Convex Finance

Convex is perhaps one of the most successful DeFi protocols, and yet it is essentially a simple overlay on Curve Finance. We take a deep look at what Convex Finance achieves, how it became so successful so quickly, and what to know when investing in CVX or cvxCRV.

Prefer a PDF? You can also download this report here!‍

Curve as a Foundation

This analysis assumes a rough understanding of Curve’s model, and relevant details are provided later on in the analysis as required.

A Brief High-level Review of Curve’s Model:

Curve is one of the most trusted, time-tested, and largest DeFi protocols by TVL. Curve facilitates digital asset swaps with minimal slippage through capital-efficient liquidity pools. Curve liquidity providers (“LPs”) are rewarded with CRV tokens (and sometimes other protocol tokens) for staking their LP tokens. The CRV token entitles holders to governance rights and is distributed as rewards to liquidity providers.

The model is made circular by giving boosted rewards to LPs that stake (“vote-lock”) their CRV for up to four years. This creates very sticky liquidity, with CRV investors (CRV stakers) incentivized to provide liquidity by benefiting from boosted rewards, and LPs incentivized to put their CRV rewards to work by staking them for non-transferable veCRV, effectively taking them out of circulation (average vote lock is 3.63 years). The maximum you can boost rewards is by 2.5x, but it is important to note that to apply the same boost factor to more capital, more veCRV is needed. veCRV is short for ‘voting escrow CRV.’

The most important takeaway is that the CRV Investor and LP roles become intertwined through these incentives.

However, this model has a few downsides, the most important (at least in the context of this analysis) being that yield-focused LPs with no interest in making an upfront investment in buying and vote-locking CRV are not able to benefit from the boosted rewards, and may choose to go elsewhere for yield that is more competitive than Curve’s non-boosted rewards.

There are two main categories of potential LPs who may be interested in Curve’s boosted rewards but who are not willing to make the required long-term investment in CRV:

1. Purely yield-focused investors that have no interest in exposure to the volatile CRV token.
2. Yield-focused investors who may want to gain exposure to CRV (and other reward tokens) but who do not have the ability to, or are not interested in, making an upfront investment in buying and staking CRV for boosted rewards.
   

Multiple protocols have taken shots at bringing the benefits of Curve to these two categories.

Enter Yearn

Yearn Finance brought Curve’s boosted rewards to the first of the two categories above, yield-focused investors with no interest in CRV token exposure. By establishing its own CRV reserves and directing the vote-lock reward boosts to its own vaults, Yearn allows LPs to pool their assets in Yearn vaults and earn boosted rewards without needing to purchase and stake CRV themselves. Yearn then retains 10% of the CRV earned to add to its veCRV reserves.

A few downsides to Yearn immediately stand out with regard to its relationship with Curve. Because its strategies typically reward LPs with single-asset rewards in the form of the underlying LP tokens, the vaults rely on selling CRV rewards, resulting in an inverse (or as some have put it, “parasitic”) relationship between Curve LPs that stake on Yearn and the Curve DAO. Going one step further, while Yearn relies on Curve’s success for its most profitable vault strategies (mainly through the value of the CRV token), it is actively hindering Curve’s success.

Another downside is that the Yearn vaults rely on constructing and auditing complex contracts to automate their vault strategies, introducing significant smart contract risk and requiring the vault strategists to be incentivized with a significant portion of revenue, thus the reason for the high management fees.

Yet another effect of this model was that by retaining 10% of CRV rewards over time to build up its boost factor, Yearn left the market open for a protocol that figures out how to bootstrap their veCRV holdings upfront.

Enter Convex!

Convex Finance

In May of 2021, more than a year after Yearn’s launch, Convex entered the scene with a new model, powerful and elegant in its simplicity. Unlike Yearn, Convex was focused solely on Curve, and brought a strong value proposition to both Curve LPs and CRV investors.

Before a deep dive into Convex’s model, let’s take a quick look at these value propositions to understand how Convex was able to rise so quickly.

Value Prop to Curve LPs

1. Higher Yield (through boosts)

Similar to Yearn, Convex allows users to boost their curve staking rewards by depositing to Convex pools without requiring them to invest in and lock up CRV.

However, unlike Yearn, the yield (mostly in the form of CRV) is not sold and reinvested in more LP tokens. The reward tokens are simply claimable by LPs.

