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The hardest stablecoin? The most comprehensive arrangement of crvUSD information
Original Author: Poopman, Encryption Researcher Original Compiler: Leo, BlockBeats
crvUSD was launched one and a half months ago. There may be many discussions and articles about it. This article written by encryption researcher Poopman is a relatively comprehensive and detailed one among many articles. This article introduces: crvUSD, LLAMMA, band (band), Uniswap V3 and The hooking and stability of LLAMMA and crvUSD, compiled by BlockBeats as follows:
crvUSD is the most hardcore stablecoin ever created. There is no need to face full liquidation when borrowing CDP, and crvUSD introduces the LLAMMA mechanism, an algorithm that uses soft liquidation to reduce impermanent losses during huge liquidation. The following is a very in-depth introduction to crvUSD.
The crvUSD stablecoin launched about a month and a half ago. Of all the current collateral, sfrxETH is the first to be accepted for minting crvUSD, followed by wstETH and WBTC. crvUSD has attracted over $67.9 million in TVL to date, and it's clear user interest in the stablecoin continues to grow.
![The hardest stablecoin? The most complete arrangement of crvUSD information] (https://img-cdn.gateio.im/social/moments-40baef27dd-68de9a220f-dd1a6f-7649e1)
What is crvUSD?
crvUSD is a CDP (collateral debt position, such as DAI), which allows users to deposit collateral and borrow crvUSD stable assets. So far, crvUSD accepts four kinds of collateral, including: sfrxETH, wstETH, wBTC, wETH.
![The hardest stablecoin? The most complete arrangement of crvUSD information] (https://img-cdn.gateio.im/social/moments-40baef27dd-18e831d164-dd1a6f-7649e1)
What is LLAMMA?
LLAMMA stands for Loan Clearance AMM Algorithm. In simple terms, the model itself functions like an AMM, allowing for soft liquidations that gradually rebalance the collateral portfolio, rather than fully liquidating positions.
To understand how crvUSD works we need to understand the model and what it is used for, next we explain soft liquidation and LLAMMA.
Soft liquidation
First, users deposit sfrxETH or other collateral to borrow crvUSD at an overcollateralization ratio (currently about 117%). LLAMMA then converts the user's collateral into LP positions in a dedicated AMM. As the price fluctuates, the user's crvUSD and sfrxETH ratio will change.
![The hardest stablecoin? The most complete arrangement of crvUSD information] (https://img-cdn.gateio.im/social/moments-40baef27dd-8a3c18cac3-dd1a6f-7649e1)
Use case 1: sfrxETH price drops
When a user deposits sfrxETH to borrow crvUSD, the collateral is entirely sfrxETH, but when the price of sfrxETH falls, LLAMMA converts part of the collateral into crvUSD, forming a collateral position that includes both sfrxETH and crvUSD.
Use case 2: sfrxETH price rebounds and rises
When the price of sfrxETH entered the recovery phase after falling, LLAMMA repurchased sfrxETH through crvUSD to restore the collateral to the full sfrxETH position.
This process is called soft liquidation. It is a process of temporarily rebalancing the user's collateral composition according to price fluctuations. So how is this "soft liquidation" actually achieved?
What is Band (band)
The "secret" of soft liquidation implementation lies in a dedicated AMM, in a price range called a "band". A band is a price/liquidity segment where users can choose the number of bands to allocate their collateral within the chosen range.
![The hardest stablecoin? The most complete arrangement of crvUSD information] (https://img-cdn.gateio.im/social/moments-40baef27dd-90aa8eb09a-dd1a6f-7649e1)
In a band, there is an upper limit and a lower limit. If the user's collateral price exceeds the range of the band, the user will enter the soft liquidation mode, and the assets in the band will be temporarily converted to crvUSD.
Before users can mint/borrow crvUSD, they need to choose the number of bands they want to store their collateral. For example, if the 10th sfrxETH collateral deposit has 5 bands, then each band stores 2 ETH of collateral for liquidation at a specific price.
