Defi review: Convex.finance

This is not financial advice. I write out these reviews as a personal exercise in understanding the project.

Disclaimer: I’m still learning so I could be off-base on some of the finer details — please feel free to correct me on any of these details in the comments.

Convex.finance lets you get higher yield farming returns on Curve.fi than if you were just yield farming off Curve directly. How?

Curve is one of the most important protocols in Defi, and is the base layer for countless protocols in the space. It is the absolute best place to swap tokens that have a similar price, such as from one stablecoin to another, because through some remarkably advanced math they offer very low fees and very low slippage even for massive transactions.

Fun fact: Curve balances stablecoins using internal math, not an external oracle. This is so accurate and reliable that Chainlink uses Curve’s data — the king of oracles looks at Curve to tell everyone hooked up into Chainlink what the price of stablecoins are!

CRV is Curve’s governance token — holders can lock up these tokens (in return, they get a veCRV token as a “receipt” proving their CRV is locked up) in exchange for 1) any liquidity they provide into a Curve pool has its yield farming rewards boosted, 2) they receive transaction fees for any trades made on Curve, and 3) being able to vote on the direction of the protocol. The catch is this: CRV must be locked up for years at a time — the longer it’s locked up, the more powerful the above three benefits are.

Most people don’t have enough CRV to lock up to achieve the maximum benefits, nor are they willing to lock it up for all those years so they can enjoy the maximum-level benefits. This is where Convex.finance comes in.

The Convex protocol takes CRV and locks it all up as one big entity. Currently, the Convex protocol is the largest holder of locked-up CRV, by orders of magnitude. As a singular entity, it experiences the maximum benefits of locked-up CRV as mentioned above. Convex allows its users to experience these benefits freely — now, anyone can have whale-level benefits without being a whale themselves.

The three benefits (four, actually)

The first benefit mentioned is that you can yield farm on Curve, and have your rewards multiplied as if you were a CRV whale. To do this, you simply need to deposit your liquidity into Curve (you receive interest-bearing “receipt” tokens in return) and then deposit these “receipt” tokens in Convex. You’ll get whatever payouts Curve naturally provides, plus some extra CRV and CVX (Convex’s governance token, more on that below) on top of that.

• The extra CRV comes from the fact that you’re receiving whale-level benefits from Convex’s pooled-together locked-up CRV.
• The extra CVX comes from Convex as a “thank you for using our protocol”.

Have a look at some of these yield farming APRs:

The second benefit mentioned is that you can receive transaction fees from trades made in Curve; Convex has so much locked-up CRV that they rake in tons of these fees, and you can get that passed on to you. You do this by giving Convex your CRV tokens — it locks them up permanently (it adds them to Convex’s gargantuan locked-CRV war chest), and gives you a cvxCRV interest-bearing “receipt” token in return, which represents that you have given Convex your CRV and are entitled to Convex’s Curve transaction fees. You stake that cvxCRV token to rake in those Curve transaction fees:

There is another benefit I did not mention above — let’s call this “benefit 2.5”. Convex has a governance token, CVX. It represents a share of ownership in the entire Convex protocol (and thus, a share of ownership in Convex’s massive locked-CRV war chest). When Convex provides benefits 1 and 2 to people, it skims a little money off the top and puts it in its coffers — this share of ownership in the protocol entitles you to some of this money. You do this by staking your CVX tokens—in return, this money is paid out to you in the form of cvxCRV, so basically this is Convex saying “Thank you for owning a share in our protocol! As a thank-you, we’re giving you ownership of a piece of our locked-CRV war chest. Go and use that to farm even more Curve fees (benefit 2).”

The third benefit has to do with the fact that locked CRV lets you vote on the direction of the Curve protocol. One of the most important items that can be voted on is which Curve pool gets “boosted rewards”: this multiplies the yield for any pool’s liquidity provider by up to 2.5x, making the pool incredibly attractive for people to park their money in.

This power cannot be understated. If a Curve pool is empowered to offer 2.5x rewards, yield farmers flock to it, thus providing that pool tons of liquidity. This is the holy grail for Defi projects — without liquidity, their project is worthless; with liquidity, their project is legitimate. These votes decide who becomes a king; thus, these voters are kingmakers.

As Convex owns the vast majority of locked-up CRV, it carries the most voting power for the Curve protocol. But, all that voting power remains dormant. The Convex team is currently developing a way (see: Votium) for CVX holders and cvxCRV holders to cast their votes in the Curve protocol. Because Convex’s locked-CRV war chest is so large, a single CVX token or cvxCRV token represents around 5-10 such votes.

Now the interesting part: projects are bribing these voters to grant their project’s Curve pools that 2.5x boost. This is being done here: https://bribe.crv.finance/

So not only can one reap the rewards of benefits 1, 2, and 2.5, but they also receive bribes from up-and-coming projects: these projects say “vote to make me a king, and in return for your vote I will give you my pre-pumped token”. This is benefit 3.

Future outlook

Curve itself is going through an incredibly exciting evolution. It became a Defi bluechip by specializing in low fee, low slippage stablecoin swapping. Other projects use Curve on their backend to facilitate these swaps — Curve truly is the backbone of Defi.

Now, Curve is offering the ability to swap tokens that aren’t similar in price: see the tricrypto pool, which allows users to swap between ETH, BTC, and USDT. If this continues to prove successful, Curve will become a competitor to non-stablecoin DEXs far and wide. Curve is extending its reach beyond just the Ethereum blockchain as well, cementing itself as the backbone for cross-chain Defi. Even if this expanded offering doesn’t take hold, it is likely Curve will stay king of stablecoin swaps.

Experimental projects around decentralized forex are using Curve for its backend. Will Curve capture this market?

Since Convex is entirely symbiotic to Curve, and in fact magnifies Curve’s effectiveness, if Curve continues to succeed, Convex will succeed by orders of magnitude.

Are Convex and Curve safe? No idea. Do your own research. Should you invest in either? Not for me to say, I’m not a financial advisor — just some guy on the internet writing up my findings. Am I bullish on these two? Absolutely. Of course we need to unpack tokenomics to get a full picture, but that’s outside the scope of my write-up here.