Field Guide to the Curve Wars: DeFi's Fight for Liquidity

Crypto is a giant game of incentive design, with billions of dollars on the line. 

Projects who design their incentives intelligently win massive power and wealth. Projects with poorly designed incentives see their tokens go to zero. 

Most incentive design in DeFi is focused on solving two problems: 

1. Discouraging people from selling your tokens 
2. Encouraging people to make your token more liquid

Historically that type of reward structure has been direct: I pay you a steady stream of tokens for the liquidity you’ve created for my token. But now we’re seeing marketplaces for liquidity, where leading protocols can aggregate various opportunities for investors to earn yield income by providing liquidity. And where protocols can pay investors to help them increase the liquidity of their tokens. 

This aggregation, and the competition for liquidity that comes with it, is playing out across a variety of platforms but the battle is hottest on Curve Finance. Thus the competition for liquidity is affectionately known as “The Curve Wars.” 

But as we’ll see, Curve is just the beginning. The Liquidity Wars will likely shape the future of DeFi, and define many of the coming investment opportunities. 

To understand what’s going on, we need to start with the app that looks like it was built on Windows 95: Curve.