High Quality Passive Income with Curve & Convex

9 min readDec 27, 2021

This is not financial advice but an overview of the defi protocol Curve and a guide about how to invest in the Curve ecosystem with Convex to maximize ROI.

Introduction

As I get more and more inquires from new crypto users about what cryptocurrencies to invest besides Bitcoin and Ether, I am writing this article as a reference for people who are looking for alternative cryptocurrencies investment in the defi space. Curve.fi is one of my favorite blue-chip defi protocols with solid fundamentals and best-in-class tokenomics. Convex is the powerful yield farming platform built around the Curve ecosystem for the average retail investors. In the following paragraph I will address fundamentals and investment thesis of the Curve protocol and tactics for investing in Curve through the Convex platform.

What is Curve?

Founded by Michael Egorov and launched in January 2020, Curve Finance was launched in January 2020.Curve is one of the most popular automated market maker (AMM) exchange liquidity pool on Ethereum (now also on other networks) and it is mainly designed to let users and other decentralised protocols exchange stablecoins such as USDT to DAI with low fees and low slippage, while non-stablecoin pools are also available on the platform (WBTC and WETH for example). Curve maintains low fees and low slippage by accommodating liquidity pools made up of similarly behaving assets. Because of low fees and slippage, Curve attracts whale and institutional investors and is currently the largest decentralised exchange for stablecoins. Although lower fees may mean lower incentives for the liquidity providers (LP) who supply the pools with tokens, Curve incentivizes the LPs by providing rewards in the form of CRV tokens and interest.

How AMM Works?

Unlike order book models, automated market makers (AMM) allow digital assets to be traded permissionlessly and automatically by using liquidity pools instead of trading between buyers and sellers via the middlemen market makers. Users supply liquidity pools with tokens, and the prices of the tokens in the pool are determined by a mathematical formula. By tweaking the formula, liquidity pools can be optimized for different purposes. Take Uniswap as an example. Its AMM mechanism is based on the formula of x*y = k, where x is the amount of one token (Token X), y is the amount of the other token (Token Y), and k is the product or constant. Most AMM may face challenges of high fees, high slippage, and impermanent loss.

In order to address these issues, Curve adopts a balanced approach between constant product and linear invariant models to find a way where pools would not run out of the assets nor do the traders have to face expensive trading fees. Besides, Curve builds liquidity pools that pair similar assets like stablecoins to further minimize impermanent loss, fees, and slippage.

For people who want to dig into more details about AMM mechanism, you can check out this website for more technical colors.
https://xord.com/research/curve-stableswap-a-comprehensive-mathematical-guide/#pp-toc__heading-anchor-5

Key Metrics- TVL, Trading Volume, Fees

TVL: $22.2 billion
Daily trading volume: ~$1 billion
Weekly fees earned: $3–4 million by the protocol, or $1.5–2 million (50%) distributed to veCRV holders

Total Value Locked (TVL) represents the sum of all financial assets that are being staked in any specific DeFi protocols for earning rewards, interest, or borrowing other cryptocurrencies. Generally, TVL is a metric used to measure the overall health of the DeFi protocols. As of 12/22/2021, TVL on Curve achieved $22.2 billion, growing exponentially from $1.5 billion at the beginning of this year and representing 9% share of overall TVL in the DeFi market (source: DefiLlama.com). Curve is ranked as #1 DeFi protocol by TVL. Daily trading volume is around $1 billion on Curve and about $3–4 million fees on average earned by Curve every week via trading (0.04% fee for swap, 0–0.02% for deposit/withdraw in general). 50% of trading fees will be distributed to veCRV holders.

