crvUSD was launched a month and a half ago, and there may be many discussions and articles about it. This article, written by crypto researcher Poopman, is one of the more comprehensive and detailed ones. The article introduces crvUSD, LLAMMA, band, Uniswap V3 and LLAMMA, as well as the link and stability of crvUSD. Here is the translation by BlockBeats:

crvUSD is the most hardcore stablecoin ever. When borrowing from a CDP, you don't have to face complete liquidation, and crvUSD introduces the LLAMMA mechanism, an algorithm that uses soft liquidation to reduce impermanent loss during massive liquidation periods. Here is a very in-depth introduction to crvUSD.

crvUSD stablecoin was launched about a month and a half ago. Among all the collateral assets, sfrxETH was the first one accepted for minting crvUSD, followed by wstETH and WBTC. So far, crvUSD has attracted over $67.9 million TVL, and it is evident that users' interest in stablecoins is growing.

What is crvUSD?

crvUSD is a CDP (Collateralized Debt Position) similar to DAI, which allows users to deposit collateral and borrow crvUSD stable assets. So far, crvUSD accepts four types of collateral: sfrxETH, wstETH, wBTC, and wETH.

What is LLAMMA?

LLAMMA stands for Loan Liquidation AMM algorithm. In simple terms, the functionality of this model itself is like an AMM, allowing a gradual rebalancing of collateral portfolio through soft liquidation instead of complete liquidation of positions.

To understand the working principle of crvUSD, we need to understand the model and its uses. Next, let's explain soft liquidation and LLAMMA.

Soft Liquidation

First, the user deposits sfrxETH or other collateral to borrow crvUSD at an over collateralization ratio (currently about 117%). Then, LLAMMA converts the user's collateral into LP positions in a dedicated AMM. As prices fluctuate, the ratio of the user's crvUSD and sfrxETH will change.

Use Case 1: sfrxETH price decreases

When a user deposits sfrxETH to borrow crvUSD, the collateral is entirely sfrxETH. But when the price of sfrxETH decreases, LLAMMA converts a portion of the collateral into crvUSD, forming a collateral position that includes both sfrxETH and crvUSD.

Use Case 2: sfrxETH price increases

When sfrxETH's price decreases and enters a recovery phase, LLAMMA buys back sfrxETH with crvUSD to restore the collateral to an entirely sfrxETH position.

This process is called soft liquidation, a temporary rebalancing of the user's collateral composition based on price fluctuations. But how is this "soft liquidation" actually implemented?

What is Band

The "secret" behind the implementation of soft liquidation lies in a dedicated AMM within a price range called "Band". A Band is a price/liquidity segment where users can choose the quantity of the Band to allocate their collateral within the selected range.

Within a Band, there are upper and lower limits. If the user's collateral price exceeds the range of the Band, the user enters soft liquidation mode, and the assets in the Band will be temporarily converted to crvUSD.

Before users mint/borrow crvUSD, they need to select the number of bands they want to store their collateral in. For example, if the 10th sfrxETH collateral deposit has 5 bands, then each band stores 2 ETH collateral for liquidation at a specific price.

Details:

If you choose a higher range (e.g., N = 30), it means your collateral will be liquidated later but the process will be slower. If you choose a shorter band range (e.g., N = 5), liquidation happens more suddenly but later compared to a higher band range.

Uniswap V 3 vs LLAMMA

So far, the entire AMM system may seem similar to Uniswap V 3, but there are some key differences:

- Liquidity Concentration

- AMM Design

- Oracle Prices

Liquidity Concentration

Uni V 3: Users can customize the range of their concentrated liquidity.

Curve: Liquidity automatically concentrates around the internal oracle price.

Thus, sacrificing users' customizability for deeper liquidity depth around the price.

AMM Design

Uni V 3: When the price of sfrxETH goes beyond the range, your LP position becomes fully ETH/crvUSD.

Curve: crvUSD follows the principle of "buy low, sell high." If the price goes down, you will own more crvUSD. If the price goes up, you will have more ETH.

Through this mechanism, crvUSD can reduce exposure to ETH when prices fall, while benefiting from the rise in ETH when prices rise. However, the rebalancing of crvUSD is done by external parties such as arbitrageurs, which requires:

- ETH/USD+++++++++++++++++ External Price

- Arbitrage Incentives

ETH/USD External Price

The external price actually comes from four sources:

Uniswap TWAP Oracle

Chainlink

TriCrypto

ETH/USD Exponential Moving Average (EMA)

This diversified data source helps mitigate the manipulation risks associated with using a single data source.

Arbitrage Incentives

The blue line represents the oracle price. The red line represents the LLAMMA AMM price. This is done to incentivize arbitrageurs to rebalance the pool faster than others.

The design of LLAMMA's AMM is such that the price in the AMM (red) changes faster than the price in Uniswap (blue). When the ETH price falls in Uniswap, the price in the AMM falls even faster, creating opportunities for arbitrageurs to repay crvUSD and exchange the collateral ETH.

Advantages: During large-scale liquidations, the market can experience significant volatility, resulting in significant impermanent losses for LPs. Through soft liquidations, assets can be gradually sold off, avoiding sudden liquidations and mitigating impermanent losses.

Disadvantages: That being said, LP may suffer losses in the ongoing rebalancing process (due to larger deviations). Additionally, during periods of high Gas fees, arbitrageurs may not be incentivized as Gas costs may diminish their profitability.

Pegging and Stability

LLAMMA serves as the first line of defense. However, to ensure the stability of crvUSD peg, Curve Finance has prepared two peg mechanisms:

-Pegkeeper

-Interest Rates

Pegkeeper

Pegkeeper: similar to Frax AMO:

When crvUSD > $1, pegkeeper releases uncollateralized crvUSD to increase supply.

When crvUSD < $1, pegkeeper destroys minted crvUSD to decrease supply.

Currently, there are four types of Pegkeepers helping maintain price stability.

Interest Rates

When crvUSD deviates from around $1, it incentivizes/prevents borrowing. When crvUSD > $1, interest rates increase to incentivize loan repayment. When crvUSD is less than $1, interest rates decrease to encourage users to mint and borrow.

Those are the key points about crvUSD. Once you understand these, you will be quite familiar with crvUSD. Let's go!