Curve Dao (CRV), the governance token for automated market maker (AMM) protocol Curve Finance, has quietly risen to become a top performer of the week, despite the craze around the Shiba Inu coin (SHIB) and other dog-themed tokens.
At the time of publication, CRV was changing hands at $4.74, according to data from Messari, up 1.87% in the past 24 hours and nearly 65% over the past week. Among tokens with at least a $1 billion market cap, including SHIB, CRV is the third-best performer this week. CRV’s rise shows that the excitement in the crypto market has extended far beyond community- and culture-based meme tokens.
Decentralized finance (DeFi) analysts and investors attribute CRV’s latest rally to two main factors: its tokenomics and rapid growth of a yield optimization protocol focusing on Curve Finance, one of the largest AMMs on the Ethereum blockchain. Launched in August 2020, the CRV token is designed to incentivize liquidity providers on Curve Finance and encourage governance participation in the community.
Five percent of an initial supply of 1.3 billion CRV was distributed to liquidity providers before the token’s launch, with one-year vesting.
“The distribution to the users who provided liquidity before token launch ended,” said Arthur Cheong, founder and portfolio manager of DeFi investment fund DeFiance Capital, adding that any potential sell pressure on CRV from the event declined. George Harrap, the co-founder of DeFi protocol Step Finance, tweeted on Oct. 25 that he “was excited to see the recent events in $CRV. Now a major part of the distribution is done and we will see things move in one direction.”
While the one-time event may have accelerated CRV’s price gains in recent days, analysts highlighted that CRV’s growth has largely benefited from Convex Finance, a new yield optimization platform that boosts rewards for CRV liquid providers. In just about five months since Convex Finance launched, the total value locked in the platform has reached $13.36 billion, according to Defi Llama’s data.
TVL is the U.S. dollar value of the cryptocurrency committed to a DeFi protocol. The TVL on Curve, in the same time period, has risen to $18.76 billion, more than doubling from $8.8 billion in May.
But how exactly has Convex Finance’s success fueled Curve’s recent growth? According to Convex Finance, by depositing a certain amount of CRV tokens into Convex, users receive a token called cvxCRV for the same amount. Convex will then stake CRV in Curve Finance and receive vote-escrowed CRV (veCRV).
As a result, Convex will have voting power to boost CRV rewards to the liquid pools that it is providing liquidity to and therefore be able to maximize the yields in the liquid pools from Curve Finance. Those who choose to stake their cvxCRV tokens on Convex Finance will receive Convex’s own CVX tokens as staking rewards, as well as part of CRV rewards from Curve via Convex.
Data from Dune Analytics shows that Convex now controls more than 37% of Curve’s governance, giving it a sizable influence to vote in higher rewards for the pools to which it is providing liquidity. “The whole dynamics of Convex buying CRV consistently for yield [earning] purpose” has powered CRV’s growth, DeFiance Capital’s Cheong said.
“Convex allows Curve Finance liquidity providers to earn trading fees and claim boosted CRV without locking CRV themselves,” Convex’s document shows. “Liquidity providers can receive boosted CRV and liquidity mining rewards with minimal effort.”
But there are also risks around using Convex. Once users deposit CRV on Convex in exchange for cvxCRV tokens, the action is irreversible, meaning that the CRV tokens will be locked forever. “Having cvxCRV maintain a close price peg to CRV on the open market is the lynchpin that holds everything together,” crypto research boutique firm Delphi Digital wrote in a research study in August. “Remember, cvxCRV is liquid meaning there will be sell pressure.”