Convex Finance Overview

Convex is a DeFi protocol built on top of Curve to facilitate higher returns for liquidity providers and CRV stakers. Launched on May 17, Convex quickly exceeded $1 billion in total value locked (TVL) in its first two weeks. As of June 28, Convex has attracted approximately $3.9 billion in TVL and generated approximately $15.1 million in protocol fees. What does Convex do and how did it manage to grow so quickly in such a short period of time?

Curve Refresher

In order to understand the value proposition that Convex offers, we first need to review how Curve works. Curve is an automated market maker (AMM) that specializes in liquidity pools with like-assets that are pegged to one another. Curve has liquidity pools with various stablecoins and pools with different flavors of wrapped or synthetic BTC, ETH and LINK. What makes Curve attractive to liquidity providers is that users can earn yield in the form of trading fees without having to worry about impermanent loss as long as the assets maintain their peg.

In addition to trading fees, Curve rewards liquidity providers with its governance token, CRV. What’s interesting about CRV tokens is that users can lock-up their CRV tokens for up to 4 years to receive vote-escrowed CRV or veCRV. The longer users lock their CRV tokens, the more veCRV they receive in exchange. Holding veCRV has three benefits: voting rights for the Curve DAO, a share of 50% of the trading fees on the Curve platform and up to 2.5x boosted CRV rewards for liquidity provisions. What Convex does is allow Curve liquidity providers to boost their CRV rewards without locking their own CRV tokens.

Enter Convex Finance

Curve liquidity providers benefit from Convex by receiving boosted CRV rewards that are made possible by other users who lock their CRV tokens with Convex. CRV holders irreversibly deposit CRV onto Convex and receive cvxCRV as a tokenized representation of their staked deposit. It should be noted that while converting CRV into cvxCRV is irreversible, one can swap cvxCRV to CRV via a liquidity pool on Sushiswap, though it is not guaranteed that they will trade 1:1. Users holding cvxCRV earn Curve trading fees as well as receive a share of the boosted CRV rewards that were made possible by the CRV that they locked. To further incentivize the use of the Convex protocol, CRV stakers and liquidity providers also receive Convex’s governance token, CVX as liquidity mining rewards. Users can stake CVX on Convex to earn a share of protocol fees.