Analysis of the Curve stablecoin White Paper: Innovative Clearing Mechanism and Automatic Stabilization System

The decentralized stablecoin market has immense potential, but many projects struggle to maintain themselves in the long term. Even LUNA and UST, which once had a market value of hundreds of billions of dollars, collapsed rapidly. Recently, Curve, with a total locked value of $3.7 billion, has also entered this fiercely competitive field.

Curve recently released the White Paper and related code for its stablecoin. According to information from GitHub, the White Paper was completed in October, but it is not the final version. Although the stablecoin's name is not explicitly stated in the White Paper, the code shows that its full name is "Curve.Fi USD Stablecoin", abbreviated as "crvUSD". This new project may help alleviate the problems caused by CRV inflation, improving Curve's financial situation through revenue from stability fees and PegKeeper.

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

Smoother Settlement Algorithm LLAMMA

Traditional lending protocols often have a severe impact on the market during the liquidation process. For example, in June this year, a liquidation operation on a lending platform caused the price of ETH on a certain DEX to plummet from $1300 to below $1000.

To reduce the impact of liquidation on the market, crvUSD adopts a smoother liquidation algorithm called LLAMMA. This is the most significant innovation of crvUSD.

crvUSD still issues through over-collateralization, but uses a special AMM to replace traditional lending and liquidation processes. When the liquidation threshold is reached, liquidation does not occur all at once, but is a continuous liquidation/de-liquidation process.

For example, borrow crvUSD using ETH as collateral. When the value of ETH is sufficient, the collateral remains unchanged. However, when the price of ETH drops into the liquidation range, ETH will gradually be sold. If the price of ETH rebounds, the system will use stablecoin to help users repurchase ETH. During fluctuations within the liquidation range, the system will continuously repeat the processes of liquidation and deleveraging.

This process is similar to the impermanent loss hedge after providing liquidity in an AMM. Compared to traditional one-time liquidation, LLAMMA can retain more value for users when the market rebounds.

According to the Curve team's tests, when the market price falls below the liquidation threshold by 10% and then rises again, the loss of user collateral is only 1% within a 3-day window.

However, this algorithm may also trigger liquidation more easily. In the case of slight fluctuations, traditional lending platforms may not liquidate, but the liquidation and deleveraging process may have already begun on Curve, resulting in users incurring minor losses.

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, causing the price to drop. When the price is below 1 dollar, PegKeeper can withdraw some crvUSD liquidity, causing the price to rise.

In this process, PegKeeper acts like selling crvUSD at high prices and buying it at low prices, which can both profit and maintain price stability. This anchoring mechanism is similar to the practices of some existing stablecoin projects, which can avoid the influence of centralized stablecoins.

Monetary policy regulates the system by controlling the relationship between the debt of the stabilizer and the supply of crvUSD. For example, when the debt/supply ratio is too high, parameters can be adjusted to encourage borrowing and selling, while the opposite encourages repayment.

Summary and Reflection

The Curve team possesses a large amount of veCRV voting power, which is beneficial for guiding the interaction between crvUSD and existing liquidity pools, facilitating the launch of crvUSD. This is an advantage that other stablecoin projects do not have.

Curve has not issued new governance tokens for its stablecoin. Currently, Curve has limited revenue as a DEX, and introducing stable fees and PegKeeper may improve its revenue situation.

Curve uses its own DEX price oracle, which may limit the range of assets that can be used as collateral, but also saves on oracle-related expenses.

Since Curve conducts lending based on trading, if it can control the borrowing limits and liquidation thresholds of various tokens based on liquidity, it can theoretically effectively prevent bad debts caused by untimely liquidations.