Erik Weijers, 5 months ago

What is Convex Finance (CVX)?

Convex Finance lets Curve’s liquidity providers and Curve stakers earn more rewards. Curve Finance is a decentralized exchange (dex) that focuses on stablecoin swapping.

Convex token (CVX) is a utility token used to receive a share of Convex platform fees. In the future, CVX tokens will also be used for governing Convex Finance.

The relation between Convex and Curve

In essence, Convex Finance rewards people locking up their Curve (CRV) tokens with Convex. For Convex Finance, there is an incentive to do this: it gives them governance over Curve and the highest rewards. 

The Convex Finance protocol offers two ways in which investors can boost their rewards on the Curve exchange: by providing liquidity and by staking. 

  • CRV stakers: users who hold CRV can stake them for the token cvxCRV by using Convex instead of staking on Curve. cvxCRV is a tokenized version of veCRV (see below), and the conversion is only one-way. By using Convex, users receive additional rewards such as CVX tokens and a portion of Convex platform's earnings.
  • Liquidity Providers on Curve: users those who hold Curve LP tokens can stake them on Convex and boost them. On Convex, they are pooled together with other CRV stakers. The larger the pool, the more Convex can increase and distribute its rewards. 

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 CRV holders. 

Buy what is veCRV? It is time-locked CRV (between one week to four years) that gives governance rights, boosted CRV rewards, earning trading fees, and receiving airdrops. People who are bullish on Curve Finance could buy CRV tokens. The normal thing to do with CRV would be to time-lock (stake) your CRV into veCRV and earn trading fees. But as mentioned, Convex gives you another, boosted option: cvxCRV.

The Curve wars

In 2021 and early 2022 the so-called Curve wars raged. Competing DeFi protocols, including Convex Finance and Yearn Finance, wanted to out-compete each other in locking up as much CRV as possible to get the governance rights and supreme payouts of Curve Finance.  

Remember the boosted CRV rewards that veCRV owners get? These rewards get relatively higher with the amount of veCRV owned. This explains why Yearn and Convex tried to get their hands on as much CRV as possible to lock it for veCRV, so they can earn the largest possible boost (the highest yield) for their depositors. 

Convex ended up winning, securing the most veCRV, and hence governance voting power of Curve Finance. The Curve wars led to a dramatic price increase of both CRV and CVX. After things cooled down in the bear market and yields came down, both tokens have lost much of their value.

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