To better understand Convex and its valuation, a brief knowledge of Curve is required. Curve is an Automated Market Maker (AMM) that focuses on pools with similar asset types such as synthetic versions of BTC, ETH and stablecoins. Liquidity providers are incentivized as they are able to earn yield in the form of trading fees and CRV tokens without a huge risk of impermanent loss. To prevent huge selling pressure on CRV, Curve invented the ve-model, allowing holders to lock their CRV tokens as veCRV up to 4 years in return for voting rights and trading fees accrual.

Convex was then announced in April 2021 as a project built on Curve, with its main product being cvxCRV, a liquid option of veCRV. To further incentivize cvxCRV stakers, CVX is given as liquidity mining rewards and are eligible for a portion of Convex’s fees.

The Convex flywheel exploded in popularity in late 2021 to explain the synergy between Curve and Convex. cvxCRV being a liquid option of veCRV with higher incentives motivates users to deposit their CRV as cvxCRV. This allowed Convex to farm more CRV and return the rewards back to cvxCRV and CVX stakers. Users are then incentivized to restake their CRV, leading to a flywheel effect.

Products

Currently, Convex has cvxCRV and cvxFXS, with plans to collaborate with more protocols that adopt the ve-model. These products offer liquidity for those who do not want to lock up with veCRV or veFXS for 4 years. However, such products are not 1:1 with their counterparties (CRV and FXS respectively), and may carry a discount when swapping. As such, users need to evaluate whether their liquidity needs are worth the risk of a potential discount. Two ways to ensure cvxCRV trades near CRV’s price is to adjust the A parameter of the cvxCRV/CRV pool or to increase the fee rewards for cvxCRV stakers.

Besides Convex’s own products, multiple projects have been built on Convex such as Llama.airforce, an autocompounder for users of Convex. cvxCRV holders for example are able to auto-compound rewards back into cvxCRV, saving gas on transactions without having to claim and restake multiple rewards.

Revenue model

Convex’s revenue is generated through liquidity providers on its platform, currently taking in a 17% platform fee. The 17% is further broken down into the following: 10% to cvxCRV stakers, 5% to CVX stakers (including vlCVX), 1% to vlCVX solely, and 1% to the harvest caller (anyone who calls the ‘harvest’ function to claim rewards) as gas reimbursement.

However, this fee percentage can change for multiple reasons, such as higher incentivization should the cvxCRV trade at a deep discount to CRV. This fee adjustment is between hard-coded ranges and can be changed through a call function by Convex’s multisig.

With the introduction of cvxFXS, Frax pools are also subject to similar fees when staked on Convex. 10% of all FXS earnings are distributed to cvxFXS LPs, and 7% are distributed to vlCVX holders.

Founders

Convex is founded by an anonymous team. It is led by an anonymous founder who goes by the pseudonym C2tP. Core members of Convex include Winthorpe, co098 and Kendrick Llama. Convex also has support from Curve’s team.

Tokenomics

CVX holders have two options of utilizing their token: either through vote locked CVX (vlCVX) or by staking it on Convex’s platform. vlCVX carries a 16 weeks + (x < 7) days lock, in exchange, lockers earn platform fees as well as giving voting weight for proposals and gauge weight voting. Staked CVX earns a lower amount of platform revenue, but is not locked and can be unstaked anytime.

Convex’s emission schedule is determined by the amount of CRV rewards that Convex has farmed. As the amount of CRV rewards farmed increases, CVX minted increases logarithmically.

Capital Raise

3.3% of the Convex supply was used as a fund raise for investors to pre-seed Convex incentives for LPs. However, the knowledge of who the investors are and how much the raise was (price per token) were not shared by the team till this date. These tokens were subject to a 1 year vesting and have since been unlocked.

Key Metrics

Total Value Locked (TVL)

Convex’s TVL reached a peak of 21 billion USD in early 2022, now hovering above 3 billion USD due to current market conditions. While this is a 85% drop at first glance, the TVL is based on asset price and most tokens are down 80-90% currently. When the TVL is measured against ETH, it represents a clearer picture where the decline was due to the asset’s performance against ETH, not a withdrawal of assets. Compared to other protocols under the ‘Yield’ category in DefiLlama, Convex still holds the top position in terms of TVL.

