Demystifying DeFi


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Curve is the largest Defi protocols out there with a whopping 18.79 billion TVL. Sitting at the number one spot for TVL according to DeFi Lama.

So what is all this cash actually doing? Well, Curve is a stable/pegged coin AMM platform so if you want to exchange say USDT for DAI then you could do this through, for example, the famous Curve 3pool. The assets in the 3pool are Dai, USDT, and USDC.

When you interact with this pool you’d exchange 1 USDT for 1 USDC, minus a fee which is distributed to the liquidity providers (LPs) of the pool (the people locking up their USDT/Dai/USDC). Furthermore, LP to certain pools also receives rewards in the form of the token CRV.

CRV is the governance token of the Curve platform. So what can you do with this? You could just sell it as you accumulate the reward. Or more interestingly you can lock it in the Curve ecosystem to receive veCRV.

Why would you want to turn your CRV into veCRV? Well a couple of reasons: 1) you get rewarded extra CRV with a higher APY depending on how long you lock your CRV. 2) veCRV is used to vote on decisions related to the Curve ecosystem.

VeCRV lets you vote on the Gauge weights. These determine how the available CRV rewards at a given point in time are distributed to the different pools. By locking up your CRV you can make more CRV directly from the veCRV and direct more CRV emissions to your pool!

But I don’t want to lock up my CRV! Well, that’s where Convex comes in. Using Convex I can then turn my CRV into cvxCRV at a 1:1 exchange rate. Convex will turn the CRV you give them into veCRV for the maximum possible time passing-on the CRV rewards minus a haircut to you.

cvxCRV can then be freely traded on secondary markets primarily against CRV in DExes. It is also important to note that by converting to cvxCRV(rather than locking up your CRV into veCRV) you transfer your voting rights to the CVX platform.

What does transferring your votes to the Convex platform mean? Well, the Convex platform has its own token called CVX. Similar to CRV, CVX can be locked up for varying amounts of time for veCRX. This in turn gives rewards in CVX and voting rights for the gauge.

To summarise by converting to cvxCRV you: 1) lose some of the APY associated with your veCRV 😞 2) lose your curve voting rights (kinda) 😞 3) gain liquidity as cvxCRV can be converted to CRV through Dexs such as SushiSwap 😊 Gaining this liquidity is HUGE!

You do however also gain a pricing risk associated with your cvxCRV. So how do we evaluate this? One way is to consider how good is cvxCRV relative to CRV i.e. how much of a discount should cvxCRV trade for CRV?

In theory, cvxCRV has an upper bound of 1 CRV as the Convex protocol will always exchange 1 CRV for 1 cvxCRV. The discount is then driven by: 1) the haircut on veCRV CRV rewards. 2) the market’s preference for liquid instruments. 3) the proportion on veCRV owned by Convex.

1) is relatively static 2) is difficult to measure 3) can be measured easily!

Why does the proportion of veCRV owned by Convex impact the discount? Well, the more veCRV Convex owns the more voting power they have. In the limit where Convex owns 100% of the veCRV supply then Convex has complete control of the Curve protocol.

Importantly the more veCRV Convex owns the more it can impact the gauge weights. This means that Convex can direct the CRV rewards to the pools cvxCRV owners are providing liquidity to and so the more cash that Convex can make!

The Convex wallet (the far left bar) is the biggest holder of veCRV by far sitting at over 40% of the total supply with second biggest wallet holding just shy of 6%. So to say that Convex is the dominant holder of veCRV is an understatement.

To monitor the marginal health of the cvxCRV/CRV peg you can compare the emissions of cvxCRV to that of CRV. When the cvxCRV/CRV emission ratio is greater than the Convex veCRV market share this is bullish for the peg and vice versa.