Curve launches an innovative stablecoin solution, expected to enhance protocol yields

The decentralized stablecoin market has immense potential, but most projects struggle to survive in the long term. Even LUNA and UST, which once had a market value of hundreds of billions of dollars, quickly went to zero. Now, Curve, which has a TVL of $3.7 billion, has also joined this competition.

Curve recently released its stablecoin whitepaper and code. From GitHub, it appears that the whitepaper was completed in October and is not the final version. Although the whitepaper does not explicitly name it, the code indicates that the full name of the stablecoin is "Curve.Fi USD Stablecoin," abbreviated as "crvUSD." This initiative may help address the revenue shortfall faced by Curve due to CRV inflation, by increasing protocol revenue through stability fees and PegKeeper income.

The white paper mainly introduces the three major innovations of crvUSD: the Lending-Liquidation Automated Market Maker Algorithm (LLAMMA), PegKeeper, and monetary policy.

LLAMMA: A Smoother Settlement Algorithm

The liquidation mechanism of traditional lending protocols can lead to severe market volatility. For example, in June of this year, a liquidation operation on a trading platform caused the price of ETH to plummet from $1300 to below $1000.

To reduce the impact of liquidation, crvUSD adopts the LLAMMA algorithm. This method is still based on over-collateralization but uses a special AMM instead of traditional lending and liquidation processes. Liquidation is no longer a one-time event but a continuous liquidation/unwinding process.

For example, using ETH as collateral to borrow crvUSD. When the value of ETH is sufficiently high, the collateral remains unchanged. When the price of ETH falls into the liquidation range, ETH will be gradually sold off. If the price of ETH rebounds, the system will repurchase ETH using stablecoins. This process is similar to the impermanent loss hedge after providing liquidity in an AMM.

Compared to one-time liquidation lending protocols, LLAMMA can retain more value for users when the market rebounds. Tests by the Curve team showed that when market prices drop 10% below the liquidation threshold and then rise again, users' collateral losses are only 1% within 3 days.

However, this algorithm may also trigger liquidation more easily. During minor fluctuations, positions on some traditional lending platforms may not be liquidated, while on Curve, there may have already been liquidation and deleveraging processes, resulting in minor losses for users.

Automatic Stabilizers and Monetary Policy

crvUSD uses the PegKeeper mechanism to maintain price stability. When the price of crvUSD is above 1 dollar, PegKeeper can mint crvUSD without collateral and deposit it into the stablecoin exchange pool to lower the price. When the price is below 1 dollar, PegKeeper can withdraw some liquidity of crvUSD to raise the price. In this process, PegKeeper profits by buying high and selling low, while maintaining the price stability of crvUSD.

Monetary policy adjusts the market by controlling the relationship between stabilizer debt and crvUSD supply. For example, when the debt/supply ratio is too high, the system encourages borrowing and selling stablecoins; conversely, it encourages repayment.

Potential Advantages and Outlook

Curve may use LP tokens from its main stablecoin pool as collateral to improve capital efficiency. The Curve team controls a large amount of veCRV voting power, which is beneficial for the cold start of crvUSD.

The introduction of stable fees and PegKeeper may improve Curve's revenue situation. Curve uses its own DEX price oracle, which may limit the types of collateral, but also saves on oracle costs.

In a transaction-based lending model, if the borrowing limit and liquidation threshold can be controlled based on liquidity, it can theoretically avoid bad debts caused by untimely liquidations.