Decentralized finance has gained a lot of popularity over the past year because it offers users the ability to perform regular finance tasks on a decentralized platform eliminating many of the fees.
More importantly, certain protocols allow users to earn a pretty decent return on investment by farming yield on different protocols.
One of those protocols is something called Yearn Finance. The basics are that Yearn aggregates stablecoins together into pools/vaults and distributes the earnings to investors.
That’s really all there is to Yearn, but it is incredibly successful.
However, as with anything successful, competitors do emerge at some point. The most recent competitor to Yearn Finance is a protocol called Convex Finance.
The Basics of Convex Finance
Convex was launched about at the beginning of May to a decent amount of fanfare. The platform quickly acquired climbed to over a billion dollars of total value locked (TVL). And it currently has a TVL of nearly $4 billion.
The next section will cover precisely what Convex Finance offers investors.
What Convex Offers Investors
At its core, Convex offers the same thing that yEarn offers – the ability to invest in Curve pools in groups for additional yield.
The main difference is that Convex pays out a reward of its native token CVX (in addition to Curve’s native rewards) for staking Curve LP tokens on the platform.
In that sense, it is similar to how SushiSwap skyrocketed to one of the more popular decentralized exchanges by offering a token reward for those that provided liquidity in the liquidity pool.
To summarize, Convex is a Curve optimizer that allows users to stake Curve LP tokens or CRV to earn Curve’s native rewards and Convex tokens.
Yes, it really is that simple. As we mentioned earlier, it is a similar model to the one that SushiSwap took to become a major competitor with Uniswap. So, this does appear to be a model that can be successful.
DeFi investors typically chase the best yield, and adding a governance token as a reward is a good way to increase yield.
Brief History of Yearn
yEarn was started by software developer Andre Cronje in the beginning of 2020. Cronje was the only person on the project as well – there are no other developers, it’s a one man show.
Anyway, Cronje started yEarn (iEarn at the time) because he wanted to maximize his stablecoin yield farming across different DeFi protocols.
Yearn does this by moving stablecoin deposits from different yield farming pools to maximize gains. This is done to ensure that the yield does not crash if, for instance, yEarn were to dump $1,000,000 worth of DAI into a CRV pool.
What Yearn Offered Investors
yYearn is a little more complicated than what we just explained, but this article is about Convex more than it’s about yEarn.
Still, we feel obligated to describe what yEarn offers investors because it’s great for understanding Convex.
yEearn basically is in a race to acquire the most Curve LP tokens. Yes, we know that yEarn has other pools other than just Curve, but Curve is what most are interested in on yEarn.
Anyway, yEarn offers the following to those willing to stake CRV tokens on the protocol:
- Return on Curve pools.
- Boosted rewards due to group investment on Curve.
- Less gas paid during harvest.
- The ability to easily convert it back to the deposited token.
- Compounding interest.
Additionally, yEarn has incorporated Convex into its aggregator, which means that yEarn depositors get a little extra income from Convex.
Yearn Adds Convex To Its Pools
As we mentioned previously, Yearn Finance decided to add Convex to its pools. This brings us to the main point of the article – can anyone overtake Yearn?
Well, the fact that Yearn decided to add Convex pools to its strategy is an indicator of two things:
- Convex pools are profitable enough for Yearn to add them to its pools.
- Yearn trusts Convex to some degree. Yearn would not risk its reputation on an untrustworthy protocol.
Now, Yearn adding Convex to its pool does a few things. For one, it increases the yield because CRX tokens are harvested, sold, and the profits distributed to investors.
However, this will put some negative pressure on the price of CRX because Yearn will constantly be acquiring and selling CRX tokens. The obvious drawback to that is that CRX will lose value and the incentive to lock Curve LP tokens or CRV into Convex for CRX will diminish.
Will Yearn Finance Offer Token Rewards?
Some are claiming that Yearn Finance will take the route that Uniswap took in response to SushiSwap – Yearn will create its own token and offer it as a reward.
Of course, this theory has a major problem – Yearn already has a governance token, YFI. And YFI holders are very unlikely to begin offering YFI rewards to those that lock in value on Yearn Finance.
In fact, it is so unlikely to happen with YFI that it is not worth mentioning.
Now, Yearn Finance could create some sort of secondary token and begin offering that as a reward, but we find that unlikely to occur.
Instead, Yearn Finance will likely continue pooling money into Convex pools and earning CVX for additional income. And the CVX will be sold for extra profit, which will have a negative impact on the price of CRX.
With that said, it will be an interesting battle to see which one of these aggregators will emerge victorious. You can expect a lot of TVL to exit Convex when the token rewards are taken away at some point.
The Real Winner From Yearn vs Convex… Curve
One thing that is not often mentioned is the real winner from the Yearn vs Convex battle. Of course, the real winner from all of this is Curve.
Specifically, it is holders of CRV.
Why are CRV holders the winners in this battle?
Simple, Convex and Yearn are both attempting to suck up CRV. Convex has simply found another way to do it by offering CVX as a reward.
This will obviously increase the value of CRV because, well, there is suddenly a lot more demand for it because it can be used to earn another token.
In fact, you can almost completely ignore Yearn and Convex at this point and simply buy CRV. It does not matter which side wins as long as investors continue to purchase CRV to earn yield on Yearn, Convex, or any other platform.
That covers it for the case of Convex potentially overtaking Yearn Finance.
Yes, it is certainly possible for this to occur. All that it would really take is Convex being able to offer CRX rewards for an extended period of time to attract those chasing the highest APR.
As we mentioned earlier, this is essentially the same model that SushiSwap used to draw a lot of value away from Uniswap.