Yield agreement war: Convex and Yearn battle it out, Curve sits on the sidelines?

Will Convex be the “Yearn killer”?

This article is from bankless, written by Ben Giove, President of Chapman Crypto.

The competitive landscape for DeFi is in a state of flux.

The license-free and combinable nature of Money Lego has created a never-ending stream of innovation, which has led to excitement among participants in addition to another aspect, such as the inability to fully keep up, while the situation has become increasingly complex.

The recent competition between Yearn Finance, the main revenue protocol, and Convex Finance, a newcomer, to lock in Curve’s CRV tokens (known as the “Curve Wars” or “The Lockening”), illustrates this point.

The rapid growth of Convex, and the 78% increase in the price of CRV tokens, has sparked debate about whether it is the “Yearn killer”. However, like almost everything in the crypto space, the answer is not so clear, and uncovering the truth will take some digging.

So let’s figure out what exactly happened between these three protocols.

Yield agreement war: Convex and Yearn battle it out, Curve sits on the sidelines?

Curve 101

Curve is one of the largest decentralized exchanges in the DeFi space, with over $10 billion in locked assets and applications deployed on the Ether and Polygon networks that enable hundreds of millions of dollars in daily trading volume.

The Curve team also recently released Curve V2, which allows for the creation of trading pools between volatile assets, and the protocol was originally optimized for low-slippage trading between “like assets”.

Curve’s popularity is attributed to several different factors. One is the minimization of the risk of unpredictable losses for liquidity providers (LPs).

Yield agreement war: Convex and Yearn battle it out, Curve sits on the sidelines?

The second reason, Curve’s yield, is that in addition to the 0.02% from each transaction and the pools that accrue interest on loans from money markets such as Compound and Aave, LPs can also earn a yield farming (liquidity mining) bonus.

Each Curve pool receives a CRV token issuance incentive, and thanks to Curve’s partnerships with other programs such as Synthetix, Alchemix and Lido, some pools even pay additional incentives on top of fees and CRV in the form of tokens native to these agreements.

Based on current price, liquidity, trading volume, reduced erratic losses and an annualized rate of return (APY) of over 40%, Curve has become a liquidity hotspot by offering liquidity farmers a substantial return in a risk-minimized manner (although some of us Degen may scoff at its “mere ” double-digit yields).

CRV and veCRV

A big reason why Curve’s yield is so high is precisely CRV’s unique token economy.

While it can be held like any other asset, token holders can lock in their CRV to get the full return on the asset. And by lock-in, I mean the process of placing CRV tokens within a Curve contract for a period of time (between one week and four years) to receive voting escrow CRV (veCRV).

It is important to note that this process is irreversible, which means that once you convert CRV to veCRV, you cannot exchange it back for your underlying assets until the end of the lock-up period, and furthermore, veCRV is not transferable.

To incentivize a longer lock-in, the amount of veCRV you will receive is proportional to the amount of time you decide to lock in the CRV. For example, for each CRV you decide to lock for four years, you will receive 1 veCRV, for each CRV locked for two years, you will receive 0.50 veCRV, for each CRV locked for one year, you will receive 0.25 veCRV, and for a CRV locked for one month, you will receive 0.02 veCRV.

And after locking, veCRV holders have these rights.

Governance rights (e.g. decide the allocation of CRV inflation between pools)

50% of the agreed transaction fee (0.02% of each trade in the non-volatility pool)

Boosts (Boosts) CRV bonus

While the first two are relatively straightforward, the last point requires some explanation. For liquidity providers (LPs), “Boosts” are used as a multiple of the CRV reward, which can be very lucrative as it increases the CRV reward by up to 2.5x.

It is worth noting that Boosts are not static: the amount of “Boosts” varies for each LP depending on the number of veCRVs held (more veCRVs = more boosts) and the liquidity in the pool.

Yield agreement war: Convex and Yearn battle it out, Curve sits on the sidelines?

This boost forms the crux of the “conflict” between Yearn and Convex: both protocols are trying to get as many CRVs as possible in order to lock up CRVs for veCRVs and thus gain the largest possible boost multiplier (meaning higher revenue) for storage users.

