Convex Finance Overview: A Yield Optimizer for Curve Finance

Decentralized finance (DeFi) users can put their digital assets to work and generate passive income in different ways. One tactic is providing liquidity to automated market makers (AMMs), where users can lock up or stake their coins in exchange for a share of transaction fees or governance tokens.

For instance, Curve Finance, a decentralized exchange (DEX) that uses an AMM to facilitate the trade of digital assets in a permissionless way, distributes 50% of its generated fees among liquidity providers (LPs). It is worth noting that Curve focuses on efficient stablecoin trading, which also enables LPs to minimize the risk of impermanent loss.

Despite its benefits, Curve can be quite confusing and intimidating to new DeFi users. Convex Finance aims to address this issue. By making it easy to optimize providing liquidity on Curve and boosting CRV rewards, the protocol has burst in popularity lately. 

What is Curve Finance (CRV)?

Curve is a popular AMM that offers a highly efficient way to exchange tokens by only accommodating liquidity pools made up of similarly behaving assets. These assets are mostly stablecoins, but also include different tokenized versions of stablecoins and other major cryptocurrencies like Bitcoin.

Notably, Curve’s pricing formula makes it extremely useful for swapping between tokens that remain in a relatively similar price range. It enables users to avoid more volatile crypto assets while still earning high interest rates, making the protocol particularly conservative since it favors stability.

This way, Curve maintains low fees, low slippage, and next to no risk of impermanent loss. And to compensate for the low fees that liquidity providers get, it delivers rewards in the form of CRV tokens and interest by integrating with external DeFi protocols.

CRV is the governance token of CurveDAO, a decentralized autonomous organization (DAO) running Curve Finance. The token is continuously distributed to liquidity providers of the protocol, with the rate decreasing annually. 

CRV tokens are convertible into veCRV (vote-escrowed CRV), which can be used in governance, boosting rewards, earning trading fees, and receiving airdrops. The more veCRV a user accumulates, the more they can boost their CRV rewards from liquidity pools.

Users can utmost boost their CRV rewards by 2.5x, but they need to apply the maximum amount of veCRV required for their deposited liquidity. Naturally, the more CRV tokens a user deposits, the more veCRV will be required to boost the rewards up to 2.5x.

It is quite inconvenient for small liquidity providers to purchase CRV, lock some of it into veCRV, and then use veCRV to boost the remaining CRV rewards. Similarly, big liquidity providers might find it difficult to gather enough veCRV needed to max boost their astronomical amount of CRV. This is where Convex Finance comes into play. 

What is Convex Finance?

Built on top of Curve Finance, Convex Finance (CVX) is an innovative DeFi protocol that allows CRV token holders and Curve liquidity providers to earn additional rewards and boost their interest rates. To further benefit users, the platform charges no withdrawal fee and negligible performance fees.

Convex achieves this by allowing users to pool their assets. The platform then uses all of the gathered assets to acquire more CRV, converts them into veCRV, and uses veCRV to boost CRV rewards for all Curve LP token holders. No matter how large or small a user’s stake in a Curve pool is, Convex usually allows them to boost rewards by up to 2.5x as long as they have Curve LP tokens.

Essentially, Convex allows two cohorts of Curve users to generate boosted rewards: Curve LPs and CRV holders. Curve liquidity providers are paid boosted CRV incentives if they use Convex, which is mainly because other users have also locked their CRV tokens with the protocol. 

Similarly, CRV stakers can earn additional rewards by locking their coins in Convex. Besides the trading fees from the Curve platform and an amount of CRV, stakers will also receive CVX rewards. CVX is the native token of Convex, minted pro-rata for each CRV token claimed on Convex Finance by the liquidity providers of Curve.

By further staking CVX tokens on Convex, users will be able to earn cvxCRV tokens. CvxCRV is a tokenized form of veCRV. It is also revenue generating, offering holders rewards from the Convex protocol and admin fees from the Curve protocol.

However, it is worth noting that staking on the Convex platform is a one-way transaction. Once users convert CRV into cvxCRV, they won’t be able to go back. That is because the converted CRV will be locked into the Curve protocol and will become Curve Liquidity Pool tokens, which are responsible for maximizing incentives for the entire Convex ecosystem.

Midas.Investments Uses Convex Finance to Boost Rewards in CeDeFi Strategies

Midas.Investments, the first CeDeFi custodial platform, seeks to create profitable investment tools for users by developing strategies that combine working with different crypto assets and various protocols. Some of these strategies use Convex Finance to offer boosted rewards. 

Specifically, Midas.Investments makes use of Convex Finance in a CeDeFi strategy called DeFi Token Farming. The strategy is a basket of incentivized liquidity pools with DeFi tokens on Convex Finance that can generate up to 35% ROI.  

This strategy taps into top-tier liquidity pools in DeFi with some major cryptocurrencies. Convex is the primary source of this strategy’s yield, with each liquidity pool including incentivized rewards from the protocol. The strategy acts as a long position on the entire DeFi ecosystem.

Currently, the DeFi Token Farming strategy makes use of five liquidity pools, which include CRV + cvxCRV, CRV + ETH, CVX + ETH, FXS + cvxFXS, Silo + FRAX, each of which is projected to offer an approximate APR of 25%, 30%, 40%, 30%, and 60%, respectively. 

Midas.Investments is a custodial CeDeFi platform seeking to bridge the gap between CeFi and DeFi, combining the former’s reliability with the latter’s high profitability. The platform implements a strict risk management policy and mandatory audits of all products in a bid to enhance security and transparency standards while reducing the possibility of fraud.

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