[Serenity Premium] Curve's crvUSD and How It Works [Initial Review Jun 2023]

Curve Finance has launched its own version of stablecoin, an overcollateralised stablecoin with a very innovative liquidation mechanism. Traditionally, liquidation is a YES-or-NO binary event, i.e., a user either gets liquidated or not. In Curve's design for crvUSD (and the backing liquidation mechanism LLAMMA), liquidation is trenched and progressive. This innovation brings the complexity of liquidation to a new level, no less than Uniswap's upgrade from V2 to V3.

In addition, Curve has also launched farming pools to incentivize the adoption of crvUSD.

The Strategy in this Article

This strategy is providing liquidity into Convex's crvUSD-USDP pool .

Current yield: 7.0% (4 June 2023)

Our risk assessment: Low to Medium

Our yield projection based on this week's Benchmark Yield: 9.5%

The Concept and How the Protocol Works

For our audience, we will not elaborate on Convex; and for USDP, please refer to our earlier article on Paxos. This article primarily focuses on the mechanism of crvUSD.

Overview

crvUSD is an overcollateralised stablecoin by Curve Finance. For now, it can be minted against sfrxETH collateral and a proposal for using stETH as collateral is being proposed. Currently, the supply of crvUSD is 9.15m, but we expect it to grow significantly once more collaterals are accepted.

Borrowing crvUSD is much more complex than any first generation overcollateralised stablecoins. In the advanced mode, a user can specify a range of prices where his collaterals will start to get liquidated and at the lower end of the range, all his collaterals will be sold to repay his crvUSD loans.

The LLAMMA Mechanism

From the borrowing process above, we note that in crvUSD, liquidation is not a one-price binary event. Rather, liquidation happens in a range (soft liquidation, as termed by Curve).

As illustrated below, Curve has created an AMM for the purpose of liquidation, termed LLAMMA. LLAMMA is essentially a reverse Uniswap V3; for any collateral type, this AMM creates a pair of collateral-crvUSD. LLAMMA divides the price of a collateral into small bands, and a user specifies the liquidation price range for his collaterals by choosing the number of bands.

When a user borrows crvUSD, the collateral price is higher than the liquidation range, and all the liquidity in the band is in the form of the collateral. As the collateral price drops, the collaterals within the band are gradually converted into crvUSD. When the price reaches the lower bound (external price) of the band, the user's collaterals are entirely converted into crvUSD.

Essentially, this ensures liquidation is a slow process, allowing users having more buffers to react to market volatility. However, it's worth noting that when a collateral enters into the soft liquidation range, liquidation will start to take place. Even if its price is restored to the original point, there will still be some loss to the borrowers.

Who is the Liquidator in LLAMMA

There's no liquidator in the design of LLAMMA.