Arguably the biggest value here is the simplicity! Because rewards do not have to be claimed, sold, and reinvested, there is no need for complex automated strategies like Yearn vaults. And because you don’t need to develop and audit these strategies, Convex vaults only cost a fraction of what it costs to deploy a Yearn strategy. You can pretty much reuse the same exact code for every Curve pool.

Since costs are dramatically reduced, LPs are able to receive more of the rewards.

2. Exposure to CRV

Remember that the reason that an LP would choose to deposit their LP tokens into Yearn wasn’t necessarily that they did not want exposure to the reward tokens and were simply interested in yield accruing to their native LP token balance. While this may be true for a portion of Yearn users, a deciding factor for many LPs was that there is no requirement for an upfront and long-term investment in CRV.

Now LPs with no (or limited) CRV holdings who want to earn CRV (or the other volatile reward assets) can do so, and are incentivized to do so via Convex instead of Curve.

3. CVX Rewards

And in addition to the above benefits, LPs also earn CVX tokens (more on this later!).

4. Supporting Curve

Last but not least, Convex offered Yearn LPs with an alternative platform that does not negatively influence the value of the CRV token, and in turn the Curve DAO.

Value Prop to CRV Investors

But how was Convex, basically from Day 1, able to offer such high reward boosts to LPs?

Convex offers CRV holders with an alternative to staking their CRV for veCRV. Instead, they can stake their CRV on Convex in return for cvxCRV (with a ratio of 1:1).

When a CRV holder stakes their CRV for cvxCRV, and then stakes their cvxCRV, they earn not only the pass-through veCRV rewards from Curve (Curve pays these in the form of 3crv tokens), but also CVX rewards and CRV tokens.

This allowed Convex to quickly accumulate a significant amount of boost power.

In summary, cvxCRV Stakers get:

1. Pass-through veCRV rewards from Curve exchange (as 3crv)
2. A portion of Convex platform earnings from LPs (as CRV)
3. CVX tokens
4. Airdrops to veCRV holders (this happens when protocols bribe veCRV holders to vote for Curve proposals that support their protocols - note that these are increasingly going to CVX stakers since they are the ones voting)

And CRV Depositors (cvxCRV Stakers) give up:

1. The option of CRV governance rights
2. The ability to swap back to CRV at a guaranteed 1:1 ratio if a more enticing protocol comes along

As Coinmunks put it,

…but note here that the “Amplified yield” is in the form of CRV (which thus earns back a portion of the CRV that the user gave up) and CVX (which in turn restores the user with some of the governance rights that they gave up).

These rewards, when added all together, are quite the incentive, and led to a rapid accumulation of veCRV, which Convex used to direct boosted rewards towards their LP pools.

Within a few days, Convex had (with an initial outlay of CRV by investors to get things going) set in motion a positive feedback loop for TVL generation and secured a leading position in veCRV and boost power.

CVX Token and the Value of Convex as a Protocol

So what is Convex? It offers clear value propositions for LPs and CRV holders, but what value does the CVX token hold? And what ultimately is its relationship to Curve? And are all these rewards sustainable?

Zooming Out

First off, Convex is an overlay on Curve’s protocol. Since the conversion of CRV to cvxCRV is a one-way street, Convex will forever hold a significant percentage of boost power (veCRV), so it is married to the success (or failure) of the Curve protocol.

As discussed above, Convex’s relationship with Curve is symbiotic. Curve provides the revenue in the form of pool fees and CRV rewards, and in turn Convex provides a way for Curve to maintain its tokenomic goal of achieving sticky liquidity while expanding the pool of potential LPs.

Whereas Yearn ‘undoes’ the sticky liquidity dynamic of Curve by allowing LPs to profit at the expense of the CRV token rather than by investing in CRV, Convex offers a neutral LP option. Some LPs may sell their rewards while others hold, but liquidity nonetheless is increased which benefits Curve. In addition, Convex offers alternative incentives (and to many investors, more attractive incentives) to lock up CRV for the maximum vote-lock period.

While we can view Convex through the lens of a toolset providing alternative ways to interact with Curve, through a strictly economic lens, Convex can be seen as a tool to split the CRV token into its revenue component and its governance rights. To understand this better, let’s take a look at the CVX token.

The CVX Token

Convex’s native token CVX can be staked (also vote-locked as “vlCVX”) in return for two main sources of value to stakers: platform fees and governance rights.

