An Analysis of Silo’s CVX LP Incentives
Those following our recent Medium posts would have been made aware that Silo recently acquired 250,212 $CVX (~$4.41m) as a way of positioning itself in the Curve Wars and incentivizing liquidity to a $SILO pool on Curve v2. Whilst my previous post outlined the general logic behind this investment, this post aims to breakdown how liquidity is actually incentivized.
Silo-owned CVX provides significant incentives for LPs to add to a SILO:FRAX Curve v2 Pool to drive liquidity
To make these incentives happen we need $CVX and $CRV holders to support our proposal on Curve Finance governance — please show some love!
A driver for non-Silo $CRV/$CVX holders to support our pool is TVL, so we encourage all $SILO and $FRAX holders to migrate liquidity to our SILO:FRAX pool
It all comes down to the Lock
A general overview of Curve Finance has been covered here. In brief, it is an AMM that uses native token emissions (paid in $CRV) to boost the APY of select pools to incentivize liquidity.
The distribution of $CRV emissions is voted on by $CRV holders. Holders are able to lock their tokens from one week to 4 years as veCRV to receive boosted voting rights — $CRV locked for 4 years has 4 times the voting rights as $CRV locked for 1 year.
veCRV holders control which pools receive CRV inflation. Currently, Curve Finance emits 633,126 CRV (as at 19/1/22) per day. The sheer value of this APY boost to pools is a big reason why vote-locking to direct emissions is still a relatively attractive option despite the loss of tradability.
The Convex Tie-In
Convex Finance recognised the 4-year time-lock of Curve as a barrier for users that want the boosted governance of veCRV whilst maintaining the liquidity of a tradable token. Their solution allows $CRV holders to permanently stake their $CRV on the protocol in exchange for $cvxCRV (a $CRV derivative which is tradable for $CRV) which is then vote escrowed for the full 4 year duration to ensure maximum Curve voting power.
The success of Convex’s approach is evident in its ability to accrue a 187,177,642 $CRV, or roughly 40% of the current circulating supply. When we consider that a large proportion of CRV is not vote-locked, the governance power of Convex is actually greater than 40%.
Convex’s underlying veCRV is controlled by $CVX, the protocol’s native token. $CVX must be locked for 16 weeks to utilize its veCRV voting power — a lock, sure, but much more manageable than 4 years.
In addition, Convex Finance also provides $CVX emissions paid to every pool on Curve which receives $CRV emissions. This means that if a Curve Pool receives X $CRV, they will also receive (X * Y%) $CVX
Breakdown of CVX → $CRV and $CVX Incentives
Now that we have a good enough understanding of Curve Finance and Convex Finance, lets look at the incentives our recent $CVX purchase will actually bring to a SILO:FRAX Curve v2 pool. We will consider a scenario where 85% of $CRV and $CVX are fully vote-locked (at present, ~69.4% of $CVX is vote-locked which means our model is slightly more conservative).
Recall that Silo owns 241,350 $CVX and assume daily emissions of 633,126 $CRV and 90,000 $CVX.
The above assumptions have been put into a model which can be accessed here. Inputting these into our model gives the following output:
Given Convex’s current holdings of 187,177,642 $CRV, if 85% of total $CRV is maximum time-locked then ~48% of $CRV voting power is controlled by vote-locked $CVX.
Given Silo’s current holdings of 250,212 $CVX, if 85% of total $CVX is vote-locked then ~0.55% of vlCVX is controlled by Silo.
Given daily $CRV emissions of 633,126, if we consider that CVX controls ~48% of veCRV voting power and Silo controls ~0.55% of vlCVX voting power, we can expect annual incentives of 614,218 $CRV to SILO:FRAX LPs.
Given daily $CVX emissions of 90,000 which are paid pro-rata to LPs receiving the 633,126 $CRV emissions, $CVX is paid out at ~14.22% of $CRV emissions. If SILO:FRAX LPs receive 614,218 $CRV emissions annually, they will also receive 87,299 $CVX emissions per annum.
APY Based on Model
Taking the average of the two models gives annual emissions of 614,218 $CRV and 87,299 $CVX to SILO:FRAX LPs every year:
At current prices (14 March 2022), LPs in our Curve v2 Pool will receive annual emissions the equivalent of $2,625,889 paid in $CRV and $CVX. We can assume that LPs would be willing to provide liquidity until APY decreases to a point where returns are no longer competitive. In any scenario, the $CRV and $CVX emissions should provide a significant boost to $SILO liquidity.
Evidently, this model does not 100% reflect the reality of incentives ultimately paid to LPs. There are a number of omissions and assumptions made that will affect its accuracy:
1. Transaction fees have been omitted
Transaction fees will be paid to LPs which will depend on the volume of transactions within the Silo Curve v2 Pool however they have been omitted due to their sheer volatility. If the above model holds, actual returns to LPs will be higher due to fees collected from transactions.
2. Bribe income has been omitted
The model assumes that 100% of Silo’s vlCVX is used to direct $CRV and $CVX emissions. In reality, this may not be necessary since a *to be determined* amount of TVL is necessary to meet our liquidity demands. Where these liquidity demands are met, excess vlCVX can be used to earn bribes on Votium which can provide a secondary income stream for the treasury. For reference, the most recent 2-week lock period paid $0.36/vlCVX.
3. Variables are constantly changing
The model will need to be constantly updated to account for these changes. This incudes percentage of $CRV and $CVX locked up which will affect the voting power controlled by Silo’s share of vlCVX and its underlying veCRV which will affect the amount of $CRV emissions to our pool.
Token emissions of $CRV and $CVX are also deflationary which will decrease incentives paid in future. Additionally, since these are both floating assets, APY will depend on their market price.
4. Extrapolation will not be completely inaccurate
Extrapolating one day data to one year does not fully account for how the above variables may change during the time period. However, it does provide benchmark emissions for LPs to plan around.
A Request for Support
Hopefully the above discussion has convinced you that Silo’s investment in $CVX is well founded and will provide a significant boost to $SILO liquidity. What needs to happen to make this a reality is to get our SILO:FRAX Curve v2 Pool approval from veCRV voters (and $CVX holders by virtue of their underlying veCRV) to begin receiving $CRV emissions. A governance proposal on Curve has been prepared here courtesy of @Crypto_Condom.
$CRV and $CVX holders would be incentivized to vote on a SILO:FRAX gauge if they see adequate liquidity within our pool. I would like to implore that members of the $SILO community provide liquidity to increase our odds. For $CRV and $CVX holders that do not hold $SILO, I will still implore that you vote on a SILO:FRAX gauge so that Silo can work towards their vision of a lending ecosystem that is secure, efficient, and permissionless.