Author: @CryptoScott_ETH | @RealResearchDAO

Foreword

Recently, the deep crisis of both the stablecoin UST and the stable pegged asset stETH has attracted everyone's attention, which is tightly related to its main trading venue, Curve. Topics related to Curve Wars are also frequently discussed. From the perspective of investment, this article conducts a comparative study on the three important targets in Curve Wars - CRV, CVX, and FXS, trying to find the most worthy investment underlying asset in Curve Wars.

1.Protocol Overview

1.1 Curve - CRV

Curve is an AMM decentralized exchange focusing on stablecoins and stable pegged assets (such as stETH-ETH). Based on its AMM algorithm, compared to other DEXs, Curve can provide a lower slippage trading experience with the same amount of liquid funds, which is suitable for a large-scale stablecoin and pegged asset transactions. Due to the characteristics of its trading assets, liquidity providers can also bear the lower impermanent loss. At the same time, Curve provides CRV tokens as liquidity mining rewards to incentivize liquidity providers to provide better liquidity depth for their different trading pools.

Tokenomics

1)Token Allocation

The core token of Curve is CRV, with a total amount of 3.03 billion. The distribution of the total amount is as follows:

• 62% distributed to liquidity providers.
• 30% to shareholders, unlocked linearly over 2-4 years.
• 3% to team members, unlocked linearly over 2 years.
• 5% as a community reserve.

2)Value Capture

• Source of value
  • 0.04% transaction fee;
  • To control the distribution of CRV in the reward portion of liquidity providers in each pool.

Value distribution

• Entrance: The veCRV obtained after the CRV is locked in the Locker can capture the value of Curve, play the function of the token, and exercise governance power. The longer the CRV is locked, the more veCRV it will get. Specifically, if 1CRV is locked for 4 years, 1veCRV can be obtained, and only 0.25veCRV can be obtained by looking for one year. veCRV is non-transferable, and the amount of veCRV decays linearly as the locked CRV approaches the expiration date.
• Fee dividends: 50% of the 0.04% transaction fees are allocated to LP and 50% to veCRV
• Boost returns for market makers: The CRV rewards for liquidity supply positions have been increased (up to 2.5x)
• Protocol Governance: In addition to the modification of protocol parameters, the scope of governance also includes Curve's new liquidity pool voting, and the weight distribution of CRV's liquidity incentives between various trading pools.

1.2 Convex - CVX

Given veCRV's strong governance capabilities and its apparent lack of liquidity, Convex offers a non-redeemable, liquid veCRV collateralized derivative - cvxCRV. Convex allows users to lock their CRV inside Convex forever in exchange for cvxCRV. cvxCRV is a highly liquid, high-yield token that derives revenue from base veCRV fees, Convex platform fees, and CVX releases.

Tokenomics

cvxCRV

cvxCRV is the representation of veCRV in Convex. Users can convert CRV 1:1 into cvxCRV in Convex, Convex will lock the CRV locked by the user in Curve for 4 years to obtain veCRV, and continuously convert veCRV into CRV for 4 years. Therefore, the process of converting CRV to cvxCRV is irreversible, but Convex provides AMM trading pairs of cvxCRV and CRV to solve users' liquidity demands. Since AMM is adopted, it also means that cvxCRV and CRV may not be exchanged 1:1. Users can lock cvxCRV in Convex, and the rewards include

 1)Curve rewards (CRV token + 50% fee dividend + airdrop),

 2)10% total fee on CRV revenue generated by Curve LP's on Convex.

 3)CVX token rewards.

CVX

1)Token Allocation

The core token of Convex is CVX, with a total amount of 100 million. The distribution of the total amount is as follows:

• 50% (50m) are Curve LP rewards;
• 25% (25m) is used for liquidity mining rewards, supports CVX/ETH and cvxCRV/CRV trading pools, and the distribution period is 4 years;
• 10% (10m) is the incentive for the founding team of Convex, which will be locked for one year after the product is launched;
• 9.7% (9.7m) as treasury reserves, locked for one year for future community incentives or other community activities;
• 3.3% (3.3m) distributed to investors, all locked for one year (this part of CVX has no cvxCRV minting);
• 1% (1m) of CVX is airdropped to veCRV token holders;
• 1% (1m) of CVX will be rewarded to users who participate in Curve.fi governance voting (i.e. support the inclusion of Convex in the Curve. fi whitelist).

