Convex Finance (CVX) is an inventive DeFi protocol built on top of stablecoin exchange Curve Finance. At its core, Convex rewards Curve liquidity providers and CRV stakers with additional DeFi yields.
The aggressive push by Convex to lock up as much Curve liquidity as possible has thrown the protocol into a DeFi war with Yearn Finance. Both projects need all the CRV tokens they can get to keep increasing interest rates for Curve LPs.
Curve Finance is now the world's largest decentralized exchange by total value locked. So, any DeFi protocol absorbing that liquidity into its own protocol will be enormous by default, which is why Yearn and Convex are battling it out.
Let's dig deeper into what Convex Finance is, how it works, and explaining CVX token.
Convex Finance is a platform for CRV token holders and Curve liquidity providers to earn additional interest rewards and Curve trading fees on their tokens. Put another way, Convex Finance offers boosted Curve staking.
That's it — that's the product. In a DeFi era where protocols offer countless products and options, it's reasonable to expect more out of Convex. However, don't be fooled. The sheer simplicity and single-minded focus of Convex's offering are what has made the platform so successful.
There are really only two people Convex is aimed at:
- 1.CRV holders: If you hold CRV tokens, Convex lets you stake them for cvxCRV.
- 2.Curve liquidity providers: If you hold Curve LP tokens, Convex lets you stake + boost them.
You might be asking yourself why you would stake CRV on Convex rather than Curve for veCRV, or why you'd deposit LP tokens there instead of Yearn. Well, it's all about the boosted rewards.
To get that point, you'll need to know a little bit about how Curve Finance works.
Curve is a decentralized exchange with a heavy focus on stablecoins. Since stablecoins are far less volatile than other cryptocurrencies, they're perfect for liquidity providers to avoid impermanent losses.
Where Curve gets really sweet for LPs is in its reward structure. Curve tokens (CRV) are issued as yield farming rewards to LPs and are convertible into veCRV (vote-escrowed CRV).
veCRV is just a fancy name for time-locked CRV that can be used in governance, boosting rewards, earning trading fees, and receiving airdrops. Going back to the whole boosted rewards thing — the more veCRV you have, the more you can boost the CRV rewards from your liquidity pool.
You can boost your CRV rewards as high as 2.5x if you apply the maximum amount of veCRV required for your deposited liquidity. Of course, the more tokens you LP in the pool, the more veCRV required to boost up to 2.5x.
To get that maximum reward takes a lot of veCRV. If you're a small LP, you probably don't want to go through the hassle of buying CRV, locking it into veCRV, then using that to boost. And if you're a big LP, the astronomical amount of veCRV needed to max boost can feel unattainable.
Essentially, everyone using Convex is pooling their assets together so the platform can acquire more CRV, convert it into veCRV, then maximize boost to all Curve LP token holders.
Isn't that brilliant? In the end, it doesn't matter how large or small your stake in a Curve pool is — as long as you have Curve LP tokens, Convex usually lets you get the maximum reward boost out of them.
We say usually because not all Convex pools are boosted to the max. Some are sitting at 1.89x, while others are solid at 2.5x. What makes some pools boosted higher than others is the amount of veCRV applied to the pool.
Convex gives you a fairly formidable four-pronged path to passive income. If you provide liquidity to one of the Convex-supported Curve liquidity pools, you get the following income streams:
- 1.Base rate interest
- 2.Slice of Curve platform trading fees
- 3.Convex-boosted CRV rewards
- 4.CVX tokens via Convex liquidity mining
Even if you aren't providing huge sums of liquidity to Curve, setting and forgetting your tokens in a Curve pool, then depositing the LP tokens to Convex long term can be handsomely rewarding.
Convex Finance isn't just built to benefit Curve liquidity providers with better CRV boost. It also wants your CRV tokens even if you aren't an LP.
Many people see the promise of Curve Finance's platform and are buying CRV tokens as a result. Usually, you'd want to time-lock your CRV into veCRV to earn a share of the platform's trading fees. But Convex gives you another option: cvxCRV.
Basically, you just stake your CRV tokens on Convex and receive cvxCRV in return. cvxCRV tokens give you a claim to:
- veCRV rewards from Curve exchange
- A slice of Convex platform earnings
- CVX tokens on top of everything else
- Airdrops to veCRV holders
That's a hefty list of rewards for converting your CRV into cvxCRV. There's probably a catch, right? The catch is that once you convert CRV —> cvxCRV, you can't go back the other way. In other words, staking your CRV tokens on Convex is a permanent claim on Curve + Convex trading fees and tokens.
- CVX can be staked on Convex Finance to earn a share of Curve and Frax LP's CRV and FXS earnings.
- Platform fees (CRV, FXS) that would be returned to CVX stakers are first locked as veCRV and veFXS, respectively, and tokenized as cvxCRV and cvxFXS before being given to CVX stakers.
- Vote-locked CVX tokens receive additional fees from both Curve.fi and Frax Finance LPs.
- Vote-locked CVX is used for voting on how Convex Finance allocates it's veCRV and veFXS towards gauge weight votes and other proposals. Users must vote-lock their CVX tokens in order to participate. Vote locking requires users to time-lock their CVX tokens for 16+ weeks.
- CVX is rewarded to CRV stakers and Curve.fi liquidity pools pro-rata to CRV generated by the platform. If you are in a high CRV rewards liquidity pool you will receive more CVX for your efforts.
- CVX tokens were airdropped at launch to some curve users.