Write-up on Convex
0x33d3
June 30th, 2022

Thesis (June 2022)

To better understand Convex and its valuation, a brief knowledge of Curve is required. Curve is an Automated Market Maker (AMM) that focuses on pools with similar asset types such as synthetic versions of BTC, ETH and stablecoins. Liquidity providers are incentivized as they are able to earn yield in the form of trading fees and CRV tokens without a huge risk of impermanent loss. To prevent huge selling pressure on CRV, Curve invented the ve-model, allowing holders to lock their CRV tokens as veCRV up to 4 years in return for voting rights and trading fees accrual.

Convex was then announced in April 2021 as a project built on Curve, with its main product being cvxCRV, a liquid option of veCRV. To further incentivize cvxCRV stakers, CVX is given as liquidity mining rewards and are eligible for a portion of Convex’s fees.

A representation of Convex’s flywheel (Source: Delphi Digital)
A representation of Convex’s flywheel (Source: Delphi Digital)

The Convex flywheel exploded in popularity in late 2021 to explain the synergy between Curve and Convex. cvxCRV being a liquid option of veCRV with higher incentives motivates users to deposit their CRV as cvxCRV. This allowed Convex to farm more CRV and return the rewards back to cvxCRV and CVX stakers. Users are then incentivized to restake their CRV, leading to a flywheel effect.

Products

Currently, Convex has cvxCRV and cvxFXS, with plans to collaborate with more protocols that adopt the ve-model. These products offer liquidity for those who do not want to lock up with veCRV or veFXS for 4 years. However, such products are not 1:1 with their counterparties (CRV and FXS respectively), and may carry a discount when swapping. As such, users need to evaluate whether their liquidity needs are worth the risk of a potential discount. Two ways to ensure cvxCRV trades near CRV’s price is to adjust the A parameter of the cvxCRV/CRV pool or to increase the fee rewards for cvxCRV stakers.

Besides Convex’s own products, multiple projects have been built on Convex such as Llama.airforce, an autocompounder for users of Convex. cvxCRV holders for example are able to auto-compound rewards back into cvxCRV, saving gas on transactions without having to claim and restake multiple rewards.

Revenue model

Convex’s revenue is generated through liquidity providers on its platform, currently taking in a 17% platform fee. The 17% is further broken down into the following: 10% to cvxCRV stakers, 5% to CVX stakers (including vlCVX), 1% to vlCVX solely, and 1% to the harvest caller (anyone who calls the ‘harvest’ function to claim rewards) as gas reimbursement.

However, this fee percentage can change for multiple reasons, such as higher incentivization should the cvxCRV trade at a deep discount to CRV. This fee adjustment is between hard-coded ranges and can be changed through a call function by Convex’s multisig.

With the introduction of cvxFXS, Frax pools are also subject to similar fees when staked on Convex. 10% of all FXS earnings are distributed to cvxFXS LPs, and 7% are distributed to vlCVX holders.

Convex’s Daily FXS Revenue distributed (Source: Dune Query 939210)
Convex’s Daily FXS Revenue distributed (Source: Dune Query 939210)
Convex’s Daily CRV Revenue distributed (Source: Dune Query 940077)
Convex’s Daily CRV Revenue distributed (Source: Dune Query 940077)
Convex’s Total Revenue (Source: Token Terminal)
Convex’s Total Revenue (Source: Token Terminal)

Founders

Convex is founded by an anonymous team. It is led by an anonymous founder who goes by the pseudonym C2tP. Core members of Convex include Winthorpe, co098 and Kendrick Llama. Convex also has support from Curve’s team.

Tokenomics

CVX holders have two options of utilizing their token: either through vote locked CVX (vlCVX) or by staking it on Convex’s platform. vlCVX carries a 16 weeks + (x < 7) days lock, in exchange, lockers earn platform fees as well as giving voting weight for proposals and gauge weight voting. Staked CVX earns a lower amount of platform revenue, but is not locked and can be unstaked anytime.

Convex’s token distribution (Source: Convex’s Gitbook)
Convex’s token distribution (Source: Convex’s Gitbook)
Convex’s emission schedule (Source: Convex’s Gitbook)
Convex’s emission schedule (Source: Convex’s Gitbook)

Convex’s emission schedule is determined by the amount of CRV rewards that Convex has farmed. As the amount of CRV rewards farmed increases, CVX minted increases logarithmically.

Capital Raise

3.3% of the Convex supply was used as a fund raise for investors to pre-seed Convex incentives for LPs. However, the knowledge of who the investors are and how much the raise was (price per token) were not shared by the team till this date. These tokens were subject to a 1 year vesting and have since been unlocked.