2. Value Capture

• Source of value
  • CRV revenue is generated by Curve LP on Convex.
  • Convex is locked on the Curve platform, and the transaction fee reward obtained is issued in the form of 3CRV.
  • Airdrop to veCRV
• Value distribution
  • There is a 17% total fee on all CRV revenue generated by Curve LPs on our platform.
  • 10% goes to cvxCRV stakes. This is paid out as CRV.
  • 5% goes to CVX stakers, which includes vote-locked CVX. This is paid out as cvxCRV.
  • 1% goes exclusively to vote-locked CVX. This is paid out as cvxCRV.
  • 1% goes to the harvest caller. This is paid out as CRV.

As can be seen from the current yields of Staked cvxCRV and Locked CVX / Staked CVX, most of the cash flow in the protocol is captured by CRV. Its governance token CVX has a poor ability to capture protocol revenue.

1.3 Frax Finance - FXS

The core business of FRAX Finance is to issue its stablecoin FRAX, which aims to be pegged 1:1 with the US dollar. The issuance of FRAX adopts a partial collateral mechanism, with USDC-based currency assets as the main collateral, so that it will not be debugged in a large proportion in extreme cases. Therefore, FRAX is also called "partially algorithmic stablecoins" or "Hybrid Algorithmic Stablecoins".

The Economic Model

There are two main types of tokens in the FRAX ecosystem: stablecoin FRAX and governance token FXS.

FRAX

In the partial algorithm model of FRAX, part of the peg to the US dollar is guaranteed by fiat currency, and the rest is guaranteed by the algorithm. The ratio of fiat collateral to total FRAX issuance is the system's Collateral Ratio.

For example:

Assuming that the current 1 FRAX=1.1 USDC and the collateral ratio is 80%, then arbitrageurs can use 800 USDC and FXS with a price of 200 USD to mint 1000 FRAX, and then put 1000 FRAX in the market at 1.1 USD. The price sells for 1100 USDC, and finally, the arbitrageur gains 100 USDC profit. After receiving USDC, the treasury will store or reinvest USDC as collateral, and FXS will be directly destroyed. Conversely, when the price of 1 FRAX is lower than 1 USDC, arbitrage can be reversed to make the price return to 1 USD.

At the genesis stage, FRAX adopts 100% collateralized, and users can directly obtain the corresponding ratio of FRAX by depositing USDC. As the system enters a partial algorithmic stage, minting FRAX requires putting in an appropriate proportion of collateral and burning a corresponding proportion of FXS. The level of the collateral ratio is determined by the price of FRAX. If the price of FRAX is higher or lower than 1 USD and exceeds a certain range, the collateral ratio refresh function in the protocol can be called by any user every hour. This function can change the collateral ratio by 0.25%.

1. When FRAX is above $1, the function lowers the collateralization ratio by one level.
2. When FRAX is below $1, the function increases the collateralization ratio by one level.

Both the refresh rate and the adjustment range can be adjusted through the governance of FXS.

When the market price of FRAX is in a stable range ($1.0033≥FRAX≥$0.9933), the FRAX protocol will not open the minting and redemption of FRAX. At this time, users can convert and trade FRAX and other assets through other DEXs.

FXS

1. Token Allocation

• The initial set total amount of FXS is 100 million
• 60% liquidity incentive, community treasury, 18 million will be released in the first year, and subsequent annual emissions will be halved
• 5% Grant, cooperation, audit, and the release speed are determined by community governance
• 20% team reward, 6-month lock-up period, linear release in December
• 3% advisors and contributors, released linearly within 3 years
• 12% financing, 2% is unlocked for the first issuance, and the remaining 10% is released within one year, half of which is locked up for 6 months.

2. Value Capture

• Source of value
  • Minting of FRAX as partial collateral
  • Minting/burning fee of FRAX stablecoin: 0.2% minting fee, 0.45% redemption fee
  • Transfer idle USDC collateral within the protocol to DeFi protocols that can earn reliable returns. Such as Aave and Compound.
  • Allocate USDC and FRAX to various liquidity platforms, such as Uniswap V3, FRAXswap, and Curve on each chain, to ensure sufficient liquidity of FRAX and stablecoins in each chain, and secondly, you can also get FRAX transaction fees as business income.
  • FRAX has built its Metapool (FRAX-3pool) on Curve, and injected USDC and FRAX into it. On the one hand, it maintains sufficient core liquidity and stabilizes market confidence. On the other hand, it can also obtain Metapool's fee income as a business income.
  • Supply FRAX directly into lending protocols like Aave, Rari, etc. to allow anyone to earn FRAX by paying interest instead of the underlying minting mechanism.
• Value distribution
  • Buy and bribe CRV, and CVX to get more liquidity in Curve
  • Referring to Curve's veToken model, in the case of staking, veFXS can be obtained according to the staked amount and staked time to capture most of the value of the FRAX.finance protocol.
  • Governance rights: In addition to exercising proposals and voting through veFXS, it also includes voting for the Gauge module of FRAX to determine the reward ratio allocated to each FRAX-related liquidity pool from FXS emissions in each cycle
  • Part of the revenue generated by each module (those obtained tokens related to liquidity governance such as CRV and CVX will enter the treasury, and most of the other parts will be used for profit distribution), FXS will be bought back through FRAXswap, and 100% will be assigned to veFXS users.
  • Minting of FRAX: When the minting function of FRAX is enabled, users not only need to provide collateral (USDC) but also need to burn the corresponding ratio of FXS, so the credit expansion of FRAX will cause the deflation of FXS and increase the inner value of FXS.

