One of the driving forces in decentralized finance (DeFi) is yield farming, in which crypto users try to find the most profitable ways to generate rewards for their holdings. Although this can be accomplished in many ways, liquidity provision in automated market makers (AMMs) is among the most popular.
Curve is one of the most-used AMMs in the crypto space, and it has revolutionized the way users are rewarded for becoming liquidity providers and participate on the platform. In doing so, it has drawn a large following. In an effort to generate even higher yields from the protocol for its users, platforms like Convex have taken advantage of the benefits of Curve’s “locked” version of its token, veCRV.
By allowing users to deposit their Curve-based tokens into a more centralized protocol, Convex effectively accomplishes collective bargaining by controlling large amounts of veCRV. This allows Convex to boost and direct rewards in ways that benefits itself and its users. Because of the success it has experienced on Curve, Convex has also launched a similar service for Frax Finance, and it has expanded to support Ethereum scaling solutions Polygon and Arbitrum.
CVX is Convex’s native platform token. It is used for governance, rewarding depositors of Curve-based tokens, and staking by users to collect portions of Convex’s revenue.
How was Convex developed?
The head(s) of Convex Finance are not known. The sole pseudonymous lead developer of the project is known as C2tP, which may be either an individual or a group. Ct2P has been an active developer of Convex on GitHub and has authored proposals related to Convex on Frax Finance’s governance platform.
Convex Finance was first introduced in a pre-launch announcement in April 2021, followed by an announcement of the airdrop of CVX tokens to veCRV holders and those who whitelisted the Convex contract on Ethereum. The platform was formally launched in May 2021, focusing entirely on improving usability and maximizing DeFi profitability using Curve.
Building on this initial focus, Convex announced that it would be expanding to Frax Finance (introducing the cvxFXS token) in December 2021. With this and other developments, Convex boasted over 31,000 users during its first year. At that time, more than 80% of its CVX tokens were locked on its platform. It has also expanded to scaling solutions including Arbitrum One and Polygon. The platform has controlled around 50% of all veCRV tokens since mid-2022, a testament to its popularity in the eyes of DeFi users.
How does Convex work?
An understanding of Curve Finance is paramount to appreciating Convex’s role in the DeFi space. Curve is a decentralized exchange (DEX) that has traditionally focused on stablecoin swaps, but it has since expanded to non-stablecoin trading pairs. It operates through an automated market maker (AMM) that relies on liquidity providers (LPs) who deposit crypto assets into pools. Its native token, CRV, is used to reward LPs, boost rewards, and govern the protocol.
The following sections detail how the CRV and veCRV tokens mediate these processes, and how users gain alternative access to yield generated by Curve through Convex’s platform. Of note, although the following sections explore Curve specifically, Convex also operates through Frax using similar methodology.
Curve’s CRV and veCRV
Curve’s CRV token provides incentives to users for interacting with the platform (through rewards for providing liquidity) and can be “locked” to return veCRV. The voting escrow token, CRV (veCRV), is allocated to users according to how many CRV they lock up and for how long they lock the tokens. Holding veCRV allows users to boost their rewards and vote on governance proposals—including those that determine incentives for specific liquidity pools.
This latter option is a draw for individuals, institutions, and projects who want to support causes important to them. By stacking veCRV, market participants can direct how Curve’s incentives are distributed, thus deepening liquidity of certain tokens and generating higher yields (in the form of CRV rewards) for themselves.
This has led to the “Curve Wars,” in which entities like Convex collect as many veCRV as possible—many times pooling the assets of individual users—in order to control a larger slice of Curve’s mechanics.
Convex in the Curve Wars
The Curve Wars refers to the battle for control of Curve’s governance ecosystem. Although individual users who hold veCRV can vote on protocol issues, the economy has naturally concentrated in a small number of big players who wield significant influence.
The biggest of these is Convex, which held approximately 40-50% of all veCRV throughout 2022-2023. Another is a DeFi protocol called Yearn Finance, which operates similarly to Convex although with some small differences. Because of its dominance in this sector, Convex has itself been subject to its own “Convex Wars,” in which multiple groups (most notably Frax Finance) collect large amounts of CVX to reap the benefits of the platform.
Accessing Curve through Convex
But how does Convex obtain veCRV in order to direct—and benefit from—Curve’s platform incentives? In short: users deposit their Curve-based tokens onto Convex, which in turn puts those tokens to use.
The process of depositing crypto into liquidity pools, receiving rewards, locking/staking tokens, boosting rewards, and participating in governance takes many steps on Curve. Convex attempts to simplify this process and amplify rewards through collective bargaining using its users’ assets. There are two types of tokens users can deposit onto Convex:
1. CRV: Curve’s governance token
Users who wish to stake their CRV can choose to do so on Convex instead of Curve, and in doing so they receive cvxCRV in return. This conversion is irreversible, and the Convex platform then holds the veCRV generated by locking collective users’ CRV on Curve. Convex then uses this veCRV to earn trading fees for providing liquidity, boost its rewards, and vote to optimize the liquidity gauges (the CRV rewards allocated to certain pools) in order to maximize platform revenue.
cvxCRV is intended to be a liquid token. Even though users’ CRV is technically “locked” on Convex to enable the above platform functions, they are able to still trade within the DeFi space. Staking cvxCRV on Convex gives users exposure to the standard rewards offered by veCRV on Curve’s own platform plus a share of Convex’s boosted CRV rewards and additional rewards in the form of CVX.
2. LP tokens
Curve users who provide liquidity in a pool receive LP tokens in return. These can be staked through Convex to gain access to boosted CRV rewards (without locking CRV, as above) as well as CVX rewards. Unlike CRV, LP tokens can be withdrawn from the staking process and redeemed through Curve as they usually would.
How is the CVX token used?
CVX is the native token of the Convex platform. It is distributed to stakers of CRV and LP tokens according to how many tokens they have deposited onto Convex. It can be staked to earn a share of the platform’s revenue.
Much like Curve allows for vote-locking of its CRV token (generating veCRV), Convex governance is performed through vote-locking CVX (generating vlCVX). Holders of vlCVX can receive additional rewards and dictate how Convex allocates its veCRV reserves.
Token distribution
CVX is minted every time CRV is claimed by Convex’s liquidity providers, and the ratio of CVX minted:CRV claimed decreases over time until the token hits its maximum supply of 100 million. Practically, this translates to a drastic reduction of CVX issuance after about 500 million CRV are claimed.
Of all 100 million CVX, 50% are dedicated to rewarding to users for depositing CRV on the platform. The remaining 50% of tokens were allocated to liquidity mining through incentive programs (25%), the Convex development team (10%), the Convex Treasury (9.7%), investors (3.3%), and veCRV holders through airdrops (2%).
Convex essentials
- Convex is a DeFi platform that leverages the power of Curve’s veCRV token to maximize yield for its users.
- By depositing Curve-based tokens (CRV and LP tokens) onto Convex, users allow Convex to control their voting power and amplify their protocol rewards.
- Convex’s CVX token is one form of rewards on the platform, and it is also used for community governance.