Curve is a decentralized exchange (DEX) with a specific orientation towards stablecoins and related financial activities, such as swaps and yield generation. Curve operates as an automated market maker (AMM) that works to pair agents with others to conduct transactions without an intermediary party. Curve powers its platform through its own novel dual token infrastructure in the form of CRV and locked CRV tokens (veCRV). This token infrastructure has enabled very unique liquidity battles known as “Curve Wars''. Due to the unique voting rights stemming from locking up CRV into veCRV, over the protocol is highly sought after, leading to the phenomenon known as Curve Wars.
Liquidity providers for Curve are rewarded with CRV tokens; CRV tokens can also be locked (up to 4-year time horizons) in exchange for veCRV, which is required to participate in governance decisions, including setting the CRV rewards issued to pools on the platform. Lockers are issued veCRV (vote-escrowed CRV), representing a non-transferrable claim on CRV, meaning their holdings are illiquid for the locking period.
Although holders are giving up liquidity, they are being compensated for this risk by being awarded special privileges within the protocol, as veCRV holders are entitled to a share of the fees generated from swaps made on Curve, boosted CRV emissions when providing liquidity, and as previously mentioned, governance rights.
Despite launching in late 2020 and limiting itself to only like-valued assets, Curve is a top-3 Ethereum DeFi dapp and exists on six other blockchains, including Polygon, Avalanche, and Fantom.
Curve Finance was launched in January 2020 following the publication of the original StableSwap white paper by Michael Egorov. Following the protocol build, the CRV token was officially launched in August 2020.
Curve Stablecoin (crvUSD)
A major ecosystem update for is the introduction of its Curve-native stablecoin, crvUSD. This is significant for Curve as the leading value proposition for the platform resides around yield options for stablecoins and similarly-priced assets. This is made possible by Curve’s unique AMM model. On May 17, 2023, crvUSD launched its user interface for crvUSD, signaling the debut of its much-anticipated stablecoin.
Before being introduced to the public, the crvUSD contracts first made their appearance on the Mainnet on May 3, 2023. The Curve team engaged in a 'testing-in-production' exercise, employing real funds to put their system through its paces. Over the two-week period leading up to the public unveiling, they had to redeploy the crvUSD several times to fix bugs and apply optimizations.
While some observers have critiqued these methods, arguing that more cautious testing approaches could have been adopted before a product launch, these tactics might have been crucial given the team's dedication to creating an immutable protocol.
At the heart of crvUSD is its groundbreaking liquidation mechanism known as 'LLAMMA.' This system offers a borrower-friendly approach by converting a borrower's collateral into a Liquidity Provider (LP) position, thereby enabling a continuous adjustment of collateral using a special-purpose Automated Market Maker (AMM). This method, termed 'soft liquidations,' presents a less volatile alternative to the forceful liquidation procedures commonly seen on other borrowing platforms.
crvUSD is the outcome of repeated research into minimizing the impact of liquidations. The name of its stablecoin model is LLAMMA (Lending-Liquidating AMM). Its distinguishing characteristic is an automated liquidation that occurs in stages during the minting/burning process. The approach not only allows stablecoin users to disperse depeg or liquidation risks by diversifying positions into multiple bands, but it can also mitigate the consequences of a quick decrease, which has proved crippling for DeFi platforms, by liquidating assets in phases.
The Lending-Liquidating Automated Market Maker Algorithm (LLAMMA) facilitates a smoother liquidation process for borrowers as their collateral value dips compared to their debt position. This is a far cry from the abrupt liquidation common to other lending platforms like Maker or Aave.
