Convex Finance-An Analysis
Disclosure: The author of this report and associated parties hold CVX, vlCVX, CRV, and cvxCRV tokens. These statements are not a recommendation to purchase any token or invest any funds. You should do your own, thorough research before investing a cent in any market. This is not financial advice, investment advice, or advice of any sort.
Key Points:
· Convex Finance has sustainable, rapidly growing revenues that accrue directly to token holders
· Based on annualized vlCVX Total Income, CVX is currently trading at ~ 1.99x earnings
· The recent introduction of 3rd party voting incentives increases CVX token holder income by 250%-500%
· Voting incentives are likely to continue to increase in the future as they apply to a wider set of Curve pools
· Fintech VC’s would knife each other for deals with Convex Finance’s economics
Like many new crypto protocols, Convex was born offering high incentives to those willing to deposit assets. And, also like most new crypto protocols these incentives are delivered in the form of protocol tokens, creating an inflationary environment where the circulating supply increases over time. The goal is to build enough user growth and revenue momentum that a transition to a more sustainable business model is possible. This sustainable business model should be one in which stakeholders are accruing value at a rate that far outpaces the rate of token inflation, while also offering all of the benefits of future protocol growth. In only the five months since genesis, Convex has attracted a staggering $8.1b in TVL and looks to be on the precipice of pivoting towards a growing, sustainable revenue model. The market does not yet understand the shift that is taking place.
This thesis assumes that the reader has a basic understanding of both the Convex and Curve protocols. If not, we recommend reading this simple primer or diving deeper with reports from research services like Delphi Digital, The Block, or Messari.
A Quick Review
Convex incentivizes users to stake CRV tokens, for which they receive cvxCRV in return. cvxCRV is effectively a fungible version of veCRV that is fully locked for 4 years, thus earning the maximum Curve protocol boost. This action is irreversible, which means that the number of CRV tokens under Convex control is unidirectional. This truly is an “up only” scenario.
At the time of publishing Convex has recently crossed the 100m token barrier and currently holds 103,333,877 veCRV, which is 36.8% of the circulating supply. What is even more impressive is that Convex is now capturing roughly 73% of the CRV emissions. With Curve rewards at 633,126.5 CRV/day until August 14, 2022, Convex annual rewards can be seen in the matrix below.
Note: All Income amounts are shown in a matrix which compares various CRV prices, and the amount of total CRV rewards claimed by Convex Finance
There’s something else worth mentioning. Much of the revenue harvested from Curve on behalf of Convex users is paid out in cvxCRV, meaning that Convex is locking up more control of Curve governance with every penny of revenue earned. This is one piece of what is known as the Convex flywheel. Even if no future users elect to convert their CRV to cvxCRV, the protocol would continue to amass veCRV from its harvested Curve rewards, increasing Convex voting power and revenue share.
This value capture mechanism alone signals that there may be room for CVX token prices to run based on a rational PE or PS ratio. While some curmudgeons may argue that this is expensive, we know that it is not expensive for high growth, mature, public companies. It should be cheap for a 5 month old project in the highest growth area of finance, and it falls in line with many crypto protocol valuations on a fully diluted basis.
How Do We Know It Is Cheap?
Imagine sitting down with 2 Silicon Valley VC’s to pitch Convex as a fintech company, solely on the data we have discussed thus far.
Also imagine that for some reason, there is an unsheathed knife sitting on the table.
“We have this 5 month old company. We’ve taken more than $8 billion in deposits. Some depositors can never withdraw their deposits, they can only sell their deposit receipts. Gross revenue is running at an annualized $500mm. How much are we losing? We’ll make a profit of $25mm this year, maybe more. You can invest right now at a 40 PE, post money. But there’s only room for one.”
Blood would be spilled.
But Wait, There’s More…
Every week Curve allows veCRV holders to vote to allocate rewards to the liquidity pools of their choice. Because Convex controls such a large share of the circulating veCRV, it wields an outsized influence in how these bonus rewards are allocated.
Furthermore, those CVX holders who are willing to lock their tokens in exchange for vlCVX control ALL of Convex’s veCRV voting power, not just their pro-rata share of the circulating CVX supply.
Recently, Andre Cronje debuted the bribe.crv.finance platform, which allows the offering of incentives to veCRV holders to cast their votes for specific liquidity pools. In the past 6 weeks, the total amount of these incentives have grown 6x to a peak of $1.132mm.
On the Convex side, another incentive platform named Votium launched on September 15th. Votium allows CVX holders who have locked their tokens to receive incentives for directing their share of Convex’s veCRV votes to a pool of the token holder’s choosing. In its first week, the ~3 million vlCVX holders who delegated their votes to the Votium platform claimed $286k in voting incentives — a number that annualizes at a 40.25% APR.
Convex is participating in the bribe.crv.finance incentive program with the veCRV votes that locked CVX holders have delegated to it. Currently, 36% of vlCVX (vote locked) is delegated to the Convex team while the remaining vlCVX is delegated to Votium. An additional 12% of vlCVX looks to be making direct deals for votes, which reflects additional revenue that is not captured by this analysis.
All vlCVX holders will accrue value from the voting incentives that Convex claims from the bribe.crv.finance rewards. This is currently accruing at roughly $160k per week. In addition, vlCVX holders that delegate to Votium are receiving an additional $286k per week.
With these additional earnings, AND an additional 1% of platform fees given to locked CVX holders, we can see that the PER TOKEN annual earnings of vlCVX are expected to be the following, assuming that there is NO additional incentive growth. We feel strongly that this is an extremely conservative assumption, especially given the fact that Curve V2 is looming on the horizon and will likely bring stronger competition for the allocation of the precious boosted CRV rewards. It may be almost impossible for protocols to avoid paying incentives to veCRV voters if they want their LPs to receive the maximum possible rewards.
When coupled with the normal platform revenue that is accrued to CVX token stakers and lockers, it is readily apparent that the CVX token presents an extremely attractive value and may be mispriced by many multiples.
While an increase in Votium platform participants and vlCVX stakers will dilute the annualized per token income as shown above, it is clear to us that CVX prices could rationally increase by a factor of 10x to 40x before they would be considered irrationally priced.
This Is Crypto, So Risks Abound
· This model is predicated on the continued willingness of protocols to incentivize veCRV voters.
· We have assumed a range of prices for CRV tokens, which is the primary source of Convex platform revenue.
· If voting incentives were to be outlawed or blocked, this would present a significant shift in earning potential.
· Voting incentives should strongly encourage more CVX holders to lock their tokens in exchange for vlCVX, which could dilute the per token earnings of voting incentives
In light of all of these risks, we still believe that the market has mispriced the CVX token by underestimating the willingness of protocols to incentivize veCRV votes and the strong demand for both CRV and CVX tokens that these factors would bring about.
