Convex Finance is a DeFi protocol that is built on top of the stablecoin exchange Curve Finance. It is a platform where CRV token holders and Curve liquidity providers earn additional interest rewards and Curve trading fees on their tokens without locking CRV. In other words, Convex Finance is a platform that offers boosted Curve staking.
What is Curve? (CRV)
Curve is a software that uses multiple cryptocurrencies to operate an automated market service. Curve is built on Ethereum and facilitates trading by pooling cryptocurrencies provided by users who earn fees through their deposits. Unlike other trading DeFi platforms, Curve focuses on stablecoin markets.
CRV is the native token of Curve. The CRV was launched by the platform in 2020. CRV tokens are issued as yield farming rewards to liquidity pool users and are convertible to veCRV. veCRVs are time-locked CRV tokens that can be used to vote for changes in the protocol, boost rewards, earn trading fees, and receive airdrops.
However, to earn the maximum reward takes a lot of veCRV. This is where CVX Finance steps in.
How does Convex Finance work with CRV?
Convex Finance pools together users’ CRV assets to acquire more CRV, convert it to veCRV, and then maximize the boost to all Curve LP token holders. CVX Finance maximizes the reward boost to attain all the CRV rewards.
When users provide liquidity to one of Convex-supported Curve liquidity pools, they get base rate interest, a portion of Curve trading fees, Convex-boosted CRV rewards, and CVX tokens.
CRV token holders could also use CVX to stake their tokens. In turn, users who staked their CRV through Convex earn cvxCRV tokens. cvxCRV token holders can claim veCRV rewards, a portion of the Convex platform earnings, CVX tokens, and airdrops to veCRV holders. However, staking CRV tokens on Convex is a permanent claim on Curve + Convex trading fees and tokens.
What is CVX?
The Convex token (CVX) is a utility token used to receive a portion of the CVX platform fees. Users must stake CVX tokens to receive cvxCRV tokens. CVX tokens will also be used to govern the CVX Finance protocol in the future.
Convex Finance competes with Yearn Finance to lock up as much Curve liquidity. Both projects need a lot of CRV tokens to increase interest rates for Curve LPs. Because Curve Finance is the largest decentralized exchange by total value locked, Yearn and Convex are competing to absorb Curve’s liquidity into its own protocol.