ITSA DeFi Insight — Curve, Convex and the Curve Wars

Curve, the largest DeFi protocol by total value locked, is a decentralized exchange (DEX) that enables swaps between stablecoins with deep liquidity, therefore reducing slippage and impermanent loss. Lately, Curve has experienced something called the “curve wars”, which can be described as different DeFi protocols trying to acquire as many Curve tokens (CRV), the governance token of Curve, as possible or “bribe” those who own them. Convex, a protocol that heavily accumulates Curve tokens, is accelerating the curve wars and is on track to have a monopoly over Curve governance.

Author: Nick Allgäuer, Christian Viehof

Tokenomics of Curve

To understand the Curve wars we first have to understand Curve and its CRV token. If you were to provide liquidity in a Curve liquidity pool, besides your basic interest, you would be rewarded with CRV tokens, which act as a reward mechanism and a governance tool. The special thing about these tokens is that you can lock them in the Curve protocol for a minimum of 1 week and a maximum of 4 years. Specifically, this means that you will not have access to your CRV tokens for your chosen time, but you will receive so-called vote-escrowed CRV (veCRV) tokens. The longer you lock your CRV tokens on the Curve protocol, thus committing to it, the more veCRV tokens you get.

These are non-tradable ERC20 tokens and allow you two special advantages:

  1. The first advantage is that if you lock your CRV tokens for a certain amount of time to get veCRV tokens, you are able to boost your interest rates for the respective liquidity pools up to 2x (if you lock them for the maximum 4 years) the original interest. LPs with many veCRV tokens will therefore receive higher compensation for their stake than those without veCRV.
  2. The second advantage is that veCRV tokens allow you to participate in the so-called “gauge weight voting”. Since LPs are rewarded not only with a base APY when providing liquidity on Curve but also with CRV tokens, it must be decided how to allocate these CRV rewards to the different liquidity pools. The gauge weight voting is doing exactly that and decides what percentage of the total compensation in the form of CRV tokens will go to each liquidity pool within the Curve protocol.
Figure 1: Gauge relative weight (source: https://dao.curve.fi/)

At the time of writing this article, the most rewards go to the frax, f-ustw and mim pool, thus incentivising LPs to provide their liquidity to these pools because of their higher rewards.

That means, if you own many veCRV tokens by locking your CRV tokens on the curve protocol, you will first boost your interest and second you are eligible to decide which liquidity pools will get how much CRV rewards.

Convex and the CRV monopoly

As mentioned, each Curve LP can boost its interest by locking its CRV tokens on the Curve protocol and receiving veCRV tokens. This has the advantage of a higher APY for the LP, but the CRV tokens are not accessible as long as they are deposited in the Curve protocol. This problem can be solved with Convex. Convex is utilizing Curve and allows users to get the maximum boost of interest while maintaining the ability to sell one’s stake. Instead of locking your CRV tokens in the Curve protocol yourself, you can simply do this via Convex. Convex will deposit all received CRV tokens in the Curve protocol for a maximum of 4 years. Therefore, Convex will receive the maximum amount of veCRV tokens, thus offering the highest APY for the LP’s stake, in each liquidity pool. In exchange for your locked CRV tokens, Convex will issue Convex tokens which can be sold at any time to preserve the liquidity of each LP. In such a way Convex offers LPs the maximum return, due to the pooled veCRV while maintaining the option to sell one’s stake due to a freely tradable token.

Since this concept has attracted a large portion of all Curve LPs in a short period of time, many of them locked their CRV tokens via Convex and not Curve. Thus Convex now owns a large number of veCRV tokens and the owners of the Convex token have a great deal of power in the gauge weight voting since they own veCRV tokens indirectly via Convex.

Figure 2: veCRV share by DAO (source: https://dune.xyz/jshogren/veCRV-Tracking)

Currently, Convex owns 42.5% of all veCRV tokens of the Curve DAO and can therefore determine to a very large extent which liquidity pools receive which share of CRV rewards.

