Decentralized finance (DeFi) is one of the critical innovations of blockchain technology and Web3. Convex Finance is an essential player in the DeFi market lately, which is why this article will address the question, "what is Convex Finance and the CVX token?" Traditional financial institutions like banks rely on a strict hierarchy and centralized operational mechanisms with a lot of bureaucracy. You don't have custody of your funds when you store money in a bank account. Instead, the bank acts as the custodian of your money.
Additionally, the bank's security measures depend on centralized safety protocols. If a hacker breaches the bank's security system, all user funds are in danger. DeFi is the stark opposite because it uses blockchain technology and decentralization. Users have full custody over their funds with the help of crypto wallets. Also, there's no bureaucracy in DeFi.
In this article, we'll explore the Convex Finance DeFi platform to find out all the details about this project. We'll examine how Convex Finance works, its key features, and its services. Also, we'll find out how the CVX token works and why it is essential for the Convex Finance platform.
What Is Convex Finance?
So, what is Convex Finance? Convex Finance is a DeFi platform that launched in 2021 to provide users with an opportunity to boost their earnings on Curve Finance (CRV). It allows Curve Finance liquidity providers to maximize their liquidity provider rewards. Curve Finance is one of the largest decentralized stablecoin exchanges on the market in terms of total value locked (TVL). The TVL amount indicates how much crypto users hold in a platform's liquidity pools in exchange for liquidity provider rewards. Users provide the platform with liquidity for trades, and the platform gives them rewards from fees. Convex Finance is one of the largest Curve Finance liquidity providers.
Users can provide liquidity directly on Curve Finance to earn rewards. However, Convex Finance goes a step further and gives users higher incentives. Convex Finance aims to attract users by giving them a better deal for providing liquidity to Curve Finance. For example, some liquidity pools on Convex Finance provide rewards several times higher than Curve Finance.
The goal of the Convex Finance protocol is to constantly increase the amount of CRV deposits to gain a higher stake in Curve Finance. The key competitor of Convex Finance is Yearn Finance, which has the same goal. Both platforms compete in offering better incentives to users to achieve dominance on Curve Finance. The competition between these two platforms is called Curve Wars.
Since its launch in 2021, Convex Finance has become an essential player on the DeFi scene because it provides deep liquidity for Curve Finance. The platform has more than three billion USD worth of locked crypto. Furthermore, Convex Finance has earned nearly 300 million USD of CRV tokens so far.
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What Services Does Convex Finance Offer?
Now that we have addressed the question, "what is Convex Finance?" let's take a look at some the services the platform offers. Convex Finance allows users to earn rewards by staking crypto in Curve liquidity pools through Convex. Also, users can participate in the classic staking of the platform's native CVX token.
The primary service is Curve liquidity provision. Instead of providing liquidity on Curve directly, users can get considerably higher liquidity provider (LP) rewards on Convex. There's a base Curve variable annual percentage rate (Curve vAPR) for each liquidity pool on the platform. The vAPR indicates annual percentage earnings based on current market circumstances. The CRV vAPR and the CVX vAPR are additional rewards for liquidity providers, paid out in CVX and cvxCRV tokens. The CRV vAPR always pays the highest rewards and includes a reward boost up to 2.5x.
For example, the CRV+cvxCRV liquidity pool currently has a 23.98% vAPR. This number consists of a base Curve vAPR of 0.31%, a CRV vAPR of 14.09%, including a 1.8x boost, and a 9.58% CVX vAPR. All these figures add up to a total 23.98% vAPR for the liquidity pool. These liquidity provider rewards are much higher than the standard Curve Finance pools, with rewards below 10% on average.
The secondary service is token staking. When users stake CVX, they earn a portion of the platform's profits in the form of cvxCRV tokens. Users can currently stake CVX for a standard 2.6% staking reward or lock their CVX to earn a higher bonus. The rewards can vary and depend on market circumstances and the total value locked. Users can also exchange their CRV tokens for cvxCRV and stake them to earn rewards.
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The CVX Token
The CVX token incentivizes users to stake crypto. CVX is the utility and governance token of Convex Finance. When you hold CVX, you actually own a portion of the protocol.
Also, users get the platform's native CVX token as an additional reward for providing liquidity on Convex. Furthermore, users can stake those CVX tokens on Convex and earn even more rewards. The two essential services of Convex Finance are liquidity provision and staking. These two functions are similar but different.
Convex Finance is mainly tied to Curve Finance in terms of liquidity, but it also provides a portion of liquidity for the Frax Finance ecosystem. Frax uses the FRAX stablecoin and the Frax Shares (FXS) token.
Users who stake CVX tokens can earn a portion of the earnings from the CRV or FXS liquidity pools. When users stake a certain amount of CVX, the platform locks the tokens as veCRV or veFXS tokens depending on the liquidity pool. Users can't retrieve these tokens. Instead, they get cvxCRV or cvxFXS tokens, which they can exchange for CRV or FXS tokens. This is the role of CVX in Convex Finance staking.
