Summary

Uncertainty and volatility in the crypto market drive up demand for stablecoins.
Curve Finance is the biggest stablecoin exchange in DeFi, having over $20 billion in total value locked (TVL).
VeCRV token holders vote on which Curve Finance liquidity pools get the most rewards. Convex Finance controls nearly 50% of the total veCRV tokens. This control gives Convex a major role in deciding which liquidity pools to boost.
Convex can expand this voting model to projects with a similar token voting mechanic. It has recently expanded to Frax.
Curve profits from its massive pools of stablecoins. More stablecoin transactions increase Curve’s profits, which flow through to Convex users.

Symbol	CVX	Circulating Supply (estimated)	57,142,824
Rank (MCAP)	#67	Total Supply	88,170,011 (max 100,000,000)
Price (Apr 30, 2022)	$29.10	Market Capitalization	$1.67B

Complete historical CVX vs. USD price chart. Source: CoinGecko

In this report, we’ll answer:

How does Convex’s model work with Curve (the biggest stablecoin exchange in DeFi)?
How does Convex boost rewards for stakers and liquidity providers (LPs)?
How could Convex tokens become more valuable?
How is Convex a critical part of DeFi and the Curve Wars?
How much could Convex grow?

What is Convex Finance?

Convex Finance (CVX) is a platform that boosts rewards for stakers and liquidity providers (LPs) in Curve Finance and Frax Finance. It launched in May 2021 and became a significant “Curve Wars” participant in 2021.

Investors can hold CVX tokens to profit from a price climb or stake their variants to receive rewards. They can also convert their CVX to vlCVX (vote-locked CVX) for payouts every two weeks.

Who’s behind Convex Finance?

At least three semi-anonymous developers run Convex Finance. They appear to have a close alignment with Curve. This connection created (unconfirmed) speculation that several may also be Curve developers.

Convex developer confirms advising by Curve devs. Source: Convex Finance Telegram

The three main developers are active in the project’s Telegram and Discord channels. They’re known by the handles “C2tP”, “Winthorpe,” and “Kendrick Llama.”

It’s hard to find if they’re tied to other successful projects since they are pseudo-anonymous. Yet, their efforts in Convex have seen tremendous success.

The team continues to deliver new features. Recently, they expanded their model to Frax. In April 2022, they also fixed a bug that could have allowed them to rugpull.

How are Convex Finance’s tokens distributed?

Convex did not have a token sale, and there are no plans for selling tokens to the public. Instead, Convex distributed the first two percent of its tokens through an airdrop.

One percent of these tokens went to veCRV holders who held during the snapshot block. The other one percent went to veCRV holders who voted for Convex’s whitelisting on Curve.

The following chart shows CVX’s token distribution:

CVX token distribution. Source: Tokenomics – ConvexFinance

This table explains each distribution category:

50% Curve LP rewards	Rewarded pro-rata for CRV received on Convex
25% Liquidity mining	Distributed over 4 years. (Incentive programs, currently CVX/ETH and cvxCRV/CRV)
9.7% Treasury	Vested over 1 year. Used for future incentives or other community driven activities
1% VeCrv holders	Instantly claimable airdrop
1% veCRV holders who vote to whitelist Convex	Instantly claimable airdrop
3.3% Investors	Vested over 1 year. 100% of investment funds used to pre-seed boost and locked forever (no cvxCRV minted).
10% Convex Team	Vested over 1 year

Convex Finance distribution category descriptions. Source: Tokenomics – ConvexFinance

When do Convex tokens unlock?

Users can lock their CVX in exchange for vlCVX tokens, which offer rewards. These locks last for 16 weeks. As a result, each week’s unlock amount depends on how many people locked their CVX 16 weeks earlier.

The platform will unlock more tokens than usual in late June and early July. A potential bug forced all users to unlock and migrate to a new contract in early March. Many chose to migrate and re-lock, so their locking periods expire near the same time.

This graph shows the unlock schedule until August 2022:

Convex Finance weekly unlock schedule. Source: Dune.xyz

Why could Convex Finance be valuable in the future?

Convex is dominating the Curve Wars

Convex solves several downsides of Curve and provides unique advantages. With Convex, the average user gets a better experience and higher rewards. More significant players, such as other protocols, gain an edge over their competition by aligning with Convex.

