the entire decentralized finance
ecosystem is centered around the core
principle of not having a middleman that
has been the case since d5 growing from
a mere 10 billion dollars in total value
locked in late 2020 to more than 105
billion dollars in total value locked in
late 2021 but what is the limit to this
decentralization and is there even a
limit to it at all what happens in
instances where decentralization becomes
more of a destructive force than a
catalyst these are the questions we will
try to answer on today's very special
coin market cap episode my name is trev
and here at coin market cap we love
making videos about all things crypto
from crypto news to market moves and to
even educational videos just like the
one you're watching right now and if you
want something more than just hype and
to actually learn about crypto then make
sure to hit the subscribe button and
also to turn on post notifications so
you're not going to miss out on a new
video so anyways guys let's just dive
right in so what are the limits of
decentralization perhaps one story can
give us an answer is the world of curve
wars curve wars refers to various
protocols fighting against each other to
provide the highest yield to their users
on curve finance which is a
decentralized stablecoin exchange
protocol that lets users trade with
lowered fees and slippage using
liquidity pools akin to those used in
uniswap and there's a lot to unpack with
that statement so let's start with the
basics curve finance is a stablecoin
exchange that lets users trade between
very stable coins using liquidity pools
since it is decentralized the protocol
itself does not have access to your
tokens but just like uniswap you make
the trades against a liquidity pool and
there are two features that distinguish
curve from other protocols minimal to no
impermanent loss curve is a stablecoin
exchange which means that users can only
trade stable coins against each other
this means that the volatility of other
coins say bitcoin and ether do plague
the protocol since most stable coins are
almost similarly priced there is very
less slippage and thus minimal and
permanent loss and the next point is
high apys for every trade that happens
on curve.phi the liquidity providers who
supply liquidity to the trading pools
are given rewards that are equally
divided between all the providers thus
when there is a high volume of activity
on the protocol the aprs tend to go
higher and contrarily on days of low
volume trading they can get quite low so
why provide liquidity on curve finance
the question then arises if there is no
volatility on the protocol which
liquidity providers exploit for benefit
then how do traders actually make money
curve has been focused on enticing
liquidity providers lps to its platforms
by offering them derivative lp tokens of
the assets that they provide to the
pools this introduces compassibility to
the protocol which means that users can
utilize the derivative tokens issued by
the platform to further participate in
the defi ecosystem and this is a huge
add-on for crypto users because usually
once locked users are unable to generate
any further yield from their assets so
what is the curved out token or crv
whenever a lp provides liquidity to any
of the pools on curve they get rewards
in crv which is the governance token of
the curve protocol since curve finance
is a decentralized autonomous
organization or dow it ensures that the
protocol and its subsequent decisions
are not made by anyone else but all
holders of the governance token thus
whenever you deposit native tokens to a
liquidity pool you get crv tokens in
return in addition to the fees and
interest and you can also earn the token
via yield farming and now this is where
it gets interesting users who have
reached a threshold amount of crv tokens
can vote lock and update to the curve
protocol these updates vary anywhere
from altering the fees to creating new
liquidity pools and even voting on
adjusting the rewards earned on yield
farming crv token holders are required
to hold the tokens for a duration of
time before they are allowed to vote on
proposals the longer someone holds the
token the more voting power that they
have on the protocol here comes the
curve wars now that you have a basic
understanding of how curve finance works
this is where it gets interesting curve
wars is a non-zero sum game that sees
protocols exerting dominance over the
protocol across the spectrum it is said
that there are no losers in curve wars
but only winners the strategy is a bit
convoluted to understand so i'll break
it down here so let's talk about how to
attract liquidity on curve finance your
objective as an emerging decentralized
stablecoin protocol is to offer
attractive yields to your users and if
you don't then your protocol will end up
being a barren land as there would be no
one to provide liquidity to your
stablecoin pair now to attract liquidity
to your platform you can do multiple