Tokenomics

Supply

The total supply of 3.03b is distributed as such:

62% to community liquidity providers
30% to shareholders (team and investors) with 2–4 years vesting
3% to employees with 2 years vesting
5% to the community reserve

The initial supply of around 1.3b (~43%) is distributed as such:

5% to pre-CRV liquidity providers with 1 year vesting
30% to shareholders (team and investors) with 2–4 years vesting
3% to employees with 2 years vesting
5% to the community reserve

In order to build deep liquidity, Curve provides CRV rewards to incentivize LPs to provide liquidity to the protocol through its own emissions. Current emission rates of CRV token supply is around 760 thousands per day. The inflation rate will decrease over time and total supply will saturate in 3–4 years from now. The release schedule is as follows (source: curve.fi):

veCRV

Curve provides CRV rewards to LPs that provide liquidity to the Curve protocol through its own emissions. The Curve platform is currently governed community, also known as a Decentralized Autonomous Organization (DAO). CRV token holders can lock their CRV into Curve DAO as the voting escrow CRV tokens (veCRV) to participate in Curve’s community governance. The longer users lock their CRV for, the more voting power they have. Lockup-period is up to 4 years and the longer users lock the more weight on the voting power. For example, if users lock 1 CRV for a year they will have a 0.25 veCRV weight but if they lock for 4 years, they will have a 1 veCRV. Three main benefits for holding veCRV:

Proposing a new liquidity pool on curve or casting votes on proposals
Earning trading fees on Curve protocol. 50% of trading fee earned by the protocol will be distributed to veCRV holders
Boosting the staking rewards by up to 2.5x
Airdrops from other protocols that want to build liquidity pool on Curve

The average lock time is 3.6 years, which means most of veCRV holders choosing to lock their CRV for max 4 years to get the most benefits.

Investment Thesis on Curve

I summarized investment thesis on Curve with four major driving forces as below. Deep liquidity pool, best tokenomics and DAO governance create the flying wheel and the competitive moat. Secular trends in usage of stablecoin and TAM expansion allow Curve to further grow the economics and value.

Secular trends in growing usage of stablecoins. Stablecoins are viewed as one of fundamental infrastructure in the DeFi system. Stablecoins basically enable investors to generate yield on the crypto assets in the DeFi market while alleviating the potential adverse effects of market volatility. Ever-growing DeFi market will continue to create demand for stablecoins so is volume for stablecoins exchange.
Best-in-class tokenomics and DAO governance. The locking mechanism and revenue sharing help offset inflation of CRV from rewards in my view. This is the main reason you can potentially earn steady and high APY without suffering from depreciation of token value due to inflation. In fact, Curve tokenomics and DAO governance have become the gold standard in the DeFi market.
Curve V2. Curve has launched its V2 update, which allows users to swap between unpegged assets and thus directly compete with AMM exchanges such as Uniswap and Sushiswap. Similar to Uniswap V3, Curve V2 also offer concentrated liquidity feature allowing users to choose which price range they’d like to provide liquidity for. A major improvement from Uniswap V3 that requires active management on liquidity pools (therefore, it is largely used by professional users but not average users), Curve will automatically concentrate all liquidity from its LPs around the current price to reduce slippage and price impact. Curve V2 will help the protocol expand its TAM in the DeFi market.
The Great Curve Wars. Curve Wars is a non-zero-sum game that external protocols aim for getting dominance over the Curve protocol in order to get most weight on CRV rewards. It is the unique and most beautiful part of Curve protocol in my opinion. Put this in a simple way. An emerging decentralized stablecoin protocol wants to offer attractive yield to its users that are incentivized to provide liquidity to the stablecoin pair. In order to achieve high yields for its users the stablecoin protocol needs to increase its influence on governance and alter the liquidity mining rewards for its pool on Curve, so the protocol could do either 1) buy a lot of CRV and lock them all to increase voting power (this creates buying pressure on CRV and boosting the CRV price), or 2) bribe other CRV holders to vote the favor of increasing rewards on its pool (this could add another 20–30% APY to CRV holders). Either scenario will enhance benefits of CRV holders.

Investing in Curve Through Convex

Quick Background on Convex

Convex Finance (CVX) is a DeFi protocol built on top of Curve Finance. It is a platform for CRV token holders and Curve LPs to earn additional interest rewards and Curve trading fees on their tokens. Remember that users need to lock their CRV for 4 years to get max benefit on veCRV. This is definitely not favorable to average retail investors given their liquidity being locked for long time if they choose to maximize benefits (as opposed to institutional investors who have plenty of liquidity to invest across the DeFi market).

