Curve, as the top three DEX on Ethereum, although its trading volume is slightly inferior to Uniswap, its status as the largest stablecoin trading platform is difficult to shake in a short time.
Centralized stablecoins occupy an absolute dominant position in the stablecoin market, but they are too dependent on the financial status of the issuer and are easily constrained by regulatory agencies. Therefore, exploring and developing encrypted native stablecoins has become a market consensus, and multiple leading protocols are also The track continues to gain momentum. This article will discuss crvUSD's unique liquidation and price stabilization mechanism, and briefly analyze its performance in the past two months since its launch.
crvUSD is an over-collateralized stablecoin. There are currently four types of collateral supported by Curve: sfrxETH, wstETH, wBTC and ETH. The collateralized rate is all above 156%
crvUSD has the following functional components:
LLAMMA：Realize gradual soft liquidation
Controller：Allocate collateral to the liquidation AMM, and calculate the corresponding liquidation price; withdraw collateral from the AMM
PegKeeper: Participate in Curve V1 pool to maintain the price stability of crvUSD
Monetary Policy: Adjust the interest rate of crvUSD to peg the price
Different from the traditional CDP stablecoin, crvUSD cites the innovative LLAMMA to realize a gradual soft liquidation method. There are several problems with the traditional CDP stablecoin liquidation model:
When collateral price fluctuates violently, there are a large number of assets to be liquidated in the stablecoin protocol. Arbitrageurs will continue to sell assets in the market after obtaining collateral at a discounted price, causing further asset price volatility
Since the liquidation process is irreversible, if the price of the mortgaged assets rises after liquidation, the losses of the mortgagee cannot be recovered
Once the liquidator does not liquidate in a timely manner, a large amount of bad debts may be formed in the protocol The LLAMMA liquidation method adopted by crvUSD, the collateral will be liquidated gradually as the price falls, and the liquidation in AMM is reversible. After the collateral price rises, the AMM will help users buy back assets to minimize the user's loss.
A simple example using ETH as collateral: User mints crvUSD by using 0.5 $ETH as collateral, liquidation range is $1000 - $ 1050, with 5 bands:
Band 100 （$1000 - $ 1010）：0.1 ETH
Band 101 （$1010 - $ 1020）：0.1 ETH
Band 102 （$1020 - $ 1030）：0.1 ETH
Band 103 （$1030 - $ 1040）：0.1 ETH
Band 104 （$1040 - $ 1050）：0.1 ETH
Once the price of ETH falls to the range of $1040-$1050, the user's position will start to be liquidated. LLAMMA sells 0.1 ETH and buys $104 crvUSD. At this time, the user's underlying assets become 0.4 ETH and $104 crvUSD. If the price of ETH rebounds, AMM will use the crvUSD in the user's underlying assets to buy back ETH. Although the user's assets will still wear out during this process, compared with the traditional liquidation model, this soft liquidation process is obviously more user-friendly.
When the user borrows crvUSD, the user can choose the range of liquidation (the number of bands is 4-50). When the user chooses fewer bands (narrower liquidation range), soft liquidation will occur later, but once Start clearing and the process will be faster. When the user selects more bands (wider liquidation range), the soft liquidation will start earlier, but the liquidation process will be slower.
This group of bands needs to be able to meet: when the user’s ETH is fully converted into crvUSD, the amount of crvUSD obtained should be greater than the user’s debt, so as to minimize the possibility of protocol bad debts. This calculation process will be in charge of the Controller.
To further explore the mechanism of action of LLAMMA:
Still using ETH as collateral as an example
In general, LLAMMA adjusts the internal price of the AMM to realize the change in the amount of collateral in the pool when the price fluctuates, and eventually the price in the AMM will tend to the external price. However, it should be noted that due to the rapid growth of the gap between the internal price of LLAMMA and the external price, if the intervention of arbitrageurs is not timely enough, or the external price changes too much, it will lead to a relatively large price difference between LLAMMA and external prices, increasing the user's loss.
The Controller is responsible for depositing and withdrawing user assets into/from the AMM. When users deposit and create debts, these parameters need to be specified:
amount of collateral
The size of crvUSD debt
The range/number of bands of the collateral deposited in the pool
The ETH deposited in LLAMMA to repay the debt is also responsible for the Controller. Range is a group of continuous Bands (mentioned above), the width refers to the number of Bands included, the user can adjust between 4-50, and the Controller will calculate the user's collateral in the band based on these three parameters distribution, and automatically deposit the user's collateral into these bands, and send crvUSD to the user at the same time. The user's debt is the amount of crvUSD sent by the Controller. It is also the responsibility of the Controller to withdraw ETH from the AMM to repay the debt.
The borrowing rate of crvUSD is dynamically adjusted. When the supply of crvUSD is insufficient, the borrowing rate is lowered to encourage users to mintcrvUSD; when the supply of crvUSD is oversupplied, the borrowing rate is increased to encourage users to repay the loan.
It can be seen that when the proportion of debt generated by PegKeeper is relatively high, the interest rate curve will shift to the left as a whole, and the price at which the interest rate starts to rise will be lower. This is because PegKeeper adds more liquidity, and more liquidity can be withdrawn when the price of crvUSD falls, to stabilize prices in the pool
As of July 12, the four types of collateral for crvUSD to go online are wstETH, sfrxETH, WBTC, and ETH, and the debt ceilings are 150 million, 10 million, 200 million, and 200 million crvUSD. Opened up the application scenarios of LSD.
So what is the performance of crvUSD? Has the peg mechanism played its due role?
We obtained the price changes of seven stablecoins from May 24th to July 11th from CoinGecko. We can see that except lusd, the prices of other stablecoins are relatively stable.
By calculating the average mean absolute error to $1 of these seven stablecoins, it can be seen that the pegging ability of crvUSD during this period is second only to Dai, usdc and usdt, and performed well. Since crvUSD is still in the early stages of development, the scale is not large,price pegging is less difficult, but this indicator is still worthy of attention. We can follow up to see if peg can still maintain at the current relatively good level when the stablecoin expands.
