DOPEX ESSENTIALS: WHAT IS CONVEX FINANCE AND WHAT DOES DOPEX HAVE TO DO WITH IT?
“Oh Mr. CEO I have learned such a splendid amount about Curve in your last explainer, but what is this so-called ‘Convex’ that I hear all the youth talking about?”
Well well well, another question right up my old alley my dear student. Once again allow I, Nutoro, Chief Education Officer of the despicable “Dopex” to explain.
REFRESHER ON CURVE TOKENOMICS
For those with poor memory, allow me to provide some quick bullet points about how Curve works:
- Curve is an AMM that allows users to swap pegged assets at high volume for low slippage.
- LPs are incentivized by $CRV emissions to specific pools which provide boosted APY.
- The amount of emissions to a pool is determined by the proportion of total veCRV allocated to that pool - if a pool receives 10% of veCRV votes it receives 10% of $CRV emissions.
- $CRV can be locked for up to 4 years to receive veCRV - longer duration locks providing a greater boost to voting power
- This creates a ‘flywheel’ effect as LPs lock $CRV as veCRV to boost APY to their own pools offsetting (to an extent) excessive sell pressure
Easy, simple, beautiful. Just like yourself.
THE PROBLEM WITH CURVE
There is no denying that Curve uses its tokenomics to great effect in achieving its goal of incentivizing LPs and (to an extent) offsetting its high emission rate. However, a user that wants to maximize their voting power would ideally lock their $CRV for 4 years. However, since veCRV is not tradable, if they need liquidity and want to exit their $CRV position this is not possible.
Bad, sad, not good. Unlike yourself.
THE CONVEX SOLUTION
The largest holder of veCRV is not some big fat disgusting whale like so-called “Tetradic Node” but rather another protocol known as Convex. Convex provides a cheeky little solution to veCRV’s liquidity issues.
Oh you silly “Tetradic Node”. Please buy my Diamond Pepes, I am underwater.
“How does this Convex contraption work?”
$CRV holders are able to lock their precious $CRV onto Convex in return for $cvxCRV. $cvxCRV can be staked on Convex in exchange for 3CRV rewards as well as $CRV and $CVX (Convex’s native token). The extra $CRV and $CVX rewards means that $cvxCRV holders receive more income than if they were to hold and stake $CRV themselves. In addition, $cvxCRV has its own Curve pool which means that holders can sell these tokens at any time.
“More income, my dear CEO? What’s the trade-off of this suspicious $cvxCRV token?”
Oh me, oh my, what a keen eye for detail you have dear student. One day you would make a fine CEO yourself.
What $cvxCRV holders gain in income, they lose in governance power - $cvxCRV has no voting rights on Curve as it is $CRV (more precisely, veCRV) that is able to vote. The $CRV that is staked on Convex is automatically locked as veCRV for the full 4-year duration.
“Incredible. So the $cvxCRV lockers lock their $CRV and then Convex locks it as veCRV. Who controls those veCRV?”
You have impressed me yet again with your astute outside-the-box thinking. Good work, student.
Since the veCRV is now owned by Convex, it is Convex that controls those voting rights. Convex is itself governed by $CVX, its native token. $CVX holders can lock their tokens in exchange for vlCVX which allows them to control the protocols underlying veCRV. Since the Convex-owned veCRV is locked for the maximum duration, vlCVX holders benefit from boosted Curve voting rights. The best part is that vlCVX has a fixed 16-week lock which allows users to exit their positions as soon as their lock duration ends. This gives $CVX far more flexibility than veCRV holders who would have to lock for 4-years for maximum voting power.
Innovative, genius, incredible. Just like yourself.
“Wow. This is so smart Mr. CEO. Does Convex do anything else?”
Oh you clever little nugget, of course it does.
Whilst pools on Curve receive $CRV emissions, Convex itself has whitelisted Curve pools that users can stake on via the Convex website. Not only do LPs receive $CRV emissions, they will also receive $CVX emissions pro-rata to the $CRV emissions allocated to that pool to further boost their APY.
Whilst some could argue that Convex has been a cheeky little $CRV hoarder, the synergies between the two protocols can not be overstated. In fact, Convex is so successful that it now holds nearly 50% of the total circulating supply of $CRV, locked safely away as protocol-owned veCRV. Because of this, a discussion of Curve rarely goes without mention of Convex since it is such a large player in how Curve is actually used.
“Such an excellent storyteller, Mr. CEO. Now remind me why we are talking about ‘Curve this, Convex that’ when we are in the Dopex classroom!”
As with all things in life, sometimes you’ve got to look at the bigger picture to appreciate the finer details.
Firstly, Curve is the de facto base layer of DeFi. In an industry where liquidity is king, there is truly no second best. Every stablecoin project that wants to have deep liquidity must be exposed to Curve. The protocol has also expanded to non-pegged assets recently with its v2 upgrade which allows it to fill an AMM role similarly to Uniswap. Since Convex owns nearly 50% of Curve, you really can’t appreciate the latter without an understanding of the former.
Secondly, it is no secret that Dopex plans on launching a stablecoin with the release of rDPX v2. The usability of dpxUSD (a more apt name would be nuUSD in my humble opinion) will be largely predicated on our ability to generate deep liquidity on Curve which will require the acquisition of $CRV and/or $CVX. More on this in the future.
Finally, another cheeky little product in the pipelines mentioned on page 5,309 of our beloved intern’s recent novel is a vlCVX vault, summarised below:
This product will allow $CVX holders to lock their vlCVX on Dopex in combination with the purchase of Atlantic puts. This will allow lockers to borrow dpxUSD against their vlCVX in a liquidation-free manner since their position is hedged by Atlantics. Lockers will still be able to direct the vlCVX’s underlying veCRV less a small deduction in voting power which is given to Dopex. Borrowing against vlCVX was previously impossible so this is some truly innovative stuff, you clever intern.
More details about this so-called “vlCVX vaults” will be released eventually. Stay tuned!
PARTING POEM
Until next time my loyal students.
Warm regards,
CEO (Chief Education Officer)
About Dopex
Dopex is a decentralized options protocol that aims to maximize liquidity, minimize losses for option writers and maximize gains for option buyers — all in a passive manner. Dopex uses option pools to allow anyone to earn a yield passively. Offering value to both option sellers and buyers by ensuring fair and optimized option prices across all strike prices and expiries. This is thanks to our own innovative and state-of-the-art option pricing model that replicates volatility smiles.
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