Volume

Convex sees daily trading USD volumes of 10 million on-chain and another 10 million in CEXes like Binance.

Valuation

Valuing Convex in relation to Curve

One ‘past’ model of valuing Convex is to calculate whether buying CRV or buying CVX is better at the current ratios. In my opinion, this ratio will always be >1 (in this case, CVX’s price will always trade higher than a 4.50x ratio relative to CRV). This is to take into account the addition of new products like cvxFXS and a liquidity premium of voting power. While there is a 16 weeks + (x < 7) days lock on CVX, CRV has to be locked up for 4 years to get the full benefits.

P/E and P/S ratios

Calculating Convex’s PE is subjective depending on factors like whether FDV or veCRV’s supply is used and whether bribes are factored in. On Token Terminal, Convex is calculated to have a 1.9x P/S Ratio, making it the fourth lowest P/S ratio amongst other top dapps. Convex is also calculated to have a 33x P/E Ratio, however, Token Terminal does not factor in bribes in that calculation.

Liquidity Liquidity can be sourced from multiple outlets, both onchain and on CEXes. The pictures below show the amount of CVX you could buy or sell before incurring 2% slippage.

Market buying CVX will incur a 2% slippage with 18k of asks on Binance, while market selling CVX will incur a 2% slippage with 74k of bids on Binance.

Competition

A recent competitor that made headlines was Aura Finance, a Convex alternative built for Balancer, a protocol that revamped its tokenomics into veBAL. While other forks of Convex may arise for protocols who are looking into changing their tokens into the ve-model, it remains to be seen whether their token holds value without CRV incentives and high trading volumes redistributed as fees.

Catalysts

One metric that further exemplifies Curve’s and Convex’s importance is the total stablecoin supply (140 billion and growing). Curve’s importance in keeping stablecoin pegs cannot be understated, as can be seen from incidents like the MIM fiasco in January 2022. The MIM stablecoin endured huge selling pressure after its founder, Daniele Sestagalli, was found to be associated with Michael Patryn, a partner with Quadriga, an exchange that lost millions in customer funds. Although the pool ratio between MIM and 3CRV reached a low of 96.5 MIM to 3.5 3CRV, MIM barely depegged, reaching a low of 0.97. Without Curve spending its emissions on incentivizing deep liquidity in the MIM/3CRV pool, MIM may have depegged further.

Expansion into partnerships with other protocols

With the success of cvxFXS, more protocols who adopt the ve-token model are incentivized to partner with Convex. Not only are partnerships money makers for Convex due to increased trading volumes and more, CVX holders will hold exposure to those protocols too as Convex gains market share due to the cvxToken model.

Risks

Smart contract risk is something every protocol is subject to. To mitigate this, Convex has had 2 external audits with Mixbytes and Peckshield linked below.

https://github.com/mixbytes/audits_public/tree/master/Convex%20Platform

https://github.com/peckshield/publications/blob/master/audit_reports/PeckShield-Audit-Report-Convex-Frax-Staking-v1.0.pdf

Convex is also subject to any risk that Curve Finance has as it is built on top of Curve. 

Addressing legitimate structural needs

The structural needs for Web3 are legitimate and successful protocols are cognizant of that. For example, Mirror Protocol is a decentralized alternative to publishing apps like Substack and Medium.

Mirror allows instant, trustless payments to enable crowdfunds, split the amounts and more. Such features closed the gap between writers and readers, allowing monetary contributions in an easy and fast method. Using block explorers like Etherscan will also help verify the funds movements so that contributors can check themselves. Blogs that are written are stored permanently on Arweave, a decentralized storage platform. This powerful combination allows writers to monetize their content and own it forever, creating a strong foundation that incentivizes writers to use Mirror.

Another real world structural need that is being tackled is decentralized voting. Snapshot is a decentralized voting system that aims to give flexibility to various organizations looking to conduct voting in a transparent manner. Through off-chain transactions, Snapshot is able to provide a gasless option both for voting and to create proposals.