Platform Fees

Platform fees, as a percent of the CRV rewards generated by Curve LP deposits, are vote-locked in Curve for veCRV and tokenized as cvxCRV. This has two important implications. For Curve, this means that these CRV token rewards are locked back up in the protocol and limit sell pressure, strengthening the argument that Convex truly benefits Curve. And for Convex, this means that even with no CRV deposits, its veCRV holdings increase. So as long as Convex retains LP deposits, it continues to accumulate boost power and strengthen its value proposition to LPs.

Governance Rights

CVX holders are also able to vote with their CVX to allocate Convex’s supply of veCRV towards deciding on Curve.fi gauge weight. In other words, CVX holders have a significant voice in how CRV emissions are allocated. CVX might be viewed as inheriting the governance rights (or at least the governance rights over gauge weights) from CRV when it is transformed into cvxCRV.

Tokenomics

CVX is distributed as rewards to staked Curve LPs, cvxCRV holders, and also to certain decentralized exchange LPs (previously cvxCRV/CRV to incentivize liquidity to allow investors to exit cvxCRV back to CRV if so desired, and currently CVX/ETH).

Token Distribution and Emissions

The majority (75%) of CVX is rewarded to Curve LPs and (currently) CVX/ETH LPs. While it is noteworthy that the Treasury, Team, and Investor allocations are limited to 1-year vesting schedules, we will focus mostly on the LP and liquidity mining rewards for this analysis as they constitute the majority of the supply.

As noted in the pie chart above, the emissions for 50% of the CVX total supply depend entirely on how many CRV are claimed (or “farmed”) through the Convex platform. The CVX minted / CRV claimed ratio decreases every time 100,000 CVX are minted.

To figure out where we are in this emissions curve, we can take the total CRV farmed (conveniently calculated here) and multiply it by the percent of cliffs remaining (since it’s an inverse relationship). This gives us the total amount of CVX minted. We can calculate the number of cliffs remaining by dividing the totalSupply (found in the CVX smart contract) by 100,000, and subtracting the result from 1,000 total cliffs. See the Convex full formula noted here.

~124,000,000 CRVfarmed * [1,000 – ~82,700,000 TotalSupplyCVX / 100,000] / 1,000 = ~22,000,000 CVX

So CVX is currently being minted at a rate of ~0.65 CVX / CRV farmed.

‍Some Quick and Rough Math

Around ~18,000,000 CRV are currently being farmed / month, with around 5% month over month growth (decelerating rapidly). Assuming constant LP deposits and month over month growth slowing to 4% over the next 6 months, about another 100,000,000 CRV will be farmed in the following 6 months.

5% of this will be paid out as cvxCRV to CVX stakers, or 20,000,000 CRV, and Convex will have therefore increased its veCRV by around 12% not even including CRV deposits.

Simple Conclusion

Convex isn’t anywhere near done accumulating veCRV. CVX emissions will continue for quite some time as seen above, and LP growth / revenue is still rising rapidly.

Circling Back to Yearn

Previously, while looking at Yearn and Curve in isolation, it appeared that Yearn was a parasitic protocol, creating negative pressure on the CRV token by instantly dumping it. Sure, Yearn perhaps helped increase Curve’s TVL, but at the expense of negating the sticky liquidity that Curve had achieved through its incentive model.

However, Yearn has more recently added Convex strategies to their Curve LP vaults. Now we have a situation where CVX holders, along with cvxCRV holders, are earning more CRV rewards thanks to Yearn’s vaults farming on Convex. While Yearn’s vaults are still dumping CRV rewards, Yearn now provides a big portion of Convex’s revenue.

An interesting way to look at this triangle of protocols is that they now all serve unique functions in a symbiotic relationship. While it is clear that Convex and Yearn rely on Curve, Curve is now able to benefit from three classes of LPs:

• Long-term Curve investors who support Curve through both participation in governance and as LPs (this goes back to the initial discussion on the ‘sticky liquidity’ model)
• LPs who do not choose to (or cannot) buy and stake CRV to participate in high rewards
• Single-sided LPs who desire no exposure to CRV and farm on Yearn

Convex has transformed a portion of Yearn’s negative sell pressure into more veCRV for Convex, and more incentives for Convex users to stake more CRV and buy, accumulate, or hold CVX. So even if Yearn’s effect on Curve is not positive, it is at least now quite a bit less negative.

Perhaps we could say the real vampire attack is on Yearn, for even when Yearn profits from Convex vaults, over the long run it deepens Convex’s moat as the major accumulator of veCRV. Note: Yearn could still in theory accumulate more CRV per Yearn Vault deposit to Convex from its 8.5% fee than Convex’s guaranteed 5% into cvxCRV, but based on the trajectories of Convex vs Yearn in terms of veCRV holdings, it’s not even a close match.