In other words, if you own a lot of Convex tokens, you own a lot of veCRV tokens and have a lot of power to decide which liquidity pools get how much reward in the form of CRV tokens, via the gauge weight voting.

However, protocols can determine the allocation of CRV rewards not only through the ownership of Convex tokens. They can also use Convex to bribe other Convex token owners to vote for their liquidity pool in the gauge weight voting.

This drives the returns of the Convex token owners even further, as they now get not only a boosted APY through Convex but additionally the confirmation money of the different protocols which bribe Convex token owners to vote for their protocols liquidity pool.

This is profitable for the protocols because on average, for every dollar spent in bribing, 4 dollars, in the form CRV rewards, are allocated to their respective liquidity pools.

The Curve wars

So, in summary, we can say that the unique tokenomics of Curve lead to what we currently call curve wars and Convex as an accelerator in this space.

Numerous protocols try to accumulate as many CRV tokens as possible or bribe Convex token owners with their respective native token to impact the CRV rewards of their Curve liquidity pool.

Figure 3: Rewards voting results (source: https://llama.airforce/#/votium/rounds/11)

Currently, Frax is the largest briber on Convex, which is one reason why it has the most CRV rewards for their liquidity pool. Other protocols try to catch up, so that the total money spent on bribing, of all protocols, accumulates to over 16 million USD.

Curve V2, which allows token pairs to be traded on the Curve protocol with different price ranges, will reinforce this, because eventually more protocols will have liquidity pools on Curve and then start bribing and accumulating CRV tokens to make their liquidity pool attractive.

The classification of CRV according to the ITC

Figure 4: CRV Tokenbase entry (source: https://itin.itsa.global/H35Y1WNB4)

Economic Purpose (EEP): The CRV token is listed as a Governance token (EEP22NT02) since it is used to govern the Curve protocol via on-chain voting.

Industry Type (EIN): The issuer of CRV is active in the field of Decentralized Exchanges, Markets and Market Making (EIN06DF01).

Technological Setup (TTS): CRV is an Ethereum ERC-20 Standard Token (TTS41BC). The Class “Ethereum ERC-20 Standard Token” captures every Token that is implemented by means of the ERC-20 Standard on top of the Ethereum blockchain.

Legal Clam (LLC): The CRV token does not entitle its holder to any legal claim or rights against the issuing organization, therefore it is listed as a No-Claim Token (LLC31).

Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. The Curve platform is built by a team of programmers and engineers that make up the core contributor community and is governed by CRV token holders. Its Issuer Type is an Application Layer Protocol (LIT62AL).

Regulatory Framework (EU) (REU): The dimension “Regulatory Status EU” provides information on the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final). CRV qualifies as a Utility Token (REU52) according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final.

The International Token Standardization Association (ITSA) e.V.

The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.

  • The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
  • The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to market capitalization of classified tokens.
  • ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.

Remarks

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Nick Allgäuer is an Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database including a classification framework and unique token identifiers and locators. Originally coming from a Data Science background, he has working experience as a Data Scientist at Cognize and as a Market Conformity Analyst at UBS. Currently finishing his bachelor’s in Computational Business Analytics, you can contact him via nick.allgaeuer@itsa.global and connect on Linkedin if you would like to further discuss ITSA e.V. or have any other open questions.

Christian Viehof is an Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database including a classification framework and unique token identifiers and locators. He completed his Bachelor in Economics at the University of Bonn, the Hong Kong University and the London School of Economics and Political Science with a focus on Behavioral Economics and Finance. Currently pursuing his Master of Finance at the Frankfurt School of Finance and Management, you can contact him via christian.viehof@itsa.global and connect with him on Linkedin, if you would like to further discuss ITSA e.V. or have any open questions.

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International Token Standardization Association

The International Token Standardization Association (ITSA) is a not for profit organization working on holistic market standards for the global token economy.