How To Build A Successful Convex
So you want to build a "Convex"? Here's what you should consider.
The success of Convex has inspired many protocols to follow suit – becoming the “Convex” of another veToken, eg. AURA to veBAL, YieldYak/Beefy/Vector to veJOE, Plutus to veDPX, veJONES, GLP. Likewise, traders/investors are also constantly on the prowl, looking for the next Convex. I believe the ease of sizing up a “Convex”-like protocol is likely the main allure. Simply calculate the NAV of the underlying token (amount of $CRV Convex holds vs market cap of Convex or locked Convex) and figure out if the “Convex” (aggregator) trades sufficiently below that NAV is the simple playbook. However, many “Convex” copycats simply aggregate tokens for the sake of aggregating. And investors can easily fall into a bull trap of calculating NAV with the expectation that it should trade to the NAV but end up with a empty bag of hopium.
I believe the reason Convex found success was tokenomics (right to the base layer of the very token it decided to build on top – CRV ). And despite my relative preference for Convex over Aura, I too believe that Aura’s staying power is that as well (BAL has inherent fundamental value).
So here we go, this is what I believe constitutes a robust token aggregator (ala “Convex”).
Step 1: The token you accumulate needs to have staying power/fundamental value. At the core, an aggregator is exchanging its native token with the token that its targeting to accumulate. It streams its native tokens as emissions to depositors. Depositors receive 1) a pass-through of the locked token’s APR (veCRV economics) net of some fee + 2) boosted APR from the aggregator’s reward tokens. Aggregator’s token is finite and so it will run out. If the aggregator is not discerning in the tokens its exchange its own tokens for then it could on its way to a death spiral.
Step 2: So say now you have a mountain of tokens that you have accumulated and those tokens have an place in the ecosystem and some fundamental value then what next? You need to find a way to monetize the governance value of those tokens. In v1 of Convex, Convex’s value proposition was boosted yields for Curve farmers. Then in v2, Convex found a higher margin business model which revolutionized the game – selling emissions via Bribes. In other words, the tokens that an aggregator intends to accumulate wield attributable governance value, ie. there needs to be demand for the governance value (hopefully beyond farming). I say beyond farming because we all know that emissions are cancerous if not properly controlled. If your value propositioning is the boosted farming and dumping of the very token that you sit on top of then you are essentially poisoning your golden goose by the day. What Bribes/Convex v2 did was allowed a kickback on the inflationary nature of Curve emissions.
To put simply, while Curve tokens are getting diluted, Convex’s stash of Curve will keep up with the inflation and in addition to that Convex holders receive a kickback on the inflation (currently 66% - $1.5 emissions per $1 spent on bribes). So the question to ask is, will there be payers for the governance of the underlying token.
Step 3: So assuming you have 1) a token with fundamental value and 2) revenue model from selling the governance value of the token – what next? Rinse, repeat, expand. As mentioned before, an aggregator trades its own currency (its own token) for the token of what it intends to subsume. For the aggregator’s token to continue on its warpath, it needs to grow in value which means growing the NAV. Convex has chosen FXS. Plutus is doing a bunch of stuff like GLP, DPX, JONES, etc. So pace out those emissions.
So that’s it, 3 step process to building your very own successful Convex.
Thanks for breaking this down in simple terms.