Understanding Convex’s value requires a basic understanding of Curve’s mechanics.

Curve votes provide liquidity

Curve is a decentralized exchange for assets that should have similar values. Stablecoins are an example of these assets: one USDC and one USDT should each be worth approximately $1.

Most DeFi projects use Curve in one way or another, thanks to its massive liquidity pools. You could think of Curve as the backbone of DeFi.

Liquidity providers (LPs) can deposit their stablecoins into “pools” on Curve. When a trade takes place, the traders exchange stablecoins in one of these pools. LPs receive a part of the trade’s fee as a reward if the transaction uses their pool’s stablecoins.

CRV tokens help these LPs boost their pool’s rewards. LPs can lock their CRV tokens for one, two, three, or four years to receive veCRV tokens. Longer lock periods give more veCRV tokens. Each veCRV token provides the LP with a vote to decide which pool’s rewards get boosted.

This mechanic incentivizes LPs to lock as much CRV as possible for four years. Locking more of their CRV increases their chances to boost their pool’s rewards.

These pool rewards are essential for protocols – they need liquidity to survive. Higher pool rewards encourage more liquidity to enter their pool. Protocols depend on that liquidity to maintain their stablecoin’s peg to $1.

This need for votes to suck liquidity from competitors created a high demand for CRV tokens. As players competed to accumulate valuable CRV tokens, the “Curve Wars” began.

Convex controls much of CRV voting power and provides other advantages

As of April 2022, Convex has nearly half of the vote-providing veCRV tokens. It gained many by getting locked veCRV from LPs in exchange for tradable cvxCRV tokens.

This monopoly gives Convex significant power to decide which Curve pools get boosted. This power has a few advantages for CVX users:

Without a significant amount of veCRV, you lack the votes to ensure your pool receives a boost. Convex community members gain more power by aligning their votes in Convex.
Convex’s monopoly encourages other protocols to pay bribes – for example, on Votium – to get votes. These bribes increase rewards for Convex users.

Convex offers investors two more advantages:

Using Convex reduces your risk from exposure to CRV’s price. Maximizing votes requires locking CRV for four years – a long time in the fast-moving crypto space. Convex gives you a tradable token (cvxCRV) in exchange for your CRV, then locks that CRV to maximize its votes.
It handles compounding on Curve – a complex management process for many users.

To summarize, Convex helps many users reduce their risk and receive more rewards. Plus, other protocols bribe or join Convex to get their required votes.

Since participation in Convex requires CVX tokens, these factors increase demand for the token. Higher demand often leads to price appreciation.

Convex’s dominance encourages bribes

Protocols need liquidity in their pools to function. Higher pool rewards incentivize LPs to deposit this liquidity in the protocol’s pool.

CRV votes carry significant weight in deciding which pool rewards to boost. Other protocols tried to gain the required votes, but Convex got them first. Instead of competing, these other protocols must now team up with Convex or pay bribes.

Protocols pay financial bribes to Votium for Convex’s votes. CVX holders can convert their CVX to vlCVX (vote-locked CVX) and delegate it to Votium. After each round concludes, Votium airdrops the received bribes to these delegators.

Bribe amounts vary between each two-week round. April 19th’s round totaled $17.5 million paid in bribes. In total, bribers have paid $174.42 million on Votium at the time of writing.

Total bribes on Votium for each two-week round: Source: Llama Airforce

These bribes are a significant part of the total yield for vlCVX holders. Higher bribes generate more profit for holders, encouraging investors to buy CVX tokens. More CVX buyers help the token’s price appreciate.

It’s reasonable to expect bribes to continue while bribers profit. If the votes required to boost a pool cost $1 but make the pool rewards worth $1.25, it’s a good deal.

If it stops becoming profitable to bribe, then the bribers may instead buy CVX for access to votes. This new demand for CVX increases the chances of an increase in CVX’s price.

Stablecoins have emerged as a narrative for 2022

Governments are shutting down the COVID era’s easy-money printers. High inflation, war, and supply chain disruption add more fuel to the fire of uncertainty.

These factors discourage investors from buying risk assets like cryptocurrencies. Meanwhile, stablecoin farms offer a way to return high yields with less risk.