1.4 Relationships

• CRV & veCRV: From August 27, 2021, the ratio of veCRV/circulating CRV will be greater than 1, and this ratio will continue to remain high. This shows that even if the acquisition of the governance rights of Curve requires the loss of liquidity, the market is still actively seizing the governance rights of Curve.

• Convex Finance & veCRV
  • Most of the early Aggregator strategies are deployed in Curve, so it is necessary to compete for veCRV to obtain higher returns, as presented by Yearn. Before June 2021, Yearn was the protocol with the largest position in veCRV, and Convex will gradually seize its share of veCRV after the launch. At present, about 50% of veCRV is held by Convex. Since vlCVX can control the governance of veCRV, and the lock-up period of vlCVX is only 16 weeks + 7 days, the liquidity cost of holding CVX to obtain Curve governance rights is lower, so Curve Wars gradually evolved from fighting for CRV to fighting for CVX.
  • Although vlCVX's staking mining income is low, only about 4% as mentioned above to obtain Curve liquidity support, major protocols will bribe vlCVX holders so that the biggest source of vlCVX income comes from bribe income.

• Frax Finance & CVX: Frax has been accumulating CVX since Convex launched. At present, Frax is the protocol with the most CVX, but it does not show an absolute advantage. To consolidate its stable position, it is still necessary to continuously accumulate CRV and CVX, and regularly pay bonuses to bribe platforms to obtain governance support.

2. Porter's Five Forces Model

Porter's Five Forces Model is commonly used in traditional finance to analyze the current competitive state of companies. The five forces include analyzing the Bargaining Power of Suppliers, Rivalry among Existing Competitors, Threat of New Entrants, Threat of Substitute Products, and the Bargaining Power of Buyers. Curve, Convex, and Frax are analyzed using Porter's Five Forces Model.

2.1 Curve

• Bargaining Power of Suppliers: The upstream is the LP liquidity supplier, whose bargaining power is low. LPs go to places with high yields, so they need to be subsidized with CRV and fee income.
• The threat of New Entrants: The stablecoin and DEX situation have been clear. Few entrepreneurs will choose this direction, and the threat of new entrants is small.
• Rivalry among Existing Competitors: There are currently no products in this segment of the market.
• The Threat of Substitute Products: Since the launch of Uniswap - V3, the trading volume of USD trading pairs has gradually approached Curve, but the status of stable price assets still cannot be shaken.

• Bargaining Power of Buyers: The buyers of Curve include traders and project parties that need Curve’s liquidity subsidy. 1) Traders are looking for low slippage, Curve has a low transaction fee rate and has advantages in slippage, but the trading variety is relatively limited, so the bargaining power of traders is moderate; 2) The project party needs Curve for pegged assets. There are no other options available, so the bargaining power of the project party is low.

2.2 Convex

• Bargaining Power of Suppliers: The upstream is Curve. At present, Convex has achieved absolute control over Curve, which is equivalent to merging the upstream.
• The threat of New Entrants: The business pattern of DeFi Aggregators has been clear. Few entrepreneurs will choose this direction, and the threat of new entrants is small.
• Rivalry among Existing Competitors: The biggest competitor Yearn has now quit the veCRV competition in favor of partnering with Convex.
• The Threat of Substitute Products: Bribery platforms.
• Bargaining Power of Buyers: No protocols have formed absolute control over Convex, so the bargaining power is low.

2.3 Frax

• Bargaining Power of Suppliers: Curve, Convex, strong upstream bargaining power.
• The threat of New Entrants: Major protocol owners and new public chains are focusing on the stablecoin market, and there are many new entrants.
• Rivalry among Existing Competitors: The major new public chains have their algorithmic stablecoins, and the competition in the same industry is fierce.
• Theatre of Substitute Products: Centralized stablecoins are more mainstream, with strong alternatives.
• Bargaining Power of Buyers: Stablecoin users have many choices of stablecoins and strong downstream bargaining power.