Key Metrics

Total Value Locked (TVL)

Convex’s TVL denominated in USD (Source: DefiLlama)
Convex’s TVL denominated in USD (Source: DefiLlama)
Convex’s TVL denominated in ETH (Source: DefiLlama)
Convex’s TVL denominated in ETH (Source: DefiLlama)

Convex’s TVL reached a peak of 21 billion USD in early 2022, now hovering above 3 billion USD due to current market conditions. While this is a 85% drop at first glance, the TVL is based on asset price and most tokens are down 80-90% currently. When the TVL is measured against ETH, it represents a clearer picture where the decline was due to the asset’s performance against ETH, not a withdrawal of assets. Compared to other protocols under the ‘Yield’ category in DefiLlama, Convex still holds the top position in terms of TVL.

Volume

CVX/ETH pool volume on Curve (Source: Curve)
CVX/ETH pool volume on Curve (Source: Curve)
Convex’s volume on Uniswap (Source: Uniswap)
Convex’s volume on Uniswap (Source: Uniswap)

Convex sees daily trading USD volumes of 10 million on-chain and another 10 million in CEXes like Binance.

Valuation

Valuing Convex in relation to Curve

Current Relative Voting Power (Source: Dune Analytics @Marcov)
Current Relative Voting Power (Source: Dune Analytics @Marcov)

One ‘past’ model of valuing Convex is to calculate whether buying CRV or buying CVX is better at the current ratios. In my opinion, this ratio will always be >1 (in this case, CVX’s price will always trade higher than a 4.50x ratio relative to CRV). This is to take into account the addition of new products like cvxFXS and a liquidity premium of voting power. While there is a 16 weeks + (x < 7) days lock on CVX, CRV has to be locked up for 4 years to get the full benefits.

P/E and P/S ratios

Calculating Convex’s PE is subjective depending on factors like whether FDV or veCRV’s supply is used and whether bribes are factored in. On Token Terminal, Convex is calculated to have a 1.9x P/S Ratio, making it the fourth lowest P/S ratio amongst other top dapps. Convex is also calculated to have a 33x P/E Ratio, however, Token Terminal does not factor in bribes in that calculation.

Convex’s P/S Ratio relative to other dapps (Source: Token Terminal)
Convex’s P/S Ratio relative to other dapps (Source: Token Terminal)

Liquidity
Liquidity can be sourced from multiple outlets, both onchain and on CEXes. The pictures below show the amount of CVX you could buy or sell before incurring 2% slippage.

+/- 2% depth in various CEX order books (Source: Coingecko)
+/- 2% depth in various CEX order books (Source: Coingecko)

Market buying CVX will incur a 2% slippage with 18k of asks on Binance, while market selling CVX will incur a 2% slippage with 74k of bids on Binance.

Selling 112000 CVX (~409K USD) incurs a 2% slippage
Selling 112000 CVX (~409K USD) incurs a 2% slippage
Buying 47000 CVX (~180K USD) incurs a 2% slippage
Buying 47000 CVX (~180K USD) incurs a 2% slippage

Competition

A recent competitor that made headlines was Aura Finance, a Convex alternative built for Balancer, a protocol that revamped its tokenomics into veBAL. While other forks of Convex may arise for protocols who are looking into changing their tokens into the ve-model, it remains to be seen whether their token holds value without CRV incentives and high trading volumes redistributed as fees.

Catalysts

One metric that further exemplifies Curve’s and Convex’s importance is the total stablecoin supply (140 billion and growing). Curve’s importance in keeping stablecoin pegs cannot be understated, as can be seen from incidents like the MIM fiasco in January 2022. The MIM stablecoin endured huge selling pressure after its founder, Daniele Sestagalli, was found to be associated with Michael Patryn, a partner with Quadriga, an exchange that lost millions in customer funds. Although the pool ratio between MIM and 3CRV reached a low of 96.5 MIM to 3.5 3CRV, MIM barely depegged, reaching a low of 0.97. Without Curve spending its emissions on incentivizing deep liquidity in the MIM/3CRV pool, MIM may have depegged further.

Total Stablecoin Supply (Source: TheBlock)
Total Stablecoin Supply (Source: TheBlock)

Expansion into partnerships with other protocols

With the success of cvxFXS, more protocols who adopt the ve-token model are incentivized to partner with Convex. Not only are partnerships money makers for Convex due to increased trading volumes and more, CVX holders will hold exposure to those protocols too as Convex gains market share due to the cvxToken model.

Risks

Smart contract risk is something every protocol is subject to. To mitigate this, Convex has had 2 external audits with Mixbytes and Peckshield linked below.

Convex is also subject to any risk that Curve Finance has as it is built on top of Curve. 

Arweave TX
baeQBXcHeiobXGvxb_EaDmVVhOF0ebQUgL7p-gdJmsA
Ethereum Address
0x33d3cad5b003aE22Eee3E2f4bF014539efbD5347
Content Digest
fBQsOQAd5ssnicxgpBXyTVMlhA2Hpfs58z7zHGHv4M4