Valuation Models

Valuing CVX

Coinmunks has detailed a few potential valuation models for CVX, and so as not to reinvent the wheel, I will walk through them here briefly with updated numbers and some comments on their application and limitations.

Governance Component of CVX

As mentioned earlier, the CVX token inherits the governance rights of the veCRV controlled by Convex. While CRV depositors receive cvxCRV in return, this only carries rights to fee and reward distributions, not control over Curve gauge weights.

With around 45% of CVX staked, there are 5.04 veCRV per CVX token staked. Assuming every CVX token is staked, that is still 3.72 veCRV per CVX.

Coinmunks Valuation Models with Updated Inputs

Coinmunks went on to demonstrate that the value to CVX stakers may be a few multiples higher when considering income from bribes.

Important to note here is that some bribes may be distributed to cvxCRV stakers, while some may be distributed to CVX stakers.

While these numbers are volatile and unreliable, they demonstrate a clear case for valuation based on a revenue component plus a governance component.

Current bribes, including a sizable one, can be seen here.

Note: as Curve v2 expands to more DeFi pairs, it is likely that we see many more bribes (see more in Questions & Considerations).

Valuing cvxCRV

cvxCRV is essentially the wrapped revenue component of veCRV, plus 10% of Convex performance fees (on CRV earned, and paid in CRV), plus CVX rewards while emissions last.

cvxCRV is currently trading within a few percent of CRV, with a slight discount.

What is notable here is that with a high variable rewards APR, and one CVX representing ~5 veCRV in terms of voting power, cvxCRV would earn back its vote component within a year at an average CVX APR of 20%. While rewards will likely be lower than 20% across the next year, there is still a good chance that staked cvxCRV earns back this vote component before CVX emissions cease – and don’t forget that Convex is continuously growing its cvxCRV/veCRV supply.

If staked cvxCRV earns back its vote component, then it is essentially wrapped veCRV (transferable) with CRV rewards on top.

What’s the downside to cvxCRV? It sounds too good to be true in comparison to veCRV. Most notable may be potential opportunity cost. Since CRV to cvxCRV is a one way street, it’s possible that its relatively close peg against CRV falls. This would likely be short-term since staked assets accrue value while CRV does not. However, if, let’s say, other protocols build on Curve in the future and have similar early yield opportunities to Convex, there may be less CRV holders willing to trade their CRV for cvxCRV when they could be staking it for a higher yielding but similar asset.

Questions & Considerations

Is Convex too Dominant?

Curve has readily won the Curve wars, is forever intertwined with Curve, and for many the mood is swinging from excitement over Curve-Convex symbiosis to caution.

We can see this sentiment in the governance discussion regarding whether or not to remove the Curve whitelist. Curve only allows whitelisted protocols to interact with the Curve DAO via smart contract. With only three whitelisted protocols, many people see the whitelist as boxing out experimentation and allowing Convex to establish its dominance without competition.

CVX and cvxCRV allow stakers to capture the benefits of veCRV without the downside of locking them up for years. This might be viewed as a failure by the Curve DAO to enforce longer vote-locks on Convex and restrictions on cvxCRV.

This comment sums up some of the frustration nicely:

Whitelist? Convex can abuse its privileged position. No whitelist? Shady protocols can simply bribe CVX voters to integrate their protocols with Curve (like what happened with Mochi).

The Race to Accumulate veCRV has Turned into the Race to Accumulate CVX.

Controlling the liquidity across DeFi tokens is powerful, and Curve v2 means that any protocols that accumulate CVX will have influence over directing liquidity to their own tokens.

Protocols can still accumulate votes over CRV gauge weight on a discount via CVX, with the added incentives of passthrough income, CRV rewards, and the ability to liquidate their position or use it as collateral.

Frax was one of the first protocols to embrace the strategy of gaining significant influence over flow of liquidity to its own token.

Protocols will soon be bribing other protocols en masse to vote in their favor!

So is Anything Here Worth Buying? With veCRV, cvxCRV, and vlCVX, What’s the Best Investment?

CVX, with its limited supply, will perpetually accrue more voting power as the cvxCRV supply increases. It will also continue to accrue CRV (though of course CRV emissions will slow over the years). Taking into account bribes and the potential for high-value payouts, this seems to be the most undervalued asset.

