Making sense of Defi concepts - Curve's tokenomic on Convex Finance

I have mentioned earlier that I wanted to write about Curve Finance tokenomic. Now I have finally gotten down to put the pieces altogether.

What is Curve Finance?

Before we dive into the tokenomic, I would recommend reading this article as a primer if you are not familiar yet with the Curve Protocol - Three minutes to take you to understand Curve Finance, the king of stablecoin trading platforms. (The article took me about 13 minutes to read instead of 3!)

[I have purposely coloured the texts of various tokens such that it is easier to differentiate them as you read.]

CRV is the native token of Curve Finance and distributed as reward for providing liquidity to the protocol. Now let's take a look at the brother protocol of Curve which serves a different purpose - Convex Finance.


What is Convex Finance?

It is a protocol that allows liquidity providers to earn trading fees and claim boosted CRV without locking up CRV themselves. Liquidity providers can receive boosted CRV and liquidity mining rewards (on Sushi)

This means that one can stake their Curve LP token with ConvexFinance to get Convex LP tokens and then stake the Convex LP tokens to earn CVX and boosted CRV.

Another function of the protocol is to allow CRV staking for rewards. The rewards are as follow:
  • Earn a share of the Convex platform fees in CRV
  • Earn trading fees from the Curve platform (3CRV) when users stake cvxCRV
  • Receive liquid cvxCRV allowing anyone to exit their staked CRV position
  • Receive CVX rewards
  • Claim veCRV aidrops such as EPS

CRV lock-up to combat emission

These staking incentives above are useful to reduce the circulating CRV supply and thus pushing up CRV's price. When users stake their CRV tokens, the CRV tokens would be irreversibly locked up on the platform as veCRV. Users would receive a tokenized version of veCRV - cvxCRV at a 1:1 rate.

Besides staking, another lock-up of CRV supply is via vote-locks in Curve DAO. One can participate in Curve's governance by locking their CRV tokens up to a maximum period of four years and get vote-escrowed CRV (veCRV) in return.

Valuable veCRV...
"The protocols then deposit the CRV received into Curve Finance and collect veCRV, gaining voting power to allocate more CRV rewards to the pools for which they provided liquidity. That’s akin to a land grab."

How is cvxCRV liquid?


There's the Sushiswap liquidity pool cvxCRV/CRV that allow cvxCRV holders to swap their tokens back to CRV (so no fret about the irreversible lock-up). A quick check on Coinmarketcap showed that their prices are fairly the same. Theoretically they should be the same although there's no hard peg on their prices.

How is cvxCRV useful?

cvxCRV can be staked into the platform to receive normal Curve admin fees one would get for staking their veCRV on Curve.fi, as 3CRV. Users staking cvxCRV will also receive CRV from Convex's performance fee, as well as the platform native token CVX.

CVX can in turn be staked on Convex platform to receive its portion of the fees as cvxCRV (tokenized veCRV). It can also be locked to get vlCVX token for governance purpose (weekly epochs) on Convex.

More about CVX here.

Here's an infographic to summarize:



A clarification to the above diagram: 
The depositor of CRV tokens will not really receive veCRV in their wallets, instead they will receive the tokenized version cvxCRV straight away.

So in a way the depositors are giving their voting chance to Convex as they forgo the option to lock up their CRV for veCRV.

The whole idea stemmed from CRV being the key token to get veCRV, which gives voting power in Curve. Other protocols that ride on the Curve protocol for their vaults want more voting power so that they can boost the yields of their vaults. The Curve founder cleverly started ConvexFinance and this reward flywheel to fight acquire more CRV to prevent any other protocols from having a high enough voting power to monopolize. (Root of the Curve War...)

This is also a fine example of how a reward token, which is CRV, can have sustained value. (Usually reward tokens get farmed and dumped.)

--

If you prefer to listen instead, below is a good video explaining the flywheel effect of the boosted rewards and the bribing mechanism on Curve DAO.



More from my making sense of Defi series:

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Thanks for reading!

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