On Convex, users convert their CRV to cvxCRV and stake the cvxCRV to get rewards in form of CRV, 3Crv, CVX and airdrops from Curve. Users basically get the same rewards as if they were locking their CRV for 4 years on Curve, netting fee charged by Convex and plus the CVX token. Users can further stake and lock their CVX to share fees earned by Convex protocol and get bribing rewards by delegating votes to the Convex team or other protocols.

When users convert their CRV to cvxCRV, Convex will lock all their CRVs on Curve for 4 years and thus users can’t exchange back their CRV tokens. However, users can exchange their cvxCRV to CRV on the secondary marketplace such as Sushiswap or Curve exchange. Therefore, users can equivalently stake their CRV and get max rewards from Curve without locking for 4 years plus CVX tokens as additional rewards. The overall APY could be steadily as high as 50–60% (without reinvesting rewards).

The Flywheel

I believe the best way for average retail investor to invest in Curve is through Convex. The following is the key concept and tactic. Let’s start with CRV token. Assume you have CRV in your wallet (you can buy CRV on CEX and transfer to web3 wallet).

Stake cvxCRV (50–60% APR): Convert CRV to cvxCRV on Curve or Sushiswap dex, and then stake you cvxCRV on Convex (You may also convert CRV & stake cvxCRV on Convex but this will cost more gas fee). You will get 50–60% APR rewards composed of CRV, 3Crv, CVX, and EPS airdrop.
Stake cvxcrvCrv (50–60% APR): Deposit liquidity (CRV or cvxCRV) into the Curve cvxcrv pool (without staking in the Curve gauge), and then stake your cvxcrvCrv tokens on Convex. You will get 50–60% APR rewards composed of CRV and CVX.
Stake & Lock CVX (30%+ APR): Stake and lock CVX (16 weeks + 4 days) to get about 4% APY of fees in the form of cvxCRV plus 30%+ APY of bribe rewards by delegating vote weight.
Stake 3poolCrv (6-7% APR): Swap 3Crv for 3poolCrv LP on Curve and then stake 3poolCrv on Convex to get 6–7% APY rewards in the form of CRV and CVX.
Stake MIMCrv (20%+ APR): Swap 3Crv for cvx3pool on abracadabra and borrow MIM, and then deposit MIM on Curve MIM pool to get mimCrv LP token. Stake mimCrv on Convex to get 20%+ APR rewards in the form of CRV and CVX.

Reinvestment: ROI can be compounded through reinvesting all rewards of CRV, CVX, cvxCRV, or 3Crv in staking if cost makes sense.

Closing Thoughts

I believe the high APY for staking rewards above-mentioned could be sustainable for at least 3–4 years when CRV supply is capped, as there is fundamental strong demand for CRV and CVX amid ever-growing usage of stablecoins and the DeFi market. Once CRV token supply approaches the cap (3.03 billion), there could be buying pressure on CRV given no additional supply and thus CRV price could appreciate. While bears argue that CRV price could decrease given no new supply as rewards for staking, I think trading fee sharing alone as incentives could be enough so support CRV value, not to mention that the fee structure and sharing ratio could be altered by DAO community.

Compared to daily foreign exchange volume of $6.6 trillion, stablecoins exchange is still nascent ($1 billion daily volume on Curve). Let’s say if Curve daily volume hits $10 billion in three years, the protocol will generate $1.4 billion of revenue a year and stake holders will get $700 million fee a year. Then it will be basically similar to a case of investing in a high growth fintech stock with 4% annual dividend. And to be honest, I don’t think there is such a fintech company we can invest in the equity market at this moment.

My last words. Curve is the benchmark DeFi protocol showing how blockchain technology can truly disruptive the current legacy and inefficient banking system in the future. Disruption can not only occur in the financial markets but other verticals that can benefit from removing the middlemen. So be prepared for the next era of web 3.0!

Disclosure: I own CRV, CVX, and cvxCRV tokens at the time of writing.