Curve Wars Part 2: The Kingmaker of DeFi Convex

In part 1, we went over Curve Finance and what makes it so attractive to investors. In this article, we will explore a relatively new addition to the Curve ecosystem called Convex Finance.

Convex Finance developed a protocol specifically for CRV staking. Since staking on Curve requires long lock-up times, Convex allows stakers to unstake at any time, making it more attractive for yield farmers that want more control of their funds.

The difference with staking on Convex is that when you stake your CRV you get back cvxCRV. Once you stake, your CRV can never be unstaked back to CRV; they will always be cvxCRV. In order to get back CRV you must trade cvxCRV to CRV. cvxCRV acts as a 1:1 peg to CRV, although it may be off by a couple percent from time to time.

The design of Convex has allowed them to control over 50% of the Curve governance token supply since stakers are giving their CRV to Convex for cvxCRV. The yields are so attractive that CRV holders are willing to do it. This has given Convex power in the Curve wars as they can control where Curve incentives flow, making their own token CVX, more desirable.

It’s important to know that CRV stakers in Convex aren’t giving their CRV to Convex for nothing. The current APR for staking CRV for cvxCRV on Convex is 51.2%!

CRV apy

Convex uses their own voting system to control the flow of Curve incentives. Convex users can lock up their CVX tokens for 16 weeks, earn yield on those locked tokens, and Convex appoints an address to vote on their behalf.

Here is a list of tokens at play:

CRV – Curve Incentive Token

veCRV – Vote Escrowed Curve Voting Token

CVX – Convex Incentive Token

cvxCRV – Curve Locked on Convex

vlCVX – Vote Locked Convex Voting Token

CRV and CVX Price Dynamic

Dune Analytics user Marcov, has created a dash for Convex. Currently there are 5.1 CRV locked per CVX. At a current price of about $4.50 per CRV that means each CVX controls $22.95 of CRV. This helps establish a floor price of CVX. The current price of CVX is $40.96. That means currently, CRV is the better buy between the two. This relationship dynamic shifts and helps boost the price of both. Buying coming into either protocol helps boost the price of the other.

Dune CRV dash

Votium is another DeFi protocol in the Curve ecosystem that offers incentives to CVX users in the form of bribes. Projects can use Votium to incentivize CVX votes.

For example, Project A offers a bribe on Votium in exchange for Convex users to vote for their pool to receive the CRV incentives. Since Convex has been given the responsibility to vote on the behalf of CVX users, they’re in charge of finding the best bribes and voting. Those bribes are then flowed to Convex users. Votium is doing millions of dollars in bribes a week.

Here is a breakdown of the Curve flywheel we have talked about so far:

  1. Curve is a DeFi exchange focused on stablecoins, low fees, and deep liquidity
  2. They’re able to pay liquidity providers yield through Curve incentives (trading fees and new CRV being released)
  3. Those CRV tokens are used for governance on the Curve network to decide which pools receive new CRV tokens released
  4. The more CRV you have staked, the more governance tokens you earn, and the more authority you have when voting on the flow of new CRV tokens
  5. Projects want to control the flow of CRV to incentivize liquidity providers to join their pool so their token has deeper liquidity
  6. Convex attracts CRV holders to stake on their protocol by offering an attractive APR
  7. Convex uses the CRV from those holders to control the flow of Curve incentives
  8. Convex uses their own token CVX to vote on behalf of their users for the pools with the best bribes on Votium incentivizing CVX holders

The crazy part is, there is more layers to this flywheel we will talk about in part 3.

Shoutout to James Bachini and his great work explaining the Curve Wars.