![The hardest stablecoin? The most complete arrangement of crvUSD information] (https://img-cdn.gateio.im/social/moments-40baef27dd-d1531bc867-dd1a6f-7649e1)
dynamic:
If you choose a higher range (e.g. N=30), it means your collateral will be liquidated sooner but more slowly. If you choose a shorter band range (for example, N=5), liquidation happens more abruptly, but later than with a high band range.
![The hardest stablecoin? The most complete arrangement of crvUSD information] (https://img-cdn.gateio.im/social/moments-40baef27dd-d61f1446b8-dd1a6f-7649e1)
Uniswap V3 vs LLAMMA
So far, the entire AMM system may look similar to Uniswap V3, but there are some key differences:
-AMM design
-Oracle price
Liquidity Concentration
Uni V3: Users can customize their centralized liquidity range.
Curve: Automatically centralize liquidity around the internal price of the oracle.
Therefore, the depth of liquidity near the price is deepened by sacrificing user customizability.
AMM Design
Uni V3: When the price of sfrxETH goes out of range, your LP position becomes full ETH/crvUSD.
Curve: crvUSD follows the principle of "buy high and sell low". If the price falls, ni will have 1 more crvUSD. If the price goes up, you will have more ETH.
![The hardest stablecoin? The most complete arrangement of crvUSD information] (https://img-cdn.gateio.im/social/moments-40baef27dd-51fdbb73b7-dd1a6f-7649e1)
Through this model, crvUSD can reduce its exposure to ETH when the price falls, while gaining the upside of ETH when the price rises, however, the rebalancing of crvUSD is carried out by external parties such as arbitrageurs, which requires:
-ETH/ USD+ +++++++++++++++ external price
ETH/USD external price
External prices actually come from 4 sources, they are:
Uniswap TWAP Oracle
Chain link
TriCrypto
ETH/USD Exponential Moving Average (EMA)
This form of diversification of data sources reduces the risk of manipulation that can occur with a single source of data.
Arbitrage Incentives
The blue line represents the oracle price. The red line represents the AMM price of LLAMMA. To attract arbitrageurs rebalance pools faster than others.
![The hardest stablecoin? The most complete arrangement of crvUSD information] (https://img-cdn.gateio.im/social/moments-40baef27dd-00c8df2839-dd1a6f-7649e1)
LLAMMA's AMM is designed in such a way that the price in the AMM (red) drops/rises faster than the price in Uniswap (blue). When the price of ETH in Uniswap fell, the price of AMM in AMM fell faster, creating an opportunity for arbitrageurs to repay crvUSD and exchange ETH collateral.
Advantages: In the process of large-scale liquidation, liquidation will lead to violent fluctuations in the market and bring huge impermanent losses to LP. Through soft liquidation, assets can be gradually sold to avoid sudden liquidation, thereby mitigating impermanent losses.
Cons: That being said, LPs may suffer losses during constant rebalancing (due to greater bias). Also, arbitrageurs may not be incentivized during periods of high gas fees, as gas costs may shrink their profitability.
Hooks and Stability
LLAMMA is the first line of defense. But in order to ensure the stability of the crvUSD peg, Curve Finance also prepared two peg mechanisms:
-interest rate
Pegkeeper
Pegkeeper: Similar to Frax AMO:
When crvUSD > $1, pegkeeper releases unstaked crvUSD to increase supply.
When crvUSD < $1, pegkeeper burns minted crvUSD to reduce supply.
Currently, there are 4 Pegkeepers that help maintain price stability.
![The hardest stablecoin? The most complete arrangement of crvUSD information] (https://img-cdn.gateio.im/social/moments-40baef27dd-03f577f1e0-dd1a6f-7649e1)
interest rate
Incentivize/discourage users from borrowing when crvUSD deviates around $1. When crvUSD > $1, the interest rate increases to incentivize users to repay the loan. When crvUSD is less than $1, the interest rate is reduced to incentivize users to mint and borrow.
The above is the key content about crvUSD. After you understand these, you will be quite familiar with crvUSD, LFG! ! !