What is Convex Finance?
As more DeFi protocols are being built on top of each other, the concept of "DeFi lego" started to take roots in the mind of the crypto community. The idea is simple: build a new service on top of an existing protocol that helps users make more money.
Convex Finance came into existence in 2021. The idea is to bring Curve users together and create a big pool to compete with other LPs on Curve. By having funds pooled together, the totality of participants can earn more than staking smaller sums separated. To no surprise, the idea was an instant banger!
Today, Convex Finance represents the biggest CVX staking pool on Curve. Not only do Convex users earn more on Convex, but they also get rewarded in the CVX token.
Convex Finance is governed by a DAO of CVX token holders. Anyone can participate in governance or just use the Convex protocol.
Convex has its own treasury from where it incentivizes CVX stakers and funds the development of the protocol. Currently the use of treasury funds will be at the discretion of the Convex Team. The protocol will eventually shift to a more community driven process, much like Curve's Grant Council.
While Convex leverages Curve Finance to make money for its users, the protocol has its own codebase, separated from Curve. To this day, Convex Finance has never been hacked.
How does Convex Finance work?
Convex Finance is the perfect example of money lego in action. The protocol pools liquidity from a broader userbase in order to leverage another DeFi protocol, namely Curve Finance. As a result, users who provide liquidity via Convex Finance can boost their CRV rewards on Curve.
To explain how Convex works, let's break down the process: users deposit Curve LP tokens to the Convex system, the protocol then automatically stakes with Curve, rewards are split among the Convex LPs.
The idea behind Convex Finance works because Curve's CRV tokens are issued based on the amount of liquidity received – more liquidity = more rewards. Curve LP tokens can then be staked into what Curve calls a pool "liquidity gauge" and boost your rewards.
What makes Convex different from an average group of liquidity providers with the same plan is how they are able to retain their userbase. While all the hard work is essentially done by Curve, Convex Finance adds a coordination layer for the liquidity providers.
In addition to the CRV rewards, Convex Finance also issues its own CVX token to reward participation. CVX is a governance token and utility token. In order to vote on any proposal on Convex, you must lock your CVX tokens for a fixed time period(a minimum of 16 weeks). Because Convex Finance is fully decentralized, CVX holders can vote to adjust the protocol parameters, fees and add rewards. These adjustments are then implemented by the Convex team.
In conclusion, Convex Finance is another way to use Curve and maximize returns. The protocol is fully run by smart contracts and governed by the CVX community. Convex Finance works for both liquidity providers and stakers on Curve. Using its native CVX token as an extra incentive, Convex is able to compete with some of the biggest liquidity providers on the Curve markets.
How to make money on Convex Finance?
There are two main ways to make money on Convex Finance: liquidity provision and staking. Both of these mechanisms apply for Curve and Convex. Depositing with Convex Finance can be more profitable vs going on Curve alone. This is because you are part of a much larger pool with Convex, and therefore qualify for more CRV rewards. Furthermore, you can add or remove liquidity at any time with no deposit or withdrawal fees. From a financial perspective, it's worth comparing the APRs on Convex and Curve before deciding to use either.
Before we dive into the ways to make money on Convex, it's important to see the fee distribution of Convex. As a staker or LP on Convex, you are entitled to a share of the revenue generated by Convex.
There is a 17% total fee on all CRV revenue generated by Curve LP's on our platform distributed as follows:
- 10% goes to cvxCRV stakers (paid out as CRV)
- 5% goes to CVX stakers, which includes vote-locked CVX (paid out as cvxCRV)
- 1% goes exclusively to vote-locked CVX (paid out as cvxCRV)
- 1% goes to the harvest caller (paid out as CRV)
These percentages make little sense unless you see the rough numbers. On the good since, Convex dashboard shows you the updated APR on your deposit, making it convenient to see the yields in real time.
Convex Finance Liquidity Provision
Your life as a liquidity provider on Convex is very easy. The first step is to have your Curve LP tokens (cvxCRV) ready. If you only have CRV, Convex will convert them to cvxCRV for you.
After depositing with Convex, your Curve LP tokens are staked in the curve gauge with boosted reward rates. As time goes by, you start to accumulate CRV rewards that can be withdrawn anytime.
Unlike other DeFi protocols, you can withdraw your LP tokens from Convex whenever you like. cvxCRV conversion is 1-way. If you would like to convert your tokens to CRV, you can use one of the many cvxCRV for CRV liquidity pools.
If a user deposits CRV into Convex, that CRV is locked forever on the platform as veCRV.