CVX has a different role for liquidity providers because it's an additional reward besides the standard LP reward. If you're a Curve liquidity provider and deposit some Curve LP tokens, you'll earn trading fees, boosted CRV, and some CVX. Boosted CRV refers to the higher rewards on Convex compared to Curve.
As Convex earns more money, CVX holders reap the benefits by staking CVX and receiving a portion of the profits. Also, CVX holders get to participate in the platform's governance and vote on development proposals.
The Role of veCRV, veFXS, cvxCRV, and cvxFXS Tokens
Users can't receive rewards directly in the form of CRV or FXS when they deposit these tokens into the platform. Instead, the platform needs to convert CRV and FXS assets into two additional forms of tokens before paying users. The steps are similar to CVX token staking. The process is part of Convex Finance's asset-locking protocol. When users deposit CRV, the platform locks those tokens forever in the form of veCRV. Users receive cvxCRV tokens at a one-on-one ratio according to their initial deposit of CRV tokens. After receiving cvxCRV, users can deposit the tokens to earn rewards or exchange them if they want to stop staking. For example, cvxCRV holders can exchange the tokens for CRV on Curve Finance. All of the mechanisms on the platform work similarly for Frax assets and pools.
Essentially, veCRV, veFXS, cvxCRV, and cvxFXS tokens are the bridge between token forms of CRV and FXS and staking rewards on Convex.
Although users can exchange cvxCRV and cvxFXS tokens on secondary markets, the platform incentivizes them to stake those tokens. When you stake cvxCRV, you earn Curve Finance governance fees, CRV from the Convex liquidity pool's boosted earnings, and some CVX.
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Liquidity Providing
Convex Finance doesn't charge deposit or withdrawal fees for participating in liquidity pools. This is in stark contrast to liquidity pools on centralized crypto exchanges which mostly charge such fees.
The liquidity pools on Convex are the same ones included on Curve because Convex is a gateway for providing Curve liquidity. Additionally, Convex has some Frax Finance pools, but the most significant portion is Curve pools. In total, there are more than 100 liquidity pools. However, a vast portion of those pools has relatively modest liquidity levels. Most of the total value locked is in the leading pools, such as CRV+cvxCRV (43 million USD), FXS+cvxFXS (60 million USD), and other high-profile pools.
The liquidity-providing rewards on Convex are much higher than Curve Finance, thanks to the Convex veCRV boost. Some of the liquidity pools have around 70% vAPRs.
Joining a Convex Finance liquidity pool is quite simple. You just need to navigate to the Stake section of the platform and choose a liquidity pool from the list. The list ranks liquidity pools from highest to lowest vAPRs. You can deposit your LP tokens into the appropriate pool and start earning LP rewards right away. The Convex operational mechanics we mentioned earlier encourage users to continue providing liquidity. The longer you participate in a liquidity pool, the more rewards you'll earn.
The more stable liquidity pools with high amounts of TVL tend to have lower LP rewards. The riskier pools with less liquidity offer higher rewards. However, it's important to note that participating in DeFi liquidity pools is a high-risk activity. You can't know how tokens will perform in the future, and you might lose considerable funds.
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What Is Convex Finance Staking?
When participating in liquidity pools on Convex, one of the rewards comes in the form of the platform's native CVX token. To stake CVX, you need to go to the bottom section of the Stake page of Convex. You can specify how many CVX tokens you want to stake and if you wish to lock the tokens. If you lock your CVX tokens, you'll get a higher staking reward, and you'll be able to vote on Convex governance proposals.
As far as cvxCRV staking is concerned, you can stake the cvxCRV rewards earned from liquidity provision, CVX staking, or convert CRV to cvxCRV directly. To convert standard CRV tokens to cvxCRV, use the conversion option in the top section of the Stake page. The Convert CRV option allows you to exchange CRV for cvxCRV and instantly stake those coins on Convex. Earning staking rewards is the primary purpose of cvxCRV. If you earn cvxCRV rewards from CVX staking or participating in liquidity pools and don't want to stake it, you can exchange it for CRV. You can do the same thing with cvxFXS tokens.
The Claim section of the platform is where users can claim and withdraw their LP and staking rewards. Also, users can simultaneously claim their rewards and re-stake them with one click with the Claim All & Stake button.
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What Is Convex Finance and the CVX Token? - Summary
Convex Finance is an example of how DeFi platforms allow users to manage their assets directly and maximize their returns. While Curve Finance provides basic liquidity-providing features, Convex Finance pushes users to earn even higher rewards. The choice of liquidity pools and staking options is broad. Also, the reward mechanics with the platform's native CVX token are innovative.
However, it remains to be seen whether the high returns are sustainable on a long-term basis. Additionally, the curve wars between Convex Finance and Yearn Finance are yet to see a winner.
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