What is Convex? (CVX)
Summary of Convex
- Convex optimizes yields and enables liquidity mining rewards for the Curve protocol.
- Convex Finance was officially launched in May 2021 by a pseudonymous person or group of people.
- CVX can be staked on the Convex platform for a share of Curve LP's CRV earnings and is used for voting on the protocol’s specific token allocations.
Convex is a yield optimizer for the Curve protocol that lets token holders earn boosted Curve (CRV) rewards. Curve is a decentralized exchange (DEX) liquidity pool on Ethereum specifically designed for swapping stablecoins.
Dubbed a “DeFi 2.0 protocol”, Convex is part of a subset of second-generation decentralized finance (DeFi) protocols that provide yield farming services. Holders of Curve’s native token (CRV) and Curve liquidity providers (LPs) are able to stake their tokens via Convex.
Staking through Convex allows users to earn Convex’s native CVX token as well as a share of boosted CRV as rewards.
CVX can be staked on the Convex platform for a share of Curve LP's CRV earnings. Additionally, CVX is used for voting on the allocation of tokens on the Convex platform. Participants must lock their CVX tokens on the platform for a minimum period of time before they can participate in the protocol’s governance process.
Who created Convex?
Like Bitcoin (BTC), whose pseudonymous founder Satoshi Nakamoto remains unknown, Convex was created by an unknown person or group of people going by the name C2tp. It is assumed the founder(s) came from a software development background, though this is yet to be officially verified.
Convex launched in May 2021 and was whitelisted on the Curve platform in April that same year. Whitelisting followed a proposal that included requests to allow Convex to participate in Curve governance. Due to the sheer amount of CRV being deposited on Convex, Convex now custodies a significant portion of the tokens that allow holders to have a say in Curve’s governance.
Convex has a maximum supply of 100 million CVX tokens with 50% allocated toward rewarding Curve liquidity providers. A further 25% is to be distributed over four years for liquidity mining purposes and 9.7% of the tokens are held in the treasury.
How does Convex work?
While Curve’s CRV token is a vote escrowed token (veCRV), CVX is a fee-earning cryptocurrency that serves to simplify staking on Curve. Vote escrow is a term pioneered by Curve that refers to the act of locking CRV in order to gain governance voting rights.
Convex allows users to access liquidity and earn fees through Curve’s stablecoin pools. To achieve this, liquidity providers deposit tokens into Curve’s vaults and then stake them on Convex. Convex, which acts as an intermediary pool, auto-harvests these tokens and distributes the rewards to liquidity providers.
Unlike yearn.finance’s vaults, which auto-sell harvested CRV as liquidity provider tokens, Convex’s rewards are distributed directly to users in either CRV or other reward tokens (such as SNX or LDO to name a few). Liquidity providers can also receive CVX as an additional reward that could be further compounded through the staking mechanism.
By depositing a certain amount of CRV tokens into Convex, users are entitled to receive cvxCRV tokens. These wrapped tokens can be staked for Convex’s own native CVX coin, as well as part of the CRV reward earned from Curve via Convex. Rewards include a 10% share of the CRV harvested by vaults and a portion of CVX tokens in the form of an airdrop.
When a user deposits CRV into Convex, the protocol converts these holdings into veCRV and credits cvxCRV to the depositor at a nearly 1:1 ratio. Since users receive veCRV in return for locking up CRV, locking up more CRV can lead to larger yields. It is also possible to exchange cvxCRV for CRV at any time using Curve’s liquidity pool.
Why does CVX have value?
Though the exact amount fluctuates, Convex typically has billions of dollars in total value locked (TVL), making it one of the largest DeFi protocols in the world at that time. Total value locked represents the sum of all cryptocurrency assets deposited in a DeFi protocol.
Convex allows users to earn trading fees and crypto staking rewards without locking CRV, enabling a secondary source of rewards on tokens they already own from the Curve network. This advantage for Convex users is a major reason for Convex’s growth.
Both CRV stakers and Curve’s liquidity providers are entitled to CVX liquidity mining rewards.
Convex also has free withdrawals and a performance fee of 16% used to fund gas costs. Gas refers to a unit of measurement related to the amount of computational energy required to process and validate transactions on a network.
In December 2021, the project announced that it will be expanding to include Frax’s FXS token on its platform, noting that a reason for the partnership is the similarity between its token-locking model to that of Curve’s.
Why buy CVX?
The stablecoin sector has experienced significant growth, with its total market capitalization growing into the hundreds of billions of dollars. Those that believe the team behind Convex will continue to further expand and create utility within the stablecoin sector may choose to opt for their services.
Those who see value in a platform building innovative ways of earning rewards on cryptocurrency holdings may be interested in Convex. Further, those who believe the Convex network will continue to grow may also choose to hold CVX, which has a maximum supply of 100 million tokens.
CVX may also be staked on the Convex platform for a share of Curve LP's CRV earnings. Participants may also lock CVX on the platform in order to vote on the protocol’s allocation of veCRV.