Votes are also easily verifiable through Snapshot’s frontend where it is publicized. In Snapshot’s current state, it showcases a solution towards voting corruption, removing any doubt of conspiracy.

Alternatives readily available for various infrastructure

As Web3 grows, more products that offer similar features are developed. This is crucial for many reasons, one being that users have the alternative to pick when one is down. For example, both Alchemy and Infura are backend infrastructures that offer different RPC nodes that users can set up themselves.

During high network usage, this is essential as users may need to manage their on-chain positions to avoid liquidations on leverage protocols like Gearbox.

Bridging the social layer for both builders and users

Using centralized social platforms like Twitter and Facebook poses the risk where your content may be regulated wrongfully. Databases are centralized too, preventing content creators from porting over their content or followers to another platform.

Lens Protocol is one infrastructure that aims to solve that problem. Lens seeks to become a user-owned social graph where users own their data, allowing them to port it to any other platform. Posts and comments are stored on-chain, adding to the user’s collective digital footprint.

Lens also helps ease the developing process for social media builders. While Lens has only been announced a few months ago, there have already been more than 50 apps developed under Lens API. Grants are also available for developers who are looking to further Lens vision.

Necessary improvements: Prioritizing security

Developments in Web3 have been made at a breakneck speed, However, this comes at the expense of security.

2021 saw a plethora of exploits - more than 2 billion dollars were siphoned from users to exploiters. With a nascent industry like Web3, it is inevitable to make mistakes. However, this could be mitigated through early and frequent audits. Many developers ‘test in prod’ at the expense of users, where a smart contract bug may lead to millions of dollars lost.

Therefore, audits should always be prioritized if the project is dealing with user funds. By engaging reputable audit firms such as Trail of Bits and Quantstamp, bugs that could otherwise cause loss of funds could be averted. While this may be an expensive task, it is a necessary one to build trust between developers and users.

Simplifying the onboarding process

To get more users into the industry, UX design is one key factor teams must focus on before deploying to retain repeating users. As the space is still new, users may be daunted if the design is complicated. For developers looking to build on various infrastructure, local meetups between the core team and enthusiast groups could help answer queries, such as setting up build environments and a live demo.

Web3 is at the forefront of changing how users interact, transact, and communicate . The current iteration of products is nothing short of amazing, but builders as a collective need to have the same ethos of having security being paramount as we forge forward with developing the future of the internet. I strongly believe that integrations of infrastructure like the examples above will lead to a modular stack where users can enjoy decentralized services and be in control of their data.

While this could be attributed to the overall macro weakness in the market, there may be other factors that play a part into this.

Reasons:

New methods of getting higher beta

With the explosion of popularity for NFTs in 2021, investors found new methods of generating returns against ETH. NFTs gave a new avenue for investors to speculate their ETH, and was able to attract a much wider audience due to the simplicity and more entertaining aspect over DeFi.

High gas fees:

Ethereum gas fees were consistently high the whole of 2021. Everyday came a new NFT mint, where hundreds of bots tried to snipe mint by directly interacting with the contracts. This usually caused the ETH network to be congested, which directly affected DeFi users. Swapping tokens or reorganizing positions took hundreds of dollars which could not be sustained.

A Diversion of Liquidity:

Liquidity is never loyal in DeFi. In a space where moving capital takes mere seconds, billions of TVL come as easy as they go.

Due to the high gas fees on Ethereum mainnet, most investors who cannot stomach 3 digit transaction fees flew to alternative ecosystems. Many forks of protocols like Aave and Yearn sprung up on chains like Polygon and Fantom, with increased yield to attract earlier users to deposit liquidity into their project instead.

Regulatory concerns:

In my opinion, regulatory concerns are one of the more serious issues hindering DeFi’s future. Due to the regulatory concerns, it is almost impossible for DeFi protocols to share fee revenue with token holders without being considered a security in the United States. I list a few examples of the increasing pressure against DeFi protocols below.

https://twitter.com/TornadoCash/status/1514904975037669386

https://twitter.com/fintechfrank/status/1517511646758981639

https://twitter.com/bantg/status/1518504778183155717

The Road Back Up:

Tokenomics Revamp:

While price action has been disappointing, delving deeper into governance forums and discord calls gives a better understanding to what developers have been trying to do to help counteract this.

