The excellent article written by codex crew member BowtiedBart summarises what Curve and Convex are and their importance. This article is a deeper exploration into how these two protocols introduced us to the concept of veTokens, gauges, and bribes
Birth of the veToken
Curve is known for its incredibly deep liquidity pools with minimal slippage. How did it achieve this? Normally protocols attempt to incentivize liquidity providers through trading fees or offering high APY rewards in their native token, but fees are usually not a good enough incentive and the high emission of their native token creates extreme sell pressure and dilution of the supply.
Enter the “vote escrowed” (ve-) token model pioneered by Curve. It starts from their native governance token called CRV. The kicker is that holders will need to lock (stake) CRV to utilize it.
- CRV holders ONLY get voting power and a share of revenue if they “lock” their CRV (getting veCRV in return)
- The amount of veCRV received (and thus the revenue it can generate for the holder) increases the longer the CRV tokens are locked for
- veCRV holders also get to “boost” their APY rewards in the different liquidity pools the longer they lock their tokens.
These may all seem like minor modifications to your typical governance token like UNI, SUSHI, COMP, or other tokens that used a simple “stake and earn rewards” model, but these small changes made all the difference.
This elegant design means Curve can consistently emit more and more CRV tokens while incentivizing people not to sell them. This has the immediate effect of taking large amounts of the CRV supply off the market, lifting the token price, as well as aligning the protocol and users interest for the long term. This by itself was an impressive achievement by Curve, but they did not stop here. There is one more mechanism that solidified it as the undisputed leader in Defi, “vote gauges”.
The Power of Gauges
Instead of distributing rewards equally or based on arbitrary metrics, the Curve model allows veCRV holders to vote on which pool CRV rewards should be allocated.
Gauge weights are the percentage of CRV emissions that are rewarded to specific liquidity pools. On a bi-weekly basis, veCRV holders can vote on their favorite pools and those that get the most votes get the most rewards (In the example above, we can see that the FRAX pool is currently receiving around 17.71% of the gauge weight. This means that all liquidity providers in the FRAX pool will share 17.71% of the daily CRV rewards)
As an individual user, this isn’t a big deal since they will likely vote for whatever pools they have their funds in. For a protocol that has a token on Curve, however, this is a game-changer.
For example, if you launch a new stablecoin and want to allow large trading volumes of it on Curve, you could either spend millions of dollars and deposit a large number of stablecoins in the pool OR you can rally the veCRV holders to vote for your pool. If your pool gets a lot of votes, that will make it incredibly attractive for other people to put their millions of dollars of stablecoins into your pool to reap the CRV rewards.
This led to the creation of a new market of enticing veCRV holders to vote for competing pools. This new market is affectionately called “Bribes”.
The Bribing Economy
Very quickly people realized that there were two ways of getting the veCRV votes - accumulating veCRV yourselves (which Convex has done and is the largest holder of veCRV), or simply “bribing” existing holders of veCRV (the largest share of these bribes now go through the Convex platform)
Without going into too much detail, the gist of the how Convex does this is:
- Instead of locking your CRV for veCRV directly with Curve, you deposit CRV on Convex instead and get a synthetic version of the token called “cvxCRV”.
- Convex will now do the job of locking your CRV tokens for you for maximum boost and ROI.
- Convex has a governance voting token called CVX to decide which pools the Curve rewards are directed to.
- Other protocols attempt to incentivize CVX holders to vote for their pool by offering payment. (usually in the form of their native token)
At the end of the day, this entire model has proven to be sustainable even in a bear market and is being emulated by other protocols. The downside to this model is its high barrier to entry for the newbies. As the model matures, other younger protocols - like TempleDAO are taking up the mantle of streamlining the process and making it easier (and cheaper) to enter this particular market. In an upcoming article, we will explore in more detail how TempleDAO intends to throw its hat into the ring and innovate in this space. Stay tuned!