2.4 Conclusion

The biggest threat to Curve currently comes from the exchange business on Uniswap V3, and Curve’s business of stable assets still cannot be shaken. Upstream LPs have certain bargaining power. Due to the poor bargaining power of downstream project parties, this part of the cost can be passed on to downstream project parties. Overall, Curve is in the monopoly of its subdivision. The collapse of UST has released a large part of the market space for algorithmic stablecoins. More and more projects will continue to chase the DeFi crown. Improving capital efficiency is the main theme, PoS and the rise of Staking as a Service such as Lido Finance is the main increment in the future.

Since Convex has achieved absolute domination of the governance rights of the Curve protocol, which is equivalent to the acquisition of the most important resources in Curve Wars, it is in a monopoly position with minimal competition and rent-seeking from all parties.

In the subdivision where Frax is located, the five forces are in a state of fierce competition and are rent-seeking objects.

3. Growth Logic

3.1 Curve

• Why Curve?
  • Reduce the coupling between assets. If the token of the protocol itself is used as a liquidity incentive, it is easy to cause the phenomenon of mining, selling, and withdrawal, triggering a death spiral.
  • Promote industrial division of labor, project parties focus on their subdivision tracks and hand over AMM to Curve.
  • Unlike anyone who can provide liquidity on Uniswap, if users want to enter Curve's core liquidity pool, they must meet the conditions through community voting: veCRV voting participation of more than 30%, and support rate of more than 51%. As the total circulation of CRV becomes larger and larger, this entry barrier will also become higher and higher.
• Growth Drivers
  • Since the stablecoin projects can gain funds at a low cost, it is favored by major capitals. The collapse of UST released a new space for the market.
  • The success of Lido Finance will attract more protocols to release liquidity for POS-locked tokens, and it is necessary to obtain the support of Curve to stabilize the liquidity of the pegged asset.

3.2 Convex

• Why Convex?
  • CVX has absolute control over CRV. If you have CVX, you have CRV liquidity support
  • The lock-up period of vlCVX is shorter, and the liquidity cost of holding vlCVX is lower.
  • Bribery is a one-time cost, more CRV and CVX should be accumulated for projects that want to operate in the long term. CRV and CVX are capital expenditures with a long-term use period and a residual value of 100% and are essential fixed asset inputs for the long-term operation of the project. Spendings at each period are equivalent to no cost. At the same time, the lock-up time for obtaining Convex governance rights is lower, and major protocols tend to hold more CVX.
• Growth Drivers
  • At present, no protocol has absolute control over CVX. To obtain 50% control of the Curve protocol, it is necessary to further control CVX.

3.3 Frax

• Why Frax?
  • After the crisis of UST, 20 billion was released to the market to stabilize the market. Fax adopted a partial collateralized model and still performed well in the deep crisis.
  • Frax has many monetary policy tools and strictly controls the occurrence of inflation.
• Growth Drivers
  • From the beginning of the project's launch, it has obtained the governance rights of the Curve platform through various methods. Its flexible monetary policy and capital efficiency also give it a clear advantage in the Curve War. With the gradual accumulation of CRV and CVX, the liquidity of Curve may be controlled in the future, injecting stronger confidence into the FRAX stablecoin.
  • Major investors prefer stablecoins. Frax has a long-standing brand and a certain reputation. It may be supported by investors in the future.
  • The team is expanding more Frax usage scenarios, such as FRAX-based privacy payment, FRAXLend, lending business (already in the audit stage), incorporating volatile assets into collateral, ETH Staking service, where users can stake ETH and generate frxETH, FRAX-based liquidity guidance planning (similar to services provided by Tokamak), FRAX.finance's own Layer 2.

4. Conclusion

• Due to its excellent AMM mechanism and its economic governance model, Curve has sufficiently high industry barriers in the DEX subdivision of stablecoins and stable price assets.
• The collapse of UST has released a new stablecoin market space, and the success of Lido Finance has pushed more projects to participate in Curve Wars to release the liquidity of POS staking tokens.
• CVX has absolute control over Curve, and the time cost of locking CVX to obtain Curve's liquidity support is lower, and Curve Wars has shifted from competing for CRV to competing for CVX.
• Since CVX currently does not have absolute control over any protocols, the bribe income and long-term fixed asset investment in the stablecoin and the stable pegged assets provide CVX with continuous dividends and purchasing power. It is the safest investment in Curve Wars.
• Frax has been actively accumulating CRV and CVX to ensure its liquidity, but it still has no absolute advantage and may be surpassed by competitors in the future. And Frax does not easily remind people of stablecoin, which may require rebranding. If Frax succeeds in gaining control, or with the support of major investors, FXS will have the highest return on investment among the three projects.

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