Curve launches an innovative stablecoin solution, expected to improve protocol revenue

The decentralized stablecoin sector has tremendous potential, but most projects have failed to survive in the long term. Even LUNA and UST, which once had a market value of hundreds of billions of dollars, collapsed in a short period of time. Now, Curve, which manages a total locked value of $3.7 billion (TVL), has also begun to venture into this field.

Recently, Curve released its white paper and code for its stablecoin. According to the GitHub records, the initial draft of the white paper was completed in October. Although it is not explicitly named in the white paper, the code indicates that the full name of this stablecoin is "Curve.Fi USD Stablecoin", abbreviated as "crvUSD". This move could alleviate the pressure from CRV inflation and improve Curve's revenue situation through stability fees and the earnings from PegKeeper.

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

LLAMMA: A Smoother Settlement Mechanism

Traditional lending protocols can trigger severe market fluctuations during the liquidation process. For example, during the market downturn in June this year, a liquidation operation of a lending protocol caused the price of ETH on a certain DEX to plummet from $1300 to below $1000.

crvUSD adopts the LLAMMA algorithm to mitigate the impact of liquidation. This mechanism issues stablecoins through over-collateralization but introduces a special AMM to replace traditional lending and liquidation processes. Liquidation is no longer a one-time event, but a continuous liquidation/de-liquidation process.

For example, borrow crvUSD by using ETH as collateral. When the value of ETH is sufficient, the collateral remains unchanged. When the price of ETH falls into the liquidation range, ETH will be gradually sold. If the price of ETH rebounds, the system will use stablecoin to help users repurchase ETH. This process is similar to hedging the impermanent loss after providing liquidity in AMM.

In the simulated test, when the market price drops 10% below the liquidation threshold and then rebounds, the user's collateral loss is only 1% within 3 days. This mechanism, while reducing liquidation losses in extreme market conditions, may trigger liquidation more easily during minor fluctuations.

automatic stabilizers and monetary policy

To maintain the price stability of crvUSD at 1 dollar, the system introduces the PegKeeper mechanism. When the price of crvUSD is above 1 dollar, PegKeeper can mint crvUSD without collateral and inject it into the stablecoin exchange pool to bring down the price. Conversely, when the price is below 1 dollar, PegKeeper can withdraw some crvUSD liquidity to push up the price. This mechanism is similar to the automatic market operations of certain stablecoin projects (AMO), avoiding the influence of centralized stablecoins.

Monetary policy adjusts the relationship between stablecoin debt and crvUSD supply through parameter adjustments to influence lending behavior and maintain system balance.

Potential Advantages and Outlook

The Curve team holds a significant amount of veCRV voting power, which helps guide the liquidity between crvUSD and the main stablecoin pools, providing a unique advantage. Additionally, Curve uses its own DEX price oracle, which may limit the range of collateral but also saves on oracle expenses.

If the LP tokens of the main stablecoin pool can be used as collateral, it will significantly improve capital utilization. Curve did not issue new governance tokens for the stablecoin plan, but rather improved the existing income structure through stable fees and PegKeeper.

Theoretically, Curve can accurately control the borrowing limits and liquidation thresholds for each token based on liquidity, with the hope of completely eliminating the bad debt risk caused by untimely liquidations.