Stablecoins are cryptocurrencies designed to maintain a stable value, typically pegged to a fiat currency like the US dollar. They come in three main varieties: reserve-based (backed by reserves of the pegged asset), collateral-based (overcollateralized with other crypto assets), and algorithmic (supply adjusted through algorithms). Well-known examples include USDT and USDC (reserve-based), DAI (collateral-based), and AMPL and ESD (algorithmic).

Traditional constant product automated market makers (AMMs) like Uniswap are not optimized for trading stablecoins or “packed coins” – representations of other crypto assets like wrapped Bitcoin or Ethereum. This is because stablecoin prices are expected to move in tandem and maintain a 1:1 exchange rate with each other. Dedicated stablecoin AMMs like Curve aim to provide better pricing and liquidity for larger trade volumes involving these assets.

Curve achieves this through a specialized pricing curve formula designed to minimize slippage (divergence from the expected exchange rate) within a certain liquidity range. The curve approximates linear pricing behavior for moderate trades but allows more slippage for extremely large or small trades to incentivize the rebalancing of the liquidity pool. This prevents one side from being overwhelmingly depleted.

Compared to traditional AMMs, Curve shows significantly lower slippage for large stablecoin/packed coin trades worth tens or hundreds of millions of dollars. However, the potential complexity of these pricing curve formulas may result in higher gas costs for trades on Curve.

A key risk with any stablecoin AMM is a “de-peg” event, where one of the stablecoins loses its pegged value. This can lead to “bank run”-like scenarios where arbitrageurs quickly extract liquidity from the remaining pegged coins, leaving liquidity providers with significant impermanent loss from being left with the de-pegged asset.

While stablecoin AMMs offer advantages for large trades of pegged assets, users should critically analyze the whitepapers and be aware that, as non-peer-reviewed works, they may omit certain assumptions, drawbacks, or nuances of the proposed solutions. A critical mindset is advised when evaluating these protocols.