things you can set aside a majority of
your token supply to facilitate
extremely lucrative liquidity mining
rewards for every user that supplies
liquidity to your stablecoin pair on the
curve protocol or you can alternatively
buy a handsome amount of crv tokens to
further influence the governance and
alter the liquidity mining rewards for
your pool or you can bribe yes you got
that right bribe other crv holders to
vote in the favor of increasing rewards
on your stablecoin pair now imagine that
another emerging defy stablecoin
protocol is trying to do the same thing
but with convex finance convex finance
is an additional d5 protocol that sits
atop kurd finance it rewards crv
liquidity providers with additional
yields you can simply repeat either of
the steps that i talked about previously
or combine them for an amplified effect
to increase the rewards on your
liquidity pool thereby a attracting more
liquidity and b increasing the price of
your governance token popular d5
protocols like urine finance convex
finance and even stake dao have been
competing against each other on the
protocol to offer higher yields to its
users for the purpose of this discussion
however we're going to be sticking with
mochi in you and how it attempted to
accrue ridiculously high rewards for
itself mochi in you and its dominance on
curve before we understand what mochi's
play was let's explore what it actually
really is mochi enu is a decentralized
stablecoin protocol that also
facilitates the listing of collateral
assets on its platform the users can
then use that collateral to mint usdm
mochi's native stablecoin and use it in
d5 since it is a decentralized protocol
all of the actions around fees are
algorithmically defined the objective is
to ensure that a variety of crypto
assets can be used as collateral for
minting the usdm stablecoin the protocol
states in their whitepapers that the
usdm stablecoin is soft pegged to the
usd and that it ensures that the peg is
maintained by highly capital efficient
stable pegged asset pools they also
state that the value of these stable
coins are backed by over collateralized
vaults subject to various credit
parameters how did mochi in you game
curve finance now there are several
questionable aspects around its
tokenomics the team and the overall
structure of what the protocol is but
let's focus on what actually happened on
curve mochi first announced the
acquisition of over 1 million cvx tokens
and they plan to use it to power the
usdm 3crv and increase the yield for
their lps on the said pool the rewards
to these lps were to be accrued in cvx
and crv this helped them boost their
liquidity pool and aided in attracting
just over a hundred million dollars in
liquidity using this they minted free
mochi and that was then used to mend
roughly 45 million dollars worth of usdm
then they decided to swap usdm for dye
and then further use the dye to swap
with eth and or buy cvx tokens worth 46
million dollars they then locked those
cvx tokens in convex finance giving them
the power to vote on higher rewards for
their pool as you can imagine this is a
repeatable cycle with no end so
theoretically mochi could be doing this
all day long to potentially wreck the
entire protocol since the rewards on all
the other pools would eventually drop as
more users concentrate on a single pool
so on the surface it looks like a clear
case of a protocol exploiting the
underlying infrastructure in their favor
right well it does but this is where it
gets more interesting curve finance
strikes back as the team at kerr finance
was watching mochi's rewards compound
they decided to do some digging into the
protocol and its tokenomics and the team
discovered a few things mochi had minted
a huge amount of governance token to
their own team members contrary to what
mochi writes in their white paper 99.5
of the circulating supply of the tokens
were actually owned by the team and this
meant that usdm was effectively under
collateralized in addition to this the
curve team also pointed out some serious
concerns about the security of smart
contracts on mochi and its founder azim
the curve protocol construed this as a
clear governance attack and the
emergency dow a team consisting of about
nine members decided that the lps in the
pool were at risk of getting rugged
therefore they decided to stop mochi
from receiving any more crv rewards the
dell reminded the lps that taking bribes
from protocols is a risky business and
highlighted that since they have the
voting power they must also understand
the responsibility that comes with it
now there are several sides to this
story one can either look at it from the
perspective that mochi in you was not in
the wrong given that it had merely
exploited the underlying infrastructure
in its own favor the other side to this
is what extent can we expect protocol
founders and the core members to allow
other protocols to exploit their
platform both these perspectives now