This is the driver of the sudden and dramatic increase in the number of CRV locks, with over 63% of the CRV supply currently out of circulation.

Let’s dive into the framework of each protocol to see how they work and understand their similarities and differences.

Yearn and Backscratcher

With over $5 billion in TVL, Yearn is currently the largest revenue protocol in the DeFi space, and Yearn’s vault (or machine-gun pool) is one of the most popular and useful products in the space, where users can deposit tokens for which Yearn will then develop and deploy different revenue optimization strategies.

And one of Yearn’s main sources of revenue is Curve, with 41 of its 46 V2 vaults using some kind of strategy involving CRV rewards. Remember, boosting requires locking in CRV, which means Yearn must have some way of channeling CRV into the hands of the Curve protocol.

This is where the “backscratcher vault” (yvBoost on the Yearn interface) comes into play.

With backscratcher, users can deposit CRV in order to convert it to yveCRV, which represents a tokenized version of veCRV (which also cannot be undone). The functionality of both tokens is the same: yveCRV holders will still receive 50% of the Curve transaction fee.

However, yveCRV also allows holders to gain the benefit of locking CRV without losing liquidity, as it is able to be traded on SushiSwap. backscratcher also automatically compounds earnings by minting or buying more yveCRV and reinvesting the transaction fees earned from Curve into the vault.

Yield agreement war: Convex and Yearn battle it out, Curve sits on the sidelines?

(Note: Yearn also offers a yvBoost-ETH vault that allows users to deposit yveCRV and then deposit yvBoost-ETH SLP to earn SUSHI and PICKLE rewards …… Yes, this can be confusing.)

The benefits of backscratcher are clear: it provides storage users with greater capital efficiency, yield, and liquidity.

Yearn also uses the CRV in backscratcher to increase the rewards for users who store in other vaults. An example of this is the Curve LP token vault, where storage users can earn standard transaction fees, as well as increased CRV rewards. This also improves capital efficiency and user profitability as they can earn these rewards without having to own and lock in the CRV themselves.

In addition, 10% of the CRV earned from these vaults is put back into backscratcher and locked to continuously maintain and increase the boosts multiplier.

To summarize.

Yearn is heavily stockpiling CRV through deposits to the backscratcher.

this backscratcher is used to increase the CRV bonus multiplier for Yearn’s other vaults.

10% of CRV rewards from all vaults are deposited into this backscratcher.

Yearn’s goal is clear: to accumulate as much CRV as possible to achieve the highest revenue boost for all vaults.

Previously, Yearn had faced little to no competition in accumulating CRV.

And recently, the emergence of Convex Finance has broken the mold.

Convex 101

Convex is a protocol designed to help Curve liquidity providers and CRV holders maximize their yields. Although the program has been launched less than a month ago, it has already attracted a lot of attention, with the value of assets locked up in the agreement now exceeding $3.4 billion.

Like Yearn, Convex offers CRV holders the ability to convert their holdings into cvxCRV, a tokenized version of veCRV (again, this is irrevocable).

Users can pledge cvxCRV to earn Curve transaction fees, boost CRV reward multipliers, use proceeds from the LP Vault Performance Fee (10% of total CRV revenue), and CVX rewards for payment. cvX can also be pledged on the platform to earn users more cvxCRV.

Yield agreement war: Convex and Yearn battle it out, Curve sits on the sidelines?

In addition to revenue farming rewards, holders of cvxCRV gain access to liquidity as cvxCRV can be traded through exchanges such as SushiSwap.

As with Yearn, CRV locked in the cvxCRV vault is used to boost Curve LP’s vault rewards. In this case, users can pledge their tokens with CVX rewards to boost CRV rewards. Similar to Yearn, this improves capital efficiency and maximizes LPs’ returns as they can get boosted returns without having to hold and lock in CRV.

And there are three key differences between Convex and Yearn.

On Convex, users will have to manually reinvest their rewards into different vaults to compound returns, while Yearn does this automatically.