Balancer (BAL) recently released veBAL which is modeled against the successful veCRV tokenomics, which will help reduce selling pressure as holders are incentivized to lock their tokens.

https://twitter.com/balancer/status/1508386622160658439

Yearn Finance (YFI) and Perpetual Protocol (PERP) have also announced their venture into ve-tokenomics, with veYFI and vePERP coming soon.

While this may not be the perfect answer in reviving price action, I think this is the right step towards better tokenomics.

A shift in market narrative:

Sometimes, less noise means more. In 2021, more than 2 billion dollars were lost due to DeFi exploits. When managing billions in TVL, the Lindy Effect may come into play as more investors start to realize that DeFi 1.0 protocols are safe to deposit their money into. I am also of the belief that market cycles have a hand in the current price action, and that we are in the accumulation phase right now.

Building never stops:

Unlike ICOs in 2018 which were P&D schemes, defi developers are still continually working behind the scenes at making the future of finance better.

Warchests have also been accumulated by protocols over the last year, either by increasing their Convex holdings to participate in the Curve Wars, or other non native assets to tide over ‘bear markets’. As market conditions improve and metrics like TVL/Mcap and P/E P/S ratios gain more significance, we might see a revival of prices soon.

https://twitter.com/Darrenlautf/status/1504291418084286468

I hope this gave a brief high level overview of what has impacted the DeFi markets over the last year. I think it would be cool to look back in the future on some of these issues and how we overcome them.

Most of them do not have a token/dapp yet, so I just turn on notifications and wait to try them out for possible retroactive rewards/a chance to invest in their presales.

If you are deep into the space you might have heard of most of them before already.

I highlight these below, with a brief summary and relevant links. Enjoy!

1) Retrograde

Retrograde aims to be the Convex model in the Terra ecosystem by supercharging yields on yield based assets.

They are looking to raise on 2nd May 2022 using a two stage launch to compete with other projects like Reactor and Apollo in the upcoming Astro Wars.

https://twitter.com/retrogrademoney/status/1516110451733667842

2) Alkimiya

Below is a good thread on what Alkimiya does, its the next DeFi innovation that much smarter minds than me are super excited about. They have launched on AVAX mainnet but no token announced yet so you might want to test it out.

https://twitter.com/alkimiya_io/status/1507371870340870146

3) Rysk

Rysk allows DeFi investors to access better yields that are uncorrelated with the movements of the market. No dapp/token yet.

https://twitter.com/ryskfinance/status/1507083040597716998

4) Panoptic

“A perpetual, oracle-free options protocol”. No token or any project/discord yet but the whitepaper is on their website.

https://twitter.com/Panoptic_xyz/status/1513871564244201486

5) Aura Finance

Aura Finance announced their arrival into the space through a governance proposal on Balancer forums 2 weeks ago. They are aiming to be the Convex model for veBAL. You can view their proposal on Balancer forums below.

I am also excited to see who will step up to be the CVX for veYFI which may be coming soon.

https://twitter.com/0xMaharishi/status/1512104356493115399

6) Astaria

By ex CTO of Sushi, Joseph, no discord/any news about what it is yet.

https://twitter.com/AstariaXYZ/status/1487231732248190977

7) Valorem

Permissionless physically settled options, on any ERC20 token on Harmony. You can sign up for their testnet in Discord, which may have retroactive rewards.

https://twitter.com/valoremxyz/status/1516075378485440525

8) Koba Finance

KOBA is an all-inclusive crypto investment management platform built on Solana. No project/token yet, developers still building.

https://twitter.com/KobaFinance/status/1515605820003991558

9) SearchOnDora

Off chain explorer, no dapp/token/discord yet.

https://twitter.com/SearchOnDora/status/1510013869384732679

10) Octav_Fi

Portfolio management system backed by Maki and other well known people. No dapp/token yet.

https://twitter.com/OctavFi/status/1480933356707753985