The stablecoin narrative is taking hold. Source: Shaan Puri on Twitter

Curve profits from its massive pools of stablecoins. More stablecoin exchange increases Curve’s profits, which flow through to Convex users.

These rewards create more demand for CVX and raise its odds of reaching higher prices.

Convex’s model can expand

Convex can expand its model to protocols that use CRV’s model of locking tokens for votes.

At the time of writing, they are expanding this model to Frax Shares. It’s reasonable to expect more expansion in the future.

Expanding to more protocols creates new sources of yield for Convex users. It also adds new sources for bribes and diversifies its risk from an overdependence on Curve.

This increase in income and reduced risk may increase demand for the CVX token and higher prices.

Future Ethereum upgrades might attract fresh capital

At the time of writing, $18 billion of Curve’s $21 billion in assets are on Ethereum.

Ethereum will upgrade, expected in H2 2022, to help address some issues such as high fees. Developers are also building layer two solutions to help Ethereum fix these problems.

If developers solve Ethereum’s scaling problem, this may attract more capital to Ethereum. This increased activity should benefit Curve – and Convex by extension.

Even if problems delay Ethereum’s upgrades, Convex could still benefit. Curve is expanding to new blockchains that haven’t encountered Ethereum’s scaling issues. This expansion increases Convex’s reach and raises Convex users’ rewards.

In either case, capital chases yield. Increased returns for Convex users create demand for the CVX token. This demand raises the odds of CVX’s price appreciating.

Cross-chain boosties are coming

Soon, “cross-chain boosties” are coming to Curve and Convex.

Before, investors could earn rewards on sidechains but only boost on Ethereum. Cross-chain boosties allow boosting on sidechains.

This boosting expands Curve’s – and Convex’s – power onto more sidechains.

More power encourages more bribes and higher yield for Convex users. These rewards can lead to price appreciation as demand for the CVX token increases.

What is the market saying about Convex Finance?

Convex has significant room for social growth

At the time of writing, Convex Finance has a community of approximately:

Over 42,100 Twitter followers
Over 9,464 Discord members
Over 3,560 Telegram discussion channel members and 1,777 announcement channel members
Over 10,216 SubReddit members (however, Discord and Telegram are the more popular discussion venues)

Convex is unique in its space after choking out competitors. This status makes it difficult to compare these numbers to very similar projects.

However, Yearn Finance (YFI), another yield aggregator, competed with Convex for veCRV votes in 2021. It has:

Over 189,700 Twitter followers
Over 20,414 Discord members
Over 13,988 Telegram members
Over 8,600 SubReddit members

Yearn’s larger social following isn’t surprising since it launched over a year before Convex. Yet, this difference suggests that Convex still has more attention to gain and room to grow.

Social volume grew from launch through Q4 2021’s euphoria before crashing with the rest of the market near the start of 2022. However, the average volume has recovered to its November levels. This recovery suggests that the community has remained interested in the project.

Social volume for Convex Finance from launch to April 12, 2022. Source: Santiment

Convex users are staying on the platform

Despite the market downturn, Convex has retained near-peak monthly users. The current bearish market could have helped retention. A bearish market favors stablecoin strategies that fuel Convex’s profits.

This favor could mean Convex will keep or grow its monthly active users through the bear market. More users bode well for the price of CVX since users need CVX to take part in the platform.

CVX’s price could increase even if user numbers decline. Protocols, which need votes from Convex, may show as few users but buy large amounts of CVX.

The following chart shows Convex’s monthly active users:

Convex monthly active users from launch to April 12, 2022. Source: Dune.xyz

Convex total value locked (TVL) remains high

Investors have trusted Convex with $12.29 billion of their funds as total value locked (TVL). This number rises to $13.86 billion if you count governance tokens staked in the protocol.

TVL first dropped during early 2022’s market crash, which lowered the price of most coins. It also saw a dip during the March 2022 bug, which required unlocking and migration.

Yet, TVL recovered to near 90% of its November 2021 levels. This reinforces the idea that investors are receiving significant value from Convex.

Convex Finance’s all-time total value locked (TVL). Source: DefiLlama

What are the risks for Convex Finance?

