Curve Launches Innovative Algorithmic Stablecoin crvUSD

The potential of the decentralized stablecoin market is enormous, 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 quickly. Now, Curve, with a total locked amount of $3.7 billion, has also decided to venture into this field.

Curve recently released its stablecoin whitepaper and code. The whitepaper was completed in October and is not yet the final version. Although the whitepaper does not explicitly name it, the code reveals that the full name of the stablecoin is "Curve.Fi USD Stablecoin", abbreviated as "crvUSD". This move may help improve the CRV inflation issue by increasing protocol revenue through stability fees and PegKeeper income.

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

Smooth Clearing Algorithm LLAMMA

Traditional lending protocols can cause severe market volatility during liquidations. For example, a liquidation operation by MakerDAO in June this year caused the price of ETH on Uniswap to plummet from $1300 to below $1000.

To alleviate the impact of liquidation, crvUSD adopts an innovative LLAMMA Algorithm. This algorithm makes the liquidation process smoother rather than occurring all at once. When the value of the collateral falls into the liquidation range, the system will gradually sell off part of the collateral. If the price rises, the collateral will be repurchased. This mechanism is similar to the impermanent loss hedge in AMM.

Compared to traditional one-time liquidation methods, LLAMMA can preserve more value for users during market rebounds. Tests by the Curve team show that when the market price falls below the liquidation threshold of 10% and then recovers, users experience only a 1% loss of collateral within 3 days.

However, LLAMMA may also trigger liquidation more easily. In cases of slight fluctuations, traditional lending platforms may not liquidate, while positions on Curve may have already gone through the liquidation and de-liquidation process, resulting in minor losses for users.

Automatic Stabilizers and Monetary Policy

To maintain the price stability of crvUSD at 1 USD, the system introduces the PegKeeper mechanism. When the price of crvUSD is above 1 USD, 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 USD, PegKeeper can withdraw part of the crvUSD liquidity to raise the price. This mechanism is similar to Frax's AMO and can avoid the impact of centralized stablecoins.

Monetary policy adjusts the relationship between the stabilizer debt and the supply of crvUSD. By adjusting parameters, the system can incentivize borrowers to either take out or repay loans under different circumstances, thus controlling the level of debt.

Potential Advantages and Impacts

Curve may use the LP tokens of its main stablecoin pool as collateral to improve capital efficiency. The Curve team holds a large amount of veCRV voting power, which is beneficial for the cold start of crvUSD. In addition, the introduction of stability fees and PegKeeper may improve Curve's revenue situation.

Curve uses its own DEX price oracle, which may limit the range of assets available for collateral, but also reduces the cost of the oracle. Since Curve conducts lending based on trading, it can theoretically avoid bad debts caused by untimely liquidations by controlling borrowing limits and liquidation thresholds.