, that has always been my plan.
This is a story that's repeated quite frequently for DeFi users who "made it." Once they reached a target or goal, they maintained their wealth by doing just what @Cryptoidealist described:
For [providing liquidity on 3Pool], you earn a portion of the fees. That's where APYs are coming from, here. And even just that, the trading fees themselves, are gonna be higher than the bank, that you would get from that money sitting in the bank...on top of that, you'll be earning CRV...that'll boost the reward.
To many people, the process @Cryptoidealist is talking about may resemble nothing like a savings account. Remember, though, this is DeFi.
Qualifying Curve's 3Pool as a DeFi Savings Account
How does one define a savings account? According to Investopedia:
A savings account is an interest-bearing deposit account held at a bank or other financial institution. Though these accounts typically pay a modest interest rate, their safety and reliability make them a great option for parking cash you want available for short-term needs.
By this measure, a savings account needs to (in order of importance):
- Be safe and reliable
- Provide modest interest for cash deposits
Safety and Reliability
During its earliest days, Curve recognized the need to address point number one, safety. In an April 2020 article titled "How Curve Hacked Curve," the protocol confesses to discovering a bug in the Y Pool that could have been exploited.
It was a learning moment, to quote:
Curve takes security seriously; it has been audited three times, and the protocol offers a bug bounty of up to $250,000 for critical finds. On top of this due diligence, the 3Pool is considered a "safe bet" due to the perceived longevity of the tokens it holds.
Stablecoins are supposed to maintain a consistent value pegged to USD. A de-pegging event can be disastrous for users who deposit their stablecoins in a stableswap.
Even when higher APYs existed in other pools, users still prefered to deposit tokens they believe will hold their peg.
And recent events seem to have reinforced the merits of erring on the side of caution when choosing to participate in the 3Pool over other stable asset deposits. One of Curve's users may have had a crystal ball about USDN.
Modest Interest for Cash Deposits
On September 7, 2020, a proposal was listed for "adding a new Curve Finance pool which is ready to be deployed. It will have DAI-USDC-USDT." By September 15, the 3Pool went live, albeit without CRV rewards.
The 3Pool quickly met condition number 2 for a savings account right away. Even without additional rewards, trading fees alone produced returns TradFi would never be able to offer in TradFi banking.
Curve rewards LPs with CRV tokens for providing liquidity. Adding in the APY from CRV rewards made the 3Pool even more lucrative. Plus, users have ability to boost rewards up to 2.5x by locking in CRV for up to four years.
Locking in CRV tokens and the ability to vote on which pools receive the most CRV rewards sprouted into a cottage industry of other protocols that could increase users' yields even further.
In a year and a half, the complexity of earning yield from Curve has increased dramatically. It's a "choose your own adventure" style approach to savings that favors the most diligent and financially literate DeFi users.
The Curve landscape has also grown increasingly political, and soon users may have to abandon the 3Pool to maintain their semblance of a savings account.
Curve Voted to Phase Out the 3Pool and DAI
A recent Curve governance proposal that would introduce a 2Pool (USDT/USDC) and 4Pool (USDC/USDT/UST/FRAX)*, both circumventing the use of DAI, passed with a nearly three-fourths majority. According to the proposal:
As there has been renewed demand for plain pools without certain assets, it seems like a good time to propose this change which will give a welcomed option to protocols planning to build on Curve as well as those who wish to not rely on DAI and MakerDAO.
By the standards of DeFi's timeline, the 3Pool had an incredible run, but its days may be numbered as Curve reduces its exposure to DAI.
Turns like these can be a good reminder that DeFi is not a space where one can "set it and forget it," because even the 3Pool, the bedrock that DeFi's savings account was built on, can get voted into history.
*This pool has become irrelevant since this article was written.
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