Convex Finance (CVX) is an inventive DeFi protocol built on top of stablecoin exchange Curve Finance. At its core, Convex rewards Curve liquidity providers and CRV stakers with additional DeFi yields.
The aggressive push by Convex to lock up as much Curve liquidity as possible has thrown the protocol into a DeFi war with Yearn Finance. Both projects need all the CRV tokens they can get to keep increasing interest rates for Curve LPs.
Curve Finance is now the world's largest decentralized exchange by total value locked ($8.76 billion). So, any DeFi protocol absorbing that liquidity into its own protocol will be enormous by default, which is why Yearn and Convex are battling it out.
Let's dig deeper into what Convex Finance is, how it works, and explaining CVX token.
What is Convex Finance?
Convex Finance is a platform for CRV token holders and Curve liquidity providers to earn additional interest rewards and Curve trading fees on their tokens. Put another way, Convex Finance offers boosted Curve staking.
That's it — that's the product. In a DeFi era where protocols offer countless products and options, it's reasonable to expect more out of Convex. However, don't be fooled. The sheer simplicity and single-minded focus of Convex's offering are what has made the platform so successful.
There are really only two people Convex is aimed at:
CRV holders: If you hold CRV tokens, Convex lets you stake them for cvxCRV.
Curve liquidity providers: If you hold Curve LP tokens, Convex lets you stake + boost them.
You might be asking yourself why you would stake CRV on Convex rather than Curve for veCRV, or why you'd deposit LP tokens there instead of Yearn. Well, it's all about the boosted rewards.
To get that point, you'll need to know a little bit about how Curve Finance works.
Understanding Curve Finance & veCRV token
Curve is a decentralized exchange with a heavy focus on stablecoins. Since stablecoins are far less volatile than other cryptocurrencies, they're perfect for liquidity providers to avoid impermanent losses.
Where Curve gets really sweet for LPs is in its reward structure. Curve tokens (CRV) are issued as yield farming rewards to LPs and are convertible into veCRV (vote-escrowed CRV).
veCRV is just a fancy name for time-locked CRV that can be used in governance, boosting rewards, earning trading fees, and receiving airdrops. Going back to the whole boosted rewards thing — the more veCRV you have, the more you can boost the CRV rewards from your liquidity pool.
You can boost your CRV rewards as high as 2.5x if you apply the maximum amount of veCRV required for your deposited liquidity. Of course, the more tokens you LP in the pool, the more veCRV required to boost up to 2.5x.
To get that maximum reward takes a lot of veCRV. If you're a small LP, you probably don't want to go through the hassle of buying CRV, locking it into veCRV, then using that to boost. And if you're a big LP, the astronomical amount of veCRV needed to max boost can feel unattainable.
How Convex Finance uses veCRV to boost rewards for Curve liquidity providers
Isn't that brilliant? In the end, it doesn't matter how large or small your stake in a Curve pool is — as long as you have Curve LP tokens, Convex usually lets you get the maximum reward boost out of them.
We say usually because not all Convex pools are boosted to the max. Some are sitting at 1.89x, while others are solid at 2.5x. What makes some pools boosted higher than others is the amount of veCRV applied to the pool.
Key benefits of providing liquidity to Curve & depositing LP tokens to Convex
Convex gives you a fairly formidable four-pronged path to passive income. If you provide liquidity to one of the Convex-supported Curve liquidity pools, you get the following income streams:
Base rate interest
Slice of Curve platform trading fees
Convex-boosted CRV rewards
CVX tokens via Convex liquidity mining
Even if you aren't providing huge sums of liquidity to Curve, setting and forgetting your tokens in a Curve pool, then depositing the LP tokens to Convex long term can be handsomely rewarding.
Not an LP? No problem. Stake CRV tokens to receive cvxCRV
Convex Finance isn't just built to benefit Curve liquidity providers with better CRV boost. It also wants your CRV tokens even if you aren't an LP.
Many people see the promise of Curve Finance's platform and are buying CRV tokens as a result. Usually, you'd want to time-lock your CRV into veCRV to earn a share of the platform's trading fees. But Convex gives you another option: cvxCRV.
That's a hefty list of rewards for converting your CRV into cvxCRV. There's probably a catch, right? The catch is that once you convert CRV —> cvxCRV, you can't go back the other way. In other words, staking your CRV tokens on Convex is a permanent claim on Curve + Convex trading fees and tokens.
CVX token explained
Convex token (CVX) is a utility token used to receive a share of Convex platform fees. To earn Convex fees, stake your CVX to receive cvxCRV tokens. The more platform revenue earned by Convex, the more value is distributed to cvxCRV holders.
Did you also know that you can trade Convex (CVX) on Shrimpy? Just connect your exchange account or DeFi wallet to Shrimpy and we'll let you instantly swap any token for CVX with the help of our smart order routing system – which finds the best liquidity at the lowest fees.
About The Author:
The Shrimpy Team
The Shrimpy Team is comprised of highly experienced content writers who analyze and research the latest market trends, delivering content suitable for both beginner and veteran crypto investors.