In order to provide liquidity with Convex Finance, follow these steps:
1. Open the Convex app
2. Click on the "Stake" tab
3. Scroll down to the "Stake Curve LP Tokens" section of the page, and choose the LP token from the list you wish to stake on Convex
4. Enter the quantity of LP tokens you would like to stake. If it's your first time on Convex, click on the "Approve" tab to approve your LP tokens for use with the contract
5. After that transaction has confirmed, you can press the "Deposit and Stake" button to deposit your LP tokens to Convex
6. Profit
If you want to withdraw, navigate to the "Withdraw" tab on the selected pool. Convex shows you the projected APR priced in USD. If all parameters stay exactly the same for a few weeks (TVL, CRV boost, CRV price, CVX price), this will eventually turn into the current APR. The APR should be taken with a grain of salt as it represents as it fluctuates in value.
Convex Finance Staking
With Convex Finance you can stake your CRV tokens on Curve and earn a share of the boosted CRV on the Convex platform. Your profits will come from the Curve fees (staking profits) as well as the boosted CRV thanks to the volume of Convex staking pools.
Having second thoughts about your staked CRV? You can receive liquid cvxCRV and exit your staked CRV position in a heartbeat.
In order to stake CRV on Convex, follow these steps:
1. Open the Convex app
2. Click on the "Stake" tab
3. Scroll down to the "Stake your CVX to earn cvxCRV" section of the page
4. Enter the quantity of CVX tokens you would like to stake. If it's your first time staking CVX approve the contract first
5. Press the "Deposit and Stake" button to deposit your CVX tokens to Convex
6. Profit
Staking CVX can be a nice way to boost your profits over time. At the end of the day, you have an LP position on Convex's liquidity pools, and a portion of the CVX token rewards staked for even more gains.
Price Prediction for Convex Finance — Can it hit $1000?
Buying and hodling CVX — the native token of Convex Finance — is one way of potentially making money on CVX.
The utility of CVX token is to serve as a governance token and LP reward. What sets CVX apart form other DeFi protocols is that CVX is being actively used by protocols such as Yearn Finance to vote on token emissions. This makes CVX a desirable token among traders who wish to sell their votes for increased rewards.
Holding CVX for the long-term equates to believing in Curve Finance and the bribing system in Yearn Finance.
By looking at its current price, it’s natural to think about the chance of CVX hitting $100 per token. This can happen sooner, or way in the future, and is determined by a couple of ever changing factors.
Let’s examine the potential growth of the CVX token by analyzing its tokenomics. CVX’s current market cap sits comfortably at ${MARKET_CAP}. With {CIRCULATING_SUPPLY} CVX tokens being in circulation today, that means a price of {PRICE} per CVX.
How did we come to that calculation? It’s quite easy, the price of a CVX token is equal to its current market cap divided by the number of tokens in circulation. Dividing ${MARKET_CAP} by {CIRCULATING_SUPPLY} gives us a result of {PRICE} for each CVX coin.
By changing the order in the simple formula above we can use it to calculate other things as well. This helps us a lot because we can deduce the market cap of CVX at different token prices. Then, we can use the result to compare it to the current state of the network and see what would be required for CVX to hit that price.
At a price of $100 per token, that means the current market cap of CVX would equal ${{CIRCULATING_SUPPLY} * 100}. Remember that we arrived at this number by multiplying the amount of circulating tokens by $100.
Now let’s shift our attention to the fully diluted market cap.
Some blockchains may have their tokenomics built in a way that only a small percentage of tokens are circulating at the beginning. This can be misleading because we don’t have the full picture and only take into account the current number of coins released in the market.
The fully diluted market cap represents the total value of a coin if all tokens were in circulation. CVX’s whole supply of tokens is {MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} CVX which means that no more coins above that number will ever be created.
These tokens are not created at the discretion of a specific entity. They are created automatically by the network to reward different actors that keep it secure.
How does this impact the price of CVX? Taking into account the current price of a CVX token, that would result in a fully diluted market cap of ${MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY * PRICE}. CVX coins that have been burned are not taken into consideration because they have been permanently removed from circulation.
Whether it seems gigantic or not, the number we came to above only takes into account the current price of a CVX token. Doing the same calculation but with a price of $100 gives us a result of ${{MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} * 100} for the CVX protocol fully diluted market cap.
These are all crucial details to know when calculating if CVX can reach the price of $100 per token. If the diluted market capitalization is way too high, the token has little room left to grow. Blockchains in general have no cap on the value they can reach, whether that number seems possible it’s totally up to you.
The future of CVX depends solely on its growth as a network used by tens and hundreds of millions of users. Technically, it is possible for the price of CVX to reach $100 by 2030, or even sooner.
If you’re looking to add some CVX to your portfolio, the most trusted places to get some are Binance and Coinbase.
