Here is what we are going to cover:

• The flow diagram for the Convex-Curve flywheel
• The implication of the actions on Convex finance
• Fueling and expansion of the flywheel

Convex finance is a layer above Curve finance and this article goes in-depth in explaining how value is accrued to $CVX through the Curve ecosystem as we move forward in time. The article also explores the origins of the reward and sustainability of the same.

The article concludes by declaring that adding more mechanisms around creating value around the $CVX tokens is the best way possible to create sustainability for $CVX, $FRAX integration is the best example to understand this.

If this simple reading layout doesn’t excite you, you could scroll down to consume the same content as if it were a magazine.

⚠ Disclaimer: All information presented here is my perspective and should be considered educational content. I won’t be responsible for any kind of financial profits or losses derived from your decisions. Financial and investment advice

Convex-Curve Flywheel

The Convex-Curve relationship is a bit more complex to understand than just going through the rewards for each activity.

For every flywheel, analyzing incentives is a crucial part as it will act as a fuel to the whole mechanism. There are broadly three possible activities that can be performed on the convex platform and there are different reward mechanisms for all of those activities.

One of the interesting things to notice is regardless of the action, the activities/actions on the Convex platform are designed to accrue value on the $CVX tokens.

Staking LP tokens

Providing liquidity on the Curve and staking those LP tokens into Convex.

Staking LP tokens in Convex lets a user earn boosed $CRV rewards without holding $veCRV.

For every 100 $CRV earned by LP, Convex charges a fee of 17% i.e. 17 $CRV would go to Convex.

As the users earn $CRV rewards they are also entitled to $CVX rewards that are emitted based on the number of $CRV earned by Convex LP.
These rewards are coming from the $veCRV that Convex holds. If Convex is holding more $veCRV there is a higher opportunity to support a much larger TVL to get boosted rewards.

This cycle works and is fueled by the $CRV rewards and ultimately $CRV price. The action is very similar to that of Curve’s and thus same conclusions apply here as well; ROI depends more on the $CRV price.

One little catch here is if all the LP for a specific pool moves their LP tokens to Convex they would eventually get a 1x boost because the boosted rewards come from the LP who is not boosting as the emission amount is fixed.

Staking $CRV

Depositing $CRV in the platform in exchange for yield-bearing $cvxCRV.

Rewards for $cvxCRV are similar to that of holding $veCRV with an upside of being liquid. Moreover, users also get a 10% $CRV distribution from the fees collected by the protocol.

Every 10/17 $CRV that the protocol collects goes to the $cvxCRV holders.

A proportional amount of $CVX is rewarded in the form of inflation to the users that get $CRV from platform fees.

$CVX rewards will be based on the emission schedule for $CVX and the number of $CRV accrued to the LPs on Convex.

The rewards here are a function of trading volume on the Curve platform for that particular pool, and the amount of $CRV earnings Convex can get.

The trading volume is more or less an independent variable but the $CRV earning potential is directly linked to the $veCRV holding of the Convex protocol.

This action creates a scarcity effect for $CRV thus making it more valuable. This also makes the $veCRV pool larger, making the $vlCVX more valuable over Curve governance. With more $veCRV Convex can direct more $CRV rewards through gauge votes

Staking and/or locking $CVX

Similar to $CRV, a user can stake or lock their $CVX to get additional rewards.

The rewards for locking $CVX are around 1% more than staking $CVX.

Contrary to staking, locking does not allow users to unstake their position for a fixed amount of time and the rewards are more when the lock duration is higher.

The rewards come from the remaining 7/17 $CRV tokens. The $CRV is locked in the convex and $cvxCRV is distributed as a reward.

All the three actions trace back to value accrual on $CVX tokens, which is never-the-less expected in any protocol.

One more interesting aspect is the voting power of Convex over Curve. Currently Convex holds more than 50% of the voting power ($veCRV)
which makes Convex’s governance token more valuable i.e. $vlCVX.

The whole flywheel is dependent on the $CRV emissions and $CRV price as $CVX has no utility unless locked. $vlCVX is valuable until there are enough $CRV rewards for people to consider using Curve.

$CRV price plays a crucial role in making the APYs & APRs look fantastic.

🧠 Closing thoughts:

As we discussed earlier that there is a game theory aspect to the boosted rewards i.e. If nobody boosts, users would get a 1x boost, and if everyone in the pool boosts everyone would again get a 1x boost.

Convex kind of plays on the fact that not all liquidity providers boost their rewards while providing liquidity on Curve. An increase in these types of LP in the Curve ecosystem enables Convex to gather more $veCRV to support more liquidity for the maximum boost.

For the X amount of unboosted liquidity, there is only Y amount of liquidity that can get a 2.5x boost with Z amount of $veCRV. If the liquidity is increased beyond Y to get boosted rewards, even if we have more of the Z amount of $veCRV the boost will reduce from 2.5x. This is because $CRV rewards for X can never go to zero.

Adding more mechanisms around creating value around the $CVX tokens is the best way possible to create sustainability for $CVX, $FRAX integration is the best example to understand this.

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You can provide the same value by sharing this article with your circle.

You could even contribute/support these articles by owning one ✌.