Stablecoin crvUSD - The main hope of the market?

Curve Finance is one of the brightest representatives of the DeFi segment. A decentralized exchange that operates using automated market maker mechanisms (AMMs), which allow the trading of assets based on pools of liquidity. This operation is supported by smart contracts that store equal shares of assets to be further exchanged. Users can exchange assets using any Web3 wallet.

Curve's decentralized operation is supported by the Curve DAO organization. According to DefiLlama, $4.1 billion in assets have been locked up in the service's smart contracts to date, making Curve one of DeFi's most popular and trusted protocols.

In November, Curve Finance released a CurveUSD white paper detailing their future stablecoin. The stabelcoin design refers to the type of stabelcoin with excess collateral.

As noted earlier, this steblecoin architecture always has a liquidation mechanism.

The advantage of this model is simplicity, but, on the other hand, it has several problems: 

1. When assets of a major player are liquidated, a lot of collateral enters the market, causing market fluctuations.
2. In most cases, liquidators sell the liquidated collateral to make a profit, causing the price of the collateral to fall again, leading to a new wave of liquidation. A death spiral is formed, which leads to enormous damage.

Given these problems, crvUSD solves the elimination problem as follows.

1. The system does not rely on external DEX.
2. This reduces user losses during liquidation.
3. The liquidation of the user's deposit is gradual and is converted back to a deposit when the price recovers.

To summarize - the basic idea of crvUSD is an AMM for continuous liquidation or deliquidation. A credit-liquidation AMM or LLAMMA.

• The supervisor and LLAMMA have primary responsibility for the work involved in liquidating the collateral
• Monetary policy is implemented by PegKeeper and Stable Pool modules. They are mainly responsible for pegging stabelcoin to $1.

crvUSD greatly minimizes liquidation penalties thanks to its innovative mechanism. With LLAMMA, if the price falls 10% below the liquidation threshold and then recovers later, only 1% of the deposit is lost.

When users pledge to create crvUSD, they must provide three things:

• Bail amount.
• Number of ranges for storing bail.
• The number of crvUSD to be created.

The deposit will be divided into equal parts according to the number of ranges to hold and then distributed in a continuous price range consisting of ranges.

The most important feature of the LLAMMA pool is that when the price of collateral (ETH) falls below a certain level, the collateral gradually turns into crvUSD. And vice versa, when the price is above a certain level, crvUSD gradually turns into collateral.

As the price falls, the collateral at the top of the ranges will be replaced by crvUSD. A devaluation will occur. Since some of the collateral will already be devalued when liquidation occurs, the loss will be significantly reduced compared to a traditional one-size-fits-all liquidation.

The figure shows the change in price in the single-band range.

Purple line = change in oracle price.

Red line = AMM price change.

This can be seen as two equations created to find the upper and lower prices of this band.

When the ether price is above P↑ (yellow range), all assets in the range will be converted to ether. When the ether price is below P↓ (green range), all assets in the range will be converted to crvUSD.

When the price is between the extreme areas (white range), the pool will be partially filled with ether and partially with crvUSD, with the share of ether and crvUSD determined by the price change.

When the oracle price starts to rise, the AMM pool price rises faster. This creates an opportunity for arbitrage. Market participants can deposit ether into the LLAMMA pool, exchange it for additional crvUSD, and make a profit. During this process, the amount of ether in the pool gradually increases, while the amount of crvUSD decreases.

And vice versa.

As the oracle price decreases, the AMM pool price decreases faster. This creates the possibility of arbitrage in the opposite direction, where market participants can deposit crvUSD into the pool, exchange it for more ETH and make a profit. During this process, the amount of crvUSD in the pool gradually increases and the amount of ETH decreases.

The LLAMMA module intentionally creates an arbitrage opportunity for speculators by exploiting the fact that AMM and Oracle prices fluctuate. When speculators try to balance the ratio of assets in the pool, they are essentially performing a partial liquidation of the pool's assets.

The advantage of this dynamic and continuous liquidation process is that it avoids large-scale liquidations that can cause market volatility. As prices recover, assets will be converted back into collateral without causing irreversible losses to the collateral.

How does the system keep the peg to $1? The PegKeeper module responsible for monetary policy is involved.

When the price of crvUSD > $1, it means that there is not enough crvUSD in the Curve pool. PegKeeper can mint new crvUSD without collateral and put them into the Curve pool to increase the supply of crvUSD on the market.

When the price of crvUSD < $1, it means that there is a surplus of crvUSD in the Curve pool. PegKeeper will begin to withdraw previously issued crvUSD from the Curve pool and burn those crvUSD to reduce the supply of crvUSD on the market.

What if PegKeeper has burned through all the unsecured crvUSD and the crvUSD price is still below $1? Curve Finance has another way to increase the price of crvUSD - use monetary policy to raise the borrowing rate.

When the price is greater than 1, the borrowing rate is extremely low (tends to 0). When the price is less than 1, the borrowing rate increases rapidly. This will force borrowers who have issued crvUSD to repay their debt quickly. Otherwise, their collateral may be liquidated.

The bear market has created problems from which all segments suffer greatly. The collapse of Terra/UST/Luna hit the reputation of the DeFi segment hard. 

Stablecoins are the heart of the market, as they are a safe haven in turbulent times and a mechanism for storing profits as well as funds for work.

A decentralized world must have decentralized stablocoins, because centralized instruments prevent it from fully opening up. 

To develop fully, we need to give up centralized stabelcoin solutions.

The loss of huge amounts of money by retail investors over the past two years has forced regulators in major countries to act.

Centralized Stablecoin issuers are increasingly under attack from them. The market cannot afford such attacks. If the foundations of the market are threatened, it causes negative sentiment and discourages the attraction of new funds.

CrvUSD can help with all of this. The largest and most important project with an excellent reputation is trying to improve the proven collateral mechanism as much as possible to finally create a stable, liquid decentralized steblecoin. We wish them a lot of luck!

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