The Innovation and Impact of Curve Stablecoins

The field of decentralized stablecoins, while full of opportunities, has seen many projects fail midway. Even the once hundred billion dollar market cap LUNA and UST could not escape the fate of instant zeroing. Against this backdrop, Curve, with a total locked value (TVL) of 3.7 billion dollars, has also begun to venture into this fiercely competitive track.

Curve recently released its whitepaper and related code for its stablecoin. According to information from GitHub, the whitepaper was completed in October and is not yet finalized. Although the whitepaper does not explicitly state the name of the Curve stablecoin, the code reveals that the full name of this stablecoin is "Curve.Fi USD Stablecoin," abbreviated as "crvUSD." CRV inflation has long been criticized, and the income from the stablecoin's stability fee and PegKeeper is expected to alleviate the issue of insufficient revenue for Curve.

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

LLAMMA: Smooth Settlement Algorithm

Traditional lending protocols may cause significant market fluctuations during the liquidation process. For example, in June of this year, a liquidation operation on a lending platform caused the price of ETH on a trading platform to plummet from $1300 to below $1000.

To mitigate the market impact caused by liquidation, crvUSD adopts an innovative LLAMMA algorithm. This algorithm transforms the liquidation process into a continuous liquidation/unwinding process through a special AMM mechanism, rather than a one-time operation.

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

Compared to one-off liquidation lending protocols, the LLAMMA algorithm can preserve more value for users during market rebounds. Tests by the Curve team showed that even if market prices drop below the liquidation threshold of 10% and then rebound, users' collateral losses within 3 days are only 1%.

However, this algorithm may also trigger liquidation more easily. In a market with slight fluctuations, positions on traditional lending platforms may not be liquidated, while positions on Curve may have already undergone the process of liquidation and deleveraging, resulting in slight losses for users.

Automatic Stabilizers and Monetary Policy

To maintain the price stability of crvUSD at 1 dollar, Curve has designed the PegKeeper mechanism. When the price of crvUSD is above 1 dollar, the PegKeeper can mint crvUSD without collateral and inject it into the stablecoin exchange pool to lower the price. Conversely, when the price is below 1 dollar, the PegKeeper can withdraw part of the crvUSD liquidity to raise the price. This mechanism not only maintains price stability but also generates revenue for the protocol.

Monetary policy adjusts the market by controlling the relationship between stablecoin debt and the supply of crvUSD. For example, when the debt/supply ratio is too high, the system adjusts parameters to encourage borrowing and selling stablecoins; when the ratio is lower, it encourages repayment to increase system debt.

Potential Advantages of Curve Stablecoins

1. Curve may allow the use of LP tokens from its stablecoin pool as collateral, increasing capital efficiency.

2. The Curve team holds a significant amount of veCRV voting power, which is beneficial for guiding the liquidity between crvUSD and the major stablecoin pools, facilitating a cold start.

3. crvUSD will not issue new governance tokens, but will improve Curve's revenue situation through stability fees and PegKeeper.

4. Curve uses its own DEX price oracle, which may limit the range of collateral but also reduces oracle costs.

5. Since Curve conducts lending based on trading, theoretically, if it can control the borrowing limits and liquidation thresholds based on liquidity, it can avoid bad debts caused by untimely liquidations.