In essence, LLAMMA cleverly transforms your collateral into a liquidity provider (LP) position – a pairing of a volatile asset and a stablecoin. Unlike the instant liquidations that lead to a total loss for the borrower, the LLAMMA mechanism minimizes potential losses and limits the protocol's risk of accruing bad debt. As the value of the collateral declines, crvUSD will leverage the liquidity of Curve pools to automatically rebalance the composition of the collateral. In this way, the platform will convert ETH proportionally to other stablecoins like USDC, creating a larger buffer and keeping a "safe" distance from the liquidation price. To prevent liquidation, debt is used to regulate the distance between the current price and the liquidation price.
To illustrate, if a borrower places ETH as collateral and borrows crvUSD, the collateral will be entirely in ETH. However, should ETH's price fall, the protocol will slowly convert some of the collateral to crvUSD. If the ETH price rebounds, the borrower can use this cash to reinstate or "de-liquidate" their LP position by buying back ETH using crvUSD.
LLAMMA versus Uniswap V3: Divergent Approaches to Liquidity
The specialized AMM that LLAMMA uses mirrors the design of Uniswap V3 pools, where liquidity is strategically concentrated across segments or intervals. The key distinction lies in how the platforms manage this concentrated liquidity. While Uniswap permits users to dictate their concentrated liquidity ranges, Curve utilizes an algorithmic approach that focuses liquidity around an internal oracle price.
Moreover, there are upper and lower price bounds for each liquidity segment. If the position's price falls outside this range, the LP position will consist entirely of a single asset. The approach differs between Uniswap V3 and LLAMMA on Curve; while Uniswap V3 would hold only the stablecoin (crvUSD) when ETH price is above the upper bound, LLAMMA would hold only ETH.
In the crvUSD ecosystem, all borrower positions are pooled together for efficient collateral management. The balancing act of selling and buying back collateral assets within the pool is conducted by external traders or arbitrageurs. For this mechanism to operate optimally, the external price of the collateral (in this case, ETH) must be known. LLAMMA fetches this price data from external oracles such as Uniswap Twap Oracle, Chainlink, and Tricrypto, applying an Exponential Moving Average (EMA) to dampen price volatility and limit potential manipulation risks.
Borrowers in soft-liquidation mode lose the ability to withdraw collateral or borrow more crvUSD. However, they have multiple strategies to regain this functionality: wait for de-liquidation, repay loans, self-liquidate by repaying the loan using collateral and a flash loan, add more collateral, or wait for full liquidation and then withdraw only in crvUSD.
Despite the benefits of the LLAMMA mechanism, borrowers should be aware that they still face financial risk with price fluctuations. Significant losses can occur if the external Oracle price sees sharp changes or if the arbitrageurs don't intervene in a timely manner. Nevertheless, there are scenarios where borrowers could potentially benefit, especially when prices move in a consistent direction.
Unpacking the LLAMMA Advantage
In summary, the novel LLAMMA liquidation mechanism offers borrowers a less abrupt and potentially less costly method of managing their collateral. It eliminates the threat of large-scale liquidations that could introduce significant market volatility, while also allowing for the rebalancing of collateral assets without causing substantial permanent losses to collateral value.
Nevertheless, it is crucial to remember that investing in cryptocurrency always carries inherent risk. While LLAMMA provides a more nuanced and strategic approach to liquidation, it cannot completely eliminate the potential for loss, particularly in volatile markets. Borrowers must remain vigilant and regularly reassess their positions to maintain an optimal balance between risk and reward.
As the cryptocurrency landscape continues to evolve and innovate, stablecoins like crvUSD, buoyed by breakthrough mechanisms like LLAMMA, are reshaping our understanding of financial risk and reward. These advances represent an exciting shift in the digital currency space, making it an increasingly appealing sector for investors and users alike. Yet, as always, it is essential to approach with a discerning eye and a thorough understanding of the potential risks and benefits.
With the dynamic and fast-paced nature of the cryptocurrency market, staying abreast of the latest trends and developments is a must. As you navigate this rapidly evolving landscape, consider partnering with trusted experts and utilizing reliable resources to make informed decisions about your investments. Remember, an educated investor is a successful investor.
