Intro
The year 2023 can be described as another period where more people realize the value and importance of cryptocurrency. At the moment, some crypto users prefer to trade tokens on exchanges, while others prefer to use various investment strategies to generate passive income. One of the most dynamically developing strategies that continues to popularize cryptocurrency is yield farming.
Crypto yield farming is an investment strategy that involves distributing capital to various DeFi protocols to receive rewards.
This way, users who don’t use their cryptocurrency at the moment can provide it to other people on DeFi platforms and receive rewards for it. By depositing their funds, investors take part in liquidity pools, lending and borrowing in dApps.
This investment strategy is very popular as it allows users to receive fairly high rewards and secure the network by depositing their tokens there.
At the moment, the market offers a huge number of different DeFi protocols that make the yield farming process simpler and more comfortable. Today's article from Notum will tell you about the Convex platform, its distinctive features, specific uses and investment strategies that are worth paying attention to in 2023.
Convex Finance: The Essentials
- TVL: $1,819,000,000
- Average APY: 3.50%
- Risk Level: Medium-high
- Blockchains: Ethereum, Arbitrum, Polygon
- Foundation Date: May, 2021
Convex is a fairly popular DeFi platform that combines several important functions. Convex Finance is a multi-chain protocol that supports three networks - Ethereum, Arbitrum, Polygon, and also acts as “yield optimizer for CRV token holders and Curve liquidity providers” - Wiki. Apart from this, the platform is also engaged in providing staking rewards on Curve.
Convex protocol optimizes yield and also provides rewards for mining liquidity on Curve.
Source: Convex
This DeFi protocol provides users with yield farming services, allowing them to receive fairly high rewards for providing liquidity. The Convex platform was originally created to work with the Curve DEX, and Convex Finance staking was intended primarily for liquidity providers on Curve.
In order for Curve to increase income from providing liquidity, it is necessary to additionally freeze the CRV tokens received for providing liquidity, due to which the profitability of the pool can be increased by 2 times.
Convex Finance allows users to take a simpler path for the user and receive income from the commissions of the Curve exchange. This is achieved through CRV boosting without locking tokens in the pool. Thus, rewards appear through staking of Curve liquidity provider tokens. So, by depositing tokens into the staking pool, the user can earn on exchange commissions and at the same time earn additional money from boosting.
Despite the fact that Convex Finance was created in May 2021, it ranks first in the market among the yield TVL ranking. The total value locked on the platform is $1.819 billion, while its closest rival Aura has a TVL of only $388 million.
Convex Finance has a native ERC-20 CVX crypto token that is distributed to users as a reward for providing liquidity through Curve. The maximum supply of the token is 1,000,000,000 CVX, and the price in December 2023 is $3.48.
To generate additional income, platform users can also take advantage of CVX staking to receive a share of Curve LP CRV earnings. In addition, CVX coin can also be used to participate in token distribution voting on Convex. However, before being able to participate in protocol governance, users must lock their CVX tokens for a minimum period.
“Staking through Convex allows users to earn Convex’s native CVX token as well as a share of boosted CRV as rewards” - Kraken.
Source: Convex
Why Invest in Yield Farming with Convex?
As you know, the yield farming strategy itself has a number of advantages, making it a preferable choice for many investors. The main ones are:
- High passive income. Yield farming offers a fairly high income not only relative to the traditional financial sector, but also to crypto investment strategies. By depositing funds into liquidity pools, users can not only receive high APYs, but also earn additional tokens as rewards.
- Accessibility. Unlike the traditional financial sector, where a number of restrictions await the user, yield farming, on the contrary, allows almost any crypto owner to participate in the DeFi world and freely earn rewards.
- Wide choice of strategies. Yield farming includes a huge number of options with different levels of risk, which means both beginners and experienced investors will be able to choose a suitable strategy.
- Providing liquidity. Users participating in yield farming provide liquidity for various DeFi protocols, which not only secures the entire decentralized finance space, but also allows for more efficient trading on DEXs.
Convex, in turn, is a great investment option because after depositing tokens, users not only earn Curve trading fees, but can also stake CRV for additional rewards. In addition, an important advantage of Convex Finance is the absence of commissions for withdrawal of funds and minimum commissions for placing funds in the pool, which reduces gas costs when the network load is low. Thus, by investing on Convex, users receive two sources of income, a user-friendly interface and decentralization of the platform, allowing them to invest without restrictions.
Convex’s Investment Strategies
Today we will look at two popular Convex Finance strategies taken from Notum that allow users to receive relatively high rewards from yield farming in 2023:
BUSD-3CRV
Total APY – 1.19%, TVL – $206.4K
This investment strategy allows users to deposit their BUSD and 3CRV assets into a liquidity pool on the Ethereum network to generate income. The average profit from participating in the pool is often between 1.10% and 1.30% and has a low level of risk , which can be beneficial for novice investors. Users also receive rewards in the form of CRV and CVX tokens, which can be used to generate additional profits.
Source: BUSD-3CRV on Notum
WETH-FRXETH
Total APY - 3.67%, TVL - $96.3M
Another investment strategy by Convex allows users to invest their WETH and FRXETH assets into a liquidity pool on the Ethereum network for getting passive income. WETH-FRXETH pool has a low level of risk, and the total annual percentage yield varies from 3.3% to 4.0%.
Participation in this liquidity pool not only allows users to earn interest, but also receive CRV and CVX reward tokens. In addition, WETH-FRXETH is a pool with high liquidity, as its TVL is over 96 million as of December 2023.
Source: WETH-FRXETH on Notum
Convex Finance: Risks
Even though the developers of decentralized platforms try to secure them as much as possible, they are still not without risks. Convex, like other yield optimizers, has its drawbacks that you should pay attention to before you start investing:
- Risk of smart contracts. Since most decentralized platforms run on smart contracts, they are also susceptible to various hacks, bugs and vulnerabilities.
- Market risks. Yield farming, like many other investment strategies, is quite volatile. Since the assets deposited into the liquidity pool may change in value, this may result in some losses. Downturns in the market can also negatively impact future returns.
- Impermanent loss. As is known, the cost of a token in a pool may differ from the usual token holding, which can also lead to a decrease in the overall income received from farming.
- Platform’s complexity. Since Convex is directly linked to Curve, it can be quite difficult for new and inexperienced investors to understand the ecosystem of the platform, which can also be reflected in the choice of the wrong strategy and lead to potential losses.
Notum’s Verdict
Convex is a popular medium-risk yield optimizing platform that offers users rewards for providing liquidity. Despite its rather short history of existence since May 2021, Convex has already managed to gain recognition from the crypto community and boasts an impressive total value locked of $1.819 billion. Besides, the platform also has its own ERC-20 standard cryptocurrency, CVX, which is provided as a reward to Curve’s LPs.
The platform offers various strategies for generating income with different levels of risk, which is suitable for both experienced investors and beginners. The average APY on Convex Finance is 3.50%, and additional tokens received for providing liquidity can be used to generate extra income. Thus, if you are looking for a well-established DeFi platform for yield farming with a good level of security - Convex may be a good option for you.
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Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.