Curve Wars and the Emergency DAO
Tech Deep Dives

Curve Wars and the Emergency DAO

2 years ago

Mochi Inu rigged dominance on Curve Finance resulted in the setting up of an EmergencyDAO, which begs the question: can there really be true decentralization?

Curve Wars and the Emergency DAO

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The entire decentralized finance (DeFi) ecosystem is centred around the core principle of not having a trusted intermediary who gets to mediate between two transacting parties. That has been the case as the ecosystem has proliferated from a mere $10B in total value locked (TVL) in late 2020 to more than $105B in TVL in late 2021. The idea of not having someone who you need to rely on in the centre creates a trustless ecosystem where any number of users can participate without suffering from any type of human bias.
But, what is the limit of this decentralization? 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 some questions that we are still looking answers for. Perhaps, one answer for this is visible in the instance of Curve Finance and Mochi Finance. Was the invoking of EmergencyDAO necessary? Or was it just some protocol members exploiting their powers?

We will explore these questions and more as we unpack everything. Let's dive in.

Curve Finance and Curve Wars — A Primer

Before we get into the details of what exactly happened, it is crucial for us to understand what exactly are Curve wars. While it is not an official name, it is one that is being thrown around for various protocols who are fighting against each other to provide the highest yield to their users on Curve Finance — a decentralized stablecoin exchange protocol that lets users trade with lowered fees and slippage using liquidity pools akin to those used in Uniswap. There's a lot to unpack in that statement. So, let's start with the basics.

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What Is Curve Finance?

Curve Finance is a stablecoin exchange, letting users to trade between various stablecoins 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. 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 stablecoins against each other. This means the volatility of other coins (say BTC and ETH) do plague the protocol. Since most stablecoins are almost similarly priced, there is very less slippage and thus minimal impermanent loss.

High APYs

For every trade that happens on, 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 activity on the protocol, the APRs tend to go higher. Contrarily, on days of low-volume trading, they can even get quite low.

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 composability to the protocol, which means that users can utilize the derivative tokens issued by the platform to further participate in the DeFi ecosystem. This is a huge add-on for crypto users, because usually once locked, users are unable to generate any further yield from their assets.

What Is the Curve DAO Token (CRV)?

Whenever a LP provides liquidity to any of the pools on Curve, they get rewards in CRV (the governance token of the Curve protocol). Since Curve Finance is a decentralized autonomous organization (DAO), 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. You can also earn the token via yield farming.

Now, this is where it gets interesting. Users who have reached a threshold amount of CRV tokens can vote-lock an 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 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 a spectrum. It is said that there are "no losers" in Curve Wars but only winners.

— Curve Market Cap (@CurveCap) May 31, 2021What did you do during the Great $CRV War? #MemorialDay

The strategy is a bit convoluted to understand so I'll break it down here.

How to Attract Liquidity on Curve Finance?

Your objective, as an emerging decentralized stablecoin protocol, is to offer attractive yields to your users. 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 governance and alter the liquidity mining rewards for your pool.
Or, you can bribe (yes, you got that right) other CRV holders to vote in the favor of increasing rewards on your stablecoin pair.
Now, imagine that another emerging DeFi stablecoin protocol is trying to do exactly the same, but with Convex Finance. Convex Finance is an additional DeFi protocol that sits atop Curve Finance. It rewards CRV liquidity providers with additional yields.

You can simply repeat either of the steps above (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 DeFi protocols like Yearn Finance, Convex Finance and even StakeDAO have been competing against each other on the protocol to offer higher yields to their users.

For the purpose of this discussion, however, we are going to stick with Mochi Inu and how it attempted to accrue ridiculously high rewards for itself.

Mochi Inu and its Dominance on Curve

Before we understand what Mochi's play was, let's explore what it really is.

What Is Mochi Inu?

Mochi Inu 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 the USDM (Mochi's native stablecoin) and use it in DeFi.
Since it is a decentralized protocol, all the actions around fees around 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 whitepaper 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 stablecoins are backed by overcollateralized vaults subject to various credit parameters.

How Did Mochi Inu Game Curve Finance?

Now, there are several questionable aspects around its tokenomics, the team and the overall structure of the protocol. But, let's focus on what actually happened on Curve.

  1. Mochi first announced the acquisition of over 1M CVX (native governance token for Convex Finance) tokens. They planned 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.
  2. This helped them boost their liquidity pool and aided in attracting just over $100M in liquidity. Using this, they minted free Mochi. That was then used to mint roughly $45M worth of USDM.
  3. Then, they decided to swap USDM for DAI, and then further use the DAI to swap with ETH and/or buy CVX tokens worth $46M.
  4. They then lock 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 other pools would eventually drop — as more users concentrate on a single pool. On the surface, it looks a 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 Curve Finance was watching Mochi's rewards compound, they decided to do some digging into the protocol and its tokenomics. 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 whitepaper, 99.5% of the circulating supply of the tokens were actually owned by "the team". This meant that USDM was effectively undercollateralized.

In addition to this, the Curve team also pointed out some serious concerns about the security of smart contracts on Mochi and its founder Azeem.

The Curve protocol construed this as a "clear governance attack" and the EmergencyDAO, a team consisting of about nine members, decided that the LPs in that pool were at risk of getting rugged. Therefore, they decided to stop Mochi from receiving any more CRV rewards.

The DAO 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 Inu was not in the wrong given that it had merely exploited the underlying infrastructure in its own favor.

The other side to this: what extent can we expect protocol founders and the core team members to allow other protocols to exploit their platform? Both these perspectives notwithstanding, 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 DeFi 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 the 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 precedence for various other decentralized protocols that in instances like these, the protocol team members would only be focused on saving what they have spent thousands of hours creating.

Curve Wars and the EmergencyDAO — Is it True Decentralization?

For the first time in the history of DAOs, the power of governance was exercised by a few members rather than the entire DAO itself. This is a first, but then so is almost everything in DeFi.

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 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 protocols and users who were simply using it to their own benefit?

But there are two sides to it which I briefly touched upon in the previous section that I want to explore in depth here.

One, could true decentralization be a myth? Bitcoin and Ethereum are branded as the epitome of decentralization and "bankless" money because they have successfully removed the need for a trusted intermediary. However, that may not entirely be true.

Take Bitcoin, for example. While it is considered true decentralized money (if it's money at all as opposed to being an asset), studies have repeatedly shown that the majority of the coins are only concentrated within a few hands. While this in itself does not conclude that the digital asset is centralized, what I 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. And why would it not be? If a certain miner finds it profitable to mine in a specific country, then others would follow suit.

Second, there are some assets within DeFi that are inadequately distributed. Take Tether (USDT) 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 DeFi would be at stake. Just think about the amount of assets are being exchanged into USDT every second!

The truth is that the one with the heaviest pocket will dominate the market regardless of what it is. That does not mean the vision of a decentralized world is an illusion. Far from it.

The truth is that it is hard to decentralize and equate human nature. It is human nature to look for better yields — greed will always be a part of human character, whether we are in a decentralized protocol or a centralized banking institution. That is also why all the LPs rushed to Mochi's USDM pool.

It is 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 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 EmergencyDAO 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 their money. What would have happened if they had not taken any action? We would not even to imagine that scenario. 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.

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