Starting out with Curve Finance can be challenging due to its complex features and the fact that its user interface is quite old-style, which is different from other dApps in decentralized finance.

The simplest way to understand Curve is to view it as an exchange for ERC-20 tokens with low fees and minimal slippage, but unlike traditional exchanges, which require a buyer and a seller to match, Curve utilizes liquidity pools to accomplish this. To maintain a high level of exchange volume, Curve requires a significant volume of liquidity, which it incentivizes through rewards to liquidity providers.

One of the benefits of using Curve is its non-custodial nature, which means that the Curve’s developers do not have access to users' assets. Additionally, Curve's pools are non-upgradable, providing users with the assurance that the logic protecting their funds will remain unchanged.

Liquidity Pools

Liquidity pools are smart contracts that hold a pool of tokens which can be exchanged or withdrawn at rates set by the parameters of the contract. By adding liquidity to a pool, users can earn a share of the trading fees generated by the pool. Additionally, some liquidity pools may offer incentives to attract liquidity providers.

Base vAPY

To understand what the different pools do, it’s also important to understand how Curve makes money for liquidity providers, for whom trading fees are the primary source of income. Every time a user exchanges tokens through Curve, whether through the website or other DEX aggregators like 1inch or Paraswap, a small fee is collected and distributed to liquidity providers. This is why the base vAPY increases with the trading volume on Curve.

Some pools, such as Compound ($COMP), $PAX, $Y, and $BUSD, also generate interest from lending protocols. Behind the scenes, these pools utilize lending protocols like Compound or AAVE to generate additional interest for liquidity providers. While this may make these pools more profitable when lending rates are high, it's important to note that it also adds additional layers of risk.

All pools generate interest from trading fees, and some also earn interest from lending. Additionally, there are pools that offer incentives. Providing liquidity on Curve also enables you to receive $CRV. The amount of the CRV token that each liquidity gauge receives is determined by the DAO's allocation.

Whenever a trade is executed on Curve.fi, liquidity providers who have deposited funds into Curve earn a small fee that is split evenly among all providers. As a result, the vAPY can be high on days with high volume and volatility. It's important to note that because fees are dependent on volume, daily vAPYs can fluctuate significantly, ranging from low to high.

Fees

The swap fees on Curve Finance are usually around 0.04 %, which is considered to be the most efficient for stablecoin exchanges. Deposits and withdrawals have fees ranging from 0 % to 0.02 %, depending on whether they are made in balance or not. If fees were 0 %, users could deposit in $USDC and withdraw in $USDT for free. However, balanced deposits or withdrawals are free of charge.

Plain v1 Pools

A plain pool is the earliest and simplest implementation of Curve, where all assets in the pool are regular ERC-20 tokens pegged to the same price.

One of the largest plain pools is ‘TriPool’, which holds only the three biggest stablecoins ($USDC/$USDT/$DAI). It is a non-lending gas-optimized pool similar to the ‘sUSD pool’ ($DAI/$USDC/$USDT/$sUSD).

Lending Pools

A small number of v1 pools are lending pools, which means liquidity providers can earn interest from lending as well as trading fees. The ‘Compound pool’ ($DAI/$USDC) was the first lending pool on Curve.

Another lending pool is the ‘y pool’ ($DAI/$USDC/$USDT/$TUSD), which includes tokens for Yearn Finance, a yield aggregator. The yToken automatically rebalances your stablecoins to protocols with the best lending rates, such as Compound, Aave, and dYdX. This is a free and non-custodial service, but it does introduce additional risks, as the ‘yPools’ use a series of protocols that could themselves have critical vulnerabilities.

Other pools, such as ‘Aave’ ($DAI/$USDC/$USDT) and ‘sAave’ ($DAI/$sUSD), also lend on the AAVE v2 protocol. However, lending pools are generally more expensive to interact with than non-lending pools.

MetaPools

Metapools enable trading between two underlying base pools using a single token. For instance, the ‘Gemini USD' metapool [$GUSD, [3Pool]] allows users to seamlessly trade $GUSD between the three stablecoins in the ‘3Pool’ ($DAI/$USDC/$USDT). This has multiple benefits, including preventing the dilution of existing pools, allowing Curve to list less liquid assets, and generating more trading fees and volume for the DAO.

The ‘GUSD’ metapool accepts $GUSD and ‘3Pool’ LP tokens. This means that liquidity providers of the ‘3Pool’ who do not provide liquidity in the $GUSD metapool are protected from systemic risks associated with the metapool.

Incentivized Pools

Liquidity pools, particularly those without opportunity costs, are essential in helping stablecoins maintain their pegs. They make it easier for traders to arbitrage when the price deviates from the peg, which is crucial for companies and foundations developing stablecoins, as having a stablecoin that's worth less than 1 USD is never a good look.

As a result, some pools on Curve are incentivized. This means that in addition to trading and lending fees, companies will offer rewards to individuals who provide liquidity to the pools using their coins.

What makes the incentive APR move?

In the screenshot, the $stETH pool earns an additional 2.69 % of $LDO per year, and three variables can affect this:

• The amount of $LDO distributed is based on the number of LP token stakers, meaning your share of rewards decreases when more people stake
• The price of $LDO can affect the yearly bonus, as a higher $LDO price leads to a larger bonus

Boosting CRV token Rewards

One of the main incentives for holding $CRV tokens is the opportunity to increase your rewards for providing liquidity. By locking your CRV tokens to acquire voting power, you can participate in the DAO and earn a boost of up to 2.5x on the liquidity you provide on Curve.

Staking CRV token

As of 19 September 2020, $veCRV holders are entitled to receive 50 % of all trading fees collected. This was made possible by a proposal from the community aimed at incentivizing both liquidity providers and governance participants.

The fees collected will be used to purchase $3CRV, the LP token for ‘3Pool’, which will then be distributed to $veCRV holders.

For those who are unfamiliar with it, $veCRV stands for vote-escrowed $CRV and refers to $CRV that has been locked in the Curve DAO.

Here is detailed video on how to stake CRV token:

I would say that the non-custodial nature of Curve Finance is a significant benefit for users, as it provides a level of security and trust that their assets are safe and cannot be accessed by the Curve team. The fact that Curve's pools are non-upgradable also provides users with assurance that the underlying logic governing their funds will not change, which is crucial when dealing with decentralized finance (DeFi) platforms.

Another significant benefit of using Curve is the ability for liquidity providers to earn a share of the trading fees generated by the pool, as well as additional interest from lending protocols. This can be a profitable venture for those who provide liquidity to the platform.

Furthermore, the incentivized pools on Curve are crucial in helping stablecoins maintain their pegs, which is important for maintaining the value of assets in users' portfolios. Additionally, users who provide liquidity on Curve can receive $CRV, which is determined by the DAO's allocation, offering further incentives for participation.

I believe that Curve Finance is a useful platform for users who are looking to exchange ERC-20 tokens with low fees and minimal slippage, while also earning rewards for providing liquidity to the pools.