Curve Wars and the Importance of Governance Tokens
The race to control one of DeFi's most important protocols
The Curve Wars are heating up, and it looks like there is one clear winner (for now).
Curve
Foremost, Curve is a super efficient decentralized exchange that offers some of the lowest rates for stable coin trading. Curve relies on liquidity pools to make trading stable coins automatic and help keep stable coins pegged to the dollar. To incentivize liquidity added to the pools, liquidity providers earn a percentage of trading fees and Curve’s native CRV governance token.
Different liquidity pools offer different rewards because of the CRV emission process. The protocol gives out a set amount of CRV tokens daily to each liquidity pool based on the weights voted for by veCRV holders. Individuals can stake their CRV tokens for veCRV tokens which allows them to vote for the bi-weekly weight distribution. The longer you stake your CRV tokens for, the more veCRV tokens you get, up to a maximum of 4 years which equates to 1 veCRV per CRV. Whoever controls veCRV, controls the emission process. Whoever controls the emission process, controls where people will be incentivized to add liquidity.
Convex
In comes Convex finance, another DeFi protocol which aims to control CRV and therefore control the very lucrative emissions. Each week 4.4 million CRV are emitted, at a current value of just under $29 million. CRV holders can stake their tokens on Convex for cvxCRV rather than veCRV, which gives them higher returns by rewarding them with the same trading fees and CRV tokens, but adds an extra incentive of CVX tokens, the native governance token of CVX. Convex is able to offer better rewards since they can pool people’s CRV together, convert it to veCRV and choose the weights of emissions, while still providing the potential 2.5 boosted rewards that veCRV holders have access to. Individuals that stake for cvxCRV lose their Curve governance rights by not being able to stake for veCRV, but make it up with the CVX they earn. With CVX, individuals can stake it for vlCVX which allows them to vote on governance decisions for Convex’s veCRV, returning their ability to vote on weight distribution for the pools.
The chase to accumulate CRV for control of Curve finance, has now been coined the “Curve Wars.” Other large players such as Yearn Finance were involved, but have quickly raised the white flag as Convex has quickly usurped almost 75% of control over the weight distribution of the weekly emitted CRV. It is becoming increasingly important to control CVX tokens, which gives control over Curve through their large CRV holdings.
Bribes
The final piece of the puzzle are the bribes. With the realization that there is profit to be made by bribing veCRV holders for a fee that is lower than the profit made from the CRV emitted, bribe websites have popped up to gain votes for their preferred weight distributions. Bribe.crv is a website that offers bribes for veCRV holders, and vlCXV holders can receive bribes on Votium.app. These bribe websites are mutually beneficial as they allow for holders to earn increased rewards on their veCRV and vlCVX, while also allowing for liquidity pools to earn more in CRV rewards than it costs them to bribe. For instance, across 8 completed voting rounds there has been $50.42 million given out in bribes. In total, this means that bribers have earned $1.88 in emissions per $1 spent on bribes, while voters who have been bribed have earned an additional $0.87 per vlCVX.
Why CVX?
Essentially, CVX has become more powerful itself than simply holding CRV. In fact, each vlCVX is equivalent to 5.22 veCRV in the gauge vote, and this number is growing year over year. Using this multiplier for the 26,634,890 vlCVX and 49,631,661.28 veCRV that voted in the 12/24/2021 gauge incentives, the vlCVX equivalent comes out to 139,034,126 veCRV. Based upon this number, in total vlCVX controls 139,034,126 / (139,034,126 + 49,631,661.28) of the gauge, which equates to 73.69% control over the CRV emissions distribution. Additionally, CVX is liquid unlike veCRV which is locked for an average of 3.68 years.
As Convex continues to dominate the protocol, they acquire more CRV weekly and their control over the weight distribution increases. Holding CVX allows for control of the weight distribution of CRV rewards to the liquidity pools, and whoever controls the incentives for liquidity pools controls where money will flow in DeFi.
Written by:
Jack McCarthy, a current college student involved in the Boston College Blockchain Club. Especially interested in DeFi and NFT technology.
Twitter: https://twitter.com/offdeblockchain
email: jackmccarthyuni@gmail.com
Works Used
https://resources.curve.fi
https://docs.convexfinance.com/convexfinance/
https://coinmarketcap.com/currencies/curve-dao-token/
https://members.delphidigital.io/reports/when-convex-yearn-compete-curve-wins/
https://llama.airforce/#/votium/overview