withstanding the truth is that there is
a thin line between decentralization and
using authoritative power to save a
protocol mochi could have continued to
attract lps to their pool by
continuously boosting the crv cvx
rewards for them this meant that a
substantial amount of liquidity would
have moved to a protocol which has
hardly any significance within the d5
ecosystem since the tokenomics of the
protocol did not seem right the smart
contracts presented some serious
security flaws there was a possibility
of rugging that would have bled all lps
and wrecked both convex and curve thus
the decision to kill the rewards for
mochi was not born out of a need to
exercise power over the protocol but to
set a precedence for various other
decentralized protocols that in
instances like these the protocol team
members would have only focused on
saving what they have spent thousands of
hours creating curve wars and the
emergency dao is it a true
decentralization for the first time in
the history of dao's the power of
governance was exercised by a few
members rather than the entire dow
itself this is a first but then so is
almost everything in defy as the
ecosystem is maturing into what it is
today we are starting to notice the
extent to which words such as
decentralization and true freedom hold
to extent one could argue that what
mochi did was truly exploit the
underlying infrastructure itself if the
architects of that infrastructure did
not think about these possibilities when
they were creating it then why should it
matter when users are simply using it
for their own benefit but there are two
sides to it which we briefly touched
upon and we should explain further
number one is could true
decentralization be a myth bitcoin and
ethereum are branded as the epitome of
decentralization in bankless money
because they have successfully removed
the need for a trusted intermediary
however that may not be entirely true
take bitcoin for example while it is
considered true decentralized money if
it's money at all opposed to being an
asset studies have repeatedly shown that
the majority of these coins are only
concentrated within a few hands while
this in itself does not conclude that
the digital asset is centralized what we
do hope to point out is that despite our
best attempts at decentralizing these
assets they somehow end up in the hands
of a few investors who have access to
billions of dollars and can instantly
buy bitcoins in the hundreds of
thousands if we argue that the
underlying network is decentralized then
what about the fact that mining for
bitcoin is highly centralized to a few
countries if a certain miner finds it
profitable to mine in a specific country
then others would follow suit and the
second point is that there are some
assets in defy that are inadequately
distributed take tether for example
there have been questions raised around
whether it has adequate reserves for
every usdt it issues if a regulatory
authority were to check its reserves and
take a step that impacts the protocol
then the entire d5 would be at stake
just think about the amount of assets
that are being exchanged into usdt every
second the truth is is that one with the
heaviest pocket will dominate the market
regardless of what it is and that
doesn't mean that the vision of a
decentralized world is an illusion far
from it actually the truth is is that
it's hard to decentralize and equate
human nature it is human nature to look
for better yields and greed will always
be a part of the human character whether
we are in a decentralized protocol or a
centralized banking institution that is
why all of the lps rush to mochi's usdm
pool it's not hard for us to distinguish
decentralization as the one and only
solution that gets to favor everyone it
is by nature not centralized which means
that the one with the most power or
money or even both can lay their hands
on a major portion of the assets what
the curve's emergency dow did was just
what anyone in their position would be
hoping to do they exercised their power
in a situation where they felt the users
who were rushing to mochi's lps could be
rugged and lose all of their money what
would have happened if they had not
taken any action honestly we would not
even want to imagine that scenario and
what mochi did was not arguably wrong
too they simply exploited the underlying
system whose rules have already been
laid out morally yes the hard-earned
money of millions of users were at stake
so wrapping it up is true power always
held within a few hands or there is such
a thing as true decentralization and if
you were in the position of curve
finance let us know what you would do in
the comment section down below anyways
guys thank you so much for tuning in to
this very special episode of coin market
cap make sure you are subscribed so
you're not going to miss out on next
week's video and anyways guys this has
been your host trev and we'll see you in
the next one
you