Convex has lower fees, as it charges a 16% profit fee, while Yearn charges a 2% management fee on top of a 20% profit fee.

On Convex, users can also tap into CVX (which can also be reinvested back into various vaults).

This is why Convex has grown so rapidly in the recent past, and like Yearn, it offers LP and CRV holders a similar increase in capital efficiency, yield and liquidity, with the added bonus of CVX tokens in return.

So, is Convex really a Yearn killer?

Above, we learned how the two protocols work, now let’s try to put all the pieces together.

As we discussed before, 63% of the current CRV supply has been locked into veCRVs, and of the 212 million veCRVs, the two entities with the largest holdings are Convex (35.5 million, or 17.1% of the supply) and Yearn (18.3 million, or 8.7% of the supply)

Yield agreement war: Convex and Yearn battle it out, Curve sits on the sidelines?

At first glance, it would seem that Convex should be gaining higher revenues as well as boosting multipliers due to its huge advantage in veCRV numbers. However, a deeper look shows that this is not the case.

We can see that despite having fewer veCRV tokens and a lower total return, Yearn is able to generate a higher return, able to reach an annualized return of 21% compared to Convexs 12.7%. This can be attributed to the elevated diversification between the different Curve pools. Remember: the boost multiple depends on the number of veCRVs held and the liquidity in the pool.

Yield agreement war: Convex and Yearn battle it out, Curve sits on the sidelines?

As we can see from the chart above, Yearn has an advantage in APY as it has boosts in most of the different pools. This creates an interesting situation where the Convex vault has a higher overall APY because of its CVX rewards, while Yearn offers better CRV returns for depositors.

An interesting factor to consider is the ability of both agreements to govern on Curve.

It is well known that veCRV holders can determine the allocation of CRV inflation rewards across the different pools. Since Convex now has the most votes, they will be able to have a considerable say in the direction of the newly issued CRVs. We can see a scenario where Convex votes to allocate CRV to the pool that maximizes its boost multiplier and weakens Yearn’s boost multiplier.

While you’re reading this article, there may already be early tests in progress, and just yesterday the Curve team made a proposal to remove CRV rewards from the alUSD pool.

Since Alchemix gets its revenue from the Yearn vault, which in turn gets some of its revenue from farming CRV, it will be interesting to see if Yearn’s sizable pledge portion ends up being the deciding factor in this vote (@banteg from the Yearn team has already indicated they plan to vote against it).

Yield agreement war: Convex and Yearn battle it out, Curve sits on the sidelines?

It is not entirely clear whether the reallocation of CRV inflation will hurt Yearn’s competitive position, as any boost to increase Convex vaults will also benefit Yearn.

This is because a significant portion of the value of Convex’s locked positions comes from Yearn, and 33 Yearn Curve LP vaults are currently using the strategy of depositing funds into Convex. In fact, Yearn currently accounts for over 20% of the allocated CVX rewards.

There is also a clear correlation between the number of CVX awards Yearn receives and the price of CVX. While this may be related to market conditions, the price of CVX tokens has declined as Yearn’s share has increased, suggesting that Yearn’s large CVX haul has put considerable downward pressure on its token price.

Yield agreement war: Convex and Yearn battle it out, Curve sits on the sidelines?

All of these factors suggest that these agreements are both complementary and competitive. yearn benefits from Convex locking in CRV because it increases the yield to depositors, while yearn locking in CRV also benefits Convex because higher yearn yields lead to higher yearn deposits and therefore Convex TVL will also increase.

Conclusion

Like most DeFi, Currency Lego blurs the line between friend and foe. While Convex may be labeled a “Yearn killer,” it is clear that both protocols will benefit from “big lock-in.

In addition to the users of both protocols, there is another very obvious beneficiary of this whole thing: CRV owners. As more and more CRVs continue to be locked, their tokens will become increasingly scarce and a potential supply shock is looming.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/yield-agreement-war-convex-and-yearn-battle-it-out-curve-sits-on-the-sidelines/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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