Hacks or rugpulls are always a risk

Hacks, which cause a loss of user funds, are common in DeFi. Another risk is “rugpulls,” where the team steals the project’s funds.

Convex does have an audit from MixBytes. While this doesn’t stop the possibility of a hack, it does reduce the risk. The project also offers a bug bounty program to find any issues.

For now, the team states that they cannot rugpull users’ funds. Even if they could, they haven’t when given the opportunity.

For example, the team discovered a vulnerability in early April 2022. This bug would allow them to rugpull $15 billion. Instead of walking away with generational wealth, they chose to fix the problem. This act suggests that they have an incentive to continue supporting the project.

Convex Finance developer commenting on potential rugpull bug. Source: Convex Finance Discord

The multi-sig could be abused or exploited

Convex has a multi-sig, which provides admin rights. Three of the five multi-sig members must vote in agreement to activate these rights.

The multi-sig voters are:

Two participants from Convex Finance
One from Curve Finance
One from Votium
One from Frax Finance

Someone could exploit, steal, or maliciously use this multi-sig. The team does not believe the multi-sig can access user funds. Yet, it’s always possible that there is an undiscovered vulnerability.

More tokens will be released

Convex has released an estimated 57.4% of the token’s max supply. Releasing the remaining tokens will act like inflation. As Convex releases more tokens, the price will drop unless investors buy more tokens.

Countering this inflation essentially requires a 74% increase in the current price. This increase would keep the price at its current level once Convex has released all tokens.

Convex’s potential makes it reasonable to expect the price to match or exceed this number.

CRV unlocks in 2024 could drop the price

It’s reasonable to expect that most users locked their CRV tokens for four years. Locking for this long gives them the highest possible votes from veCRV.

If many users did lock their tokens for four years, many CRV would begin unlocking in late August 2024. The unlocks could cause downward pressure on CRV’s price as more tokens enter the market. This drop could affect Convex’s price since it depends on Curve.

Yet, these unlocks are far away. Current investors concerned by this risk have years before these unlocks begin.

Problems with Curve could affect Convex

Convex’s success hinges on Curve’s success. Any problems with Curve will likely affect Convex – for example, a hack or rugpull.

Another problem could surface if major protocols continue the trend of gaining monopolies over veCRV votes.

Smaller projects need veCRV votes to get their essential liquidity. They might struggle to get enough liquidity if monopolies control all the votes.

This lack of liquidity could force smaller projects to leave Curve for elsewhere. This departure could fragment Curve’s liquidity and reduce its power.

Since Convex depends on Curve, a weakened Curve would also reduce Convex’s power. Convex can mitigate some of this risk by diversifying to other protocols, as it has done with Frax.

Bottom line

Convex has an almost unbeatable advantage in the Curve Wars since it controls nearly half of the reward-boosting veCRV votes. This monopolistic power creates profit for its users, increasing demand for the CVX token.

It’s reasonable to expect Convex’s power and monopoly to grow during the next few years with:

Booming stablecoin growth
Its dedicated team
Curve’s spread to new blockchains and potential growth from Ethereum upgrades
A model ready for expansion to similar token voting systems

What can I do from here?

Buy and hold CVX from any of these exchanges. (Difficulty: Beginner)
Stake CVX to earn cvxCRV. (Difficulty: Medium)
Stake CVX/ETH or CRV/cxvCRV SushiSwap LP tokens to earn CVX. (Difficulty: Medium)
Convert Curve LP tokens to Convex LP tokens, then stake these Convex LP tokens to earn CVX and boosted CRV. (Difficulty: Advanced)
Convert CRV to cvxCRV, and stake this cvxCRV to earn CVX rewards, Curve trading fees, airdrops, and CRV. (Difficulty: Advanced)
Vote lock your CVX to take part in gauge weight or governance votes – or delegate it to Votium to earn bribes. (Difficulty: Advanced)

Who should I follow?

Learn more and stay up-to-date with articles on Convex Finance’s official Medium
Join the community discussion on Convex Finance’s Discord and Telegram chat channel.
Follow updates from Convex Finance’s Telegram announcement channel and Twitter.

Issue #3: The protocol controlling the biggest stablecoin exchange in DeFi