What’s on the Horizon for Convex?

Convex plans to add all incentivized Curve v2 pools, which it has already started doing. As Curve moves into the volatile asset market, it opens up a broader market of LPs (more potential LP deposits for Convex).

This will likely impact bribes (positively)! Up until now, bribes to vlCVX holders have mostly been from stablecoin protocols. Incentivized Curve v2 pools will open this up to a much broader potential market of governance tokens. Expected bribes per CVX may be significantly undervalued due to an underestimation of the competition to come.

Convex is also monitoring Curve development for multichain boosted rewards. Curve is investing heavily in establishing itself as a cross-chain protocol, being one of the first to trustlessly bridge revenue back to its mainnet hub.

While Curve’s rewards can sustain pools with low volume for the time being (and likely for quite a few more years), it will require volume (through greater adoption and integrations) to replace the slowing emissions.

Can Convex Build Other Products, or Expand in Other Ways Outside of Providing Reward Boosts for Curve?

Yes! However, Convex is forever linked to Curve and will continue to grow closer together, and it's unclear what additional moves might make sense for the protocol.

Convex did retain a sizable treasury of almost 10% of the CVX supply (worth upwards of $250 million), but has yet to put together a grant council. At the moment, the multisig retains control over how these funds are spent. The option to introduce up to a 2% fee to the treasury on profits (CRV from LPs) is also built into the protocol.

What Happens When CVX Emissions Run out?

While it will likely take another ~2 years or so to exhaust CVX rewards (this is tied to the number of CRV farmed, which has been continuously accelerating), CVX will retain value without rewards. This is due to the fact that Convex will hold by far the largest amount of boost power for Curve LPs. Since Convex will retain significant LP deposits, it will continue to earn CRV rewards, and CVX will perpetually accrue more voting power (limited supply of CVX with ever-growing cvxCRV supply). It will of course, also continue to pay cvxCRV to CVX stakers.

Similarly, cvxCRV will continue to pay out CRV to stakers and attract new CRV holders that want the revenue share without the time-lock requirements of veCRV.

What Happens When Curve Reward Emissions Slow?

This is many years away, and in short, nobody knows. One thing to remember is that CRV could appreciate significantly in value, allowing the future emissions to still carry enough incentivization value. If the token doesn’t appreciate in value within a few years, but Curve has cemented itself as a lead generator of dex volume by then, the CRV token will continue to carry value as it streams rewards to veCRV holders in the form of 3crv.

And Convex?

Let’s assume the worst case, that CRV token emissions become insignificant four years from now due to the CRV price not appreciating in value. At this point, CVX still represents governance rights over a growing pool of veCRV. Every CVX controls multiple veCRV in terms of voting power. In addition, it’s transferable, unlike veCRV. However, since the pass-through fees from Curve trading volume are going to cvxCRV holders, CVX stakers would not benefit from a transition from a reward-driven Curve economy to a strictly volume-driven economy.

Can New Contenders Enter the Curve Wars? Does Convex Have Enough to Permanently Hold its Place?

Convex owns around 43% of the CRV supply, and since a big portion of the remaining supply is vote-locked for over 3 years, there is no room for a contender. While smaller attempts may be made by protocols to earn veCRV, it will not be on the same scale (or will at least take years to accumulate as much as Convex).

There have, however, been many new protocols taking shots at accumulating CRV, and this article dives deep into some of the most successful.

In What Instances or Circumstances Might Concepts from Convex Tokenomics be Applied to Other Protocols?

Convex is really a boosting service, and because very few other protocols mirror Curve in its reward boost model, it is challenging to apply this overlay model onto other protocols.

One value proposition worth bringing up again is the splitting of veCRV into its governance and revenue components. We will likely see more of this as protocols mature and different parties become interested in exposure to only one of these facets.

The vote-lock model is also being copied by protocol giants, including Yearn, which has recently been redesigning their tokenomics. This trend will likely continue, with many considering Curve as exemplifying a golden tokenomic strategy.

Helpful Links

Curve Swaps: Check the conversion rates of CRV/cvxCRV

Bribes to veCRV and vlCVX holders:

• bribe.crv.finance
• votium.app

Convex Tokenomics: Convex Docs

• CVX Mint formula/code here

CRV and veCRV Dune Dashboard: https://dune.xyz/banteg/misc

Comprehensive Dune Dashboard for Convex: https://dune.xyz/Marcov/Convex-Finance

• Total CVX over time
• Total CRV farmed by Convex