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Curve stablecoin crvUSD launched! Introduction to clearing and price anchoring mechanism, understand how to use it in one article

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Curve stablecoin crvUSD launched! Introduction to clearing and price anchoring mechanism, understand how to use it in one article

Curve Finance's stablecoin crvUSD project was announced in June last year and released a whitepaper in November. After a long period of development and testing, the frontend of crvUSD has finally officially launched today. This article will introduce the liquidation and price anchoring mechanism of crvUSD and explain how to use Curve's crvUSD lending function.

Reference: Introduction to the Principles and Architecture of Curve Stablecoin, written by Taiwan FuruCombo engineer albertlin.eth

The Deficiencies in Liquidation of Overcollateralized Stablecoins

The crvUSD introduced by Curve is an overcollateralized stablecoin where users can mint or borrow crvUSD by collateralizing specific assets based on their prices, while also paying a certain borrowing interest.

Unlike the mainstream overcollateralized stablecoins like MakerDAO's DAI, the crvUSD differs in its liquidation mechanism. For example, when the price of collateral assets falls below a certain level, liquidation is triggered in MakerDAO, and the collateral is auctioned at a price below the market price to cover the user's borrowing deficit.

However, the flaws in this liquidation mechanism have become increasingly apparent since its popularity, including issues such as price manipulation of collateral assets, insufficient liquidity of collateral assets leading to protocol insolvency, and market volatility caused by large-scale liquidation of assets.

Curve Stablecoin crvUSD Liquidation Mechanism LLAMMA

In contrast to the above method, Curve's newly introduced LLAMMA (Lending-Liquidating AMM Algorithm) provides a more flexible approach to liquidation, avoiding a situation where all assets are liquidated at once, and instead opting for a progressive liquidation approach. Additionally, it retains the possibility of recovering the liquidated collateral assets.

In simple terms, when the price of collateral assets falls continuously to a certain price range, liquidation is triggered, gradually converting the collateral assets into crvUSD as the price falls. Conversely, if the price rebounds after a decline, crvUSD is reconverted into the original collateral assets.

Therefore, if the collateral assets do not recover after a price drop, Curve still has enough crvUSD to repay user debts.

Actual Scenario of Borrowing with Curve Stablecoin crvUSD

When users borrow crvUSD on Curve, they need to provide three pieces of data:

  1. The quantity of collateral assets
  2. How much crvUSD is borrowed
  3. How the collateral assets are allocated in bands

The collateral assets are calculated based on the number of bands and the borrowing amount, then evenly distributed within the bands. As the price of collateral assets drops to different bands, the assets in those bands are gradually liquidated.

After the launch of the crvUSD frontend interface today, users can start using sfrxETH as collateral assets. In the example below, 10 sfrxETH is used to borrow 16,000 crvUSD, with the collateral assets allocated in five price bands, which can be adjusted by clicking Adjust.

After entering the required parameters, relevant information can be seen in the yellow box. The band range represents the band number where the collateral assets are located, N represents the number of bands, and Health indicates the borrowing health index, with higher numbers indicating greater safety.

On the right side of the borrowing field, detailed band information is displayed. In this borrowing example, the collateral assets are allocated in bands 3-7. This means that when the price of collateral assets falls to band 3, the assets in this band will gradually be converted into crvUSD. If the price subsequently rises above the price of band 3, the crvUSD will be converted back into sfrxETH.

If the price continues to drop below band 7, all of the user's sfrxETH will be converted into crvUSD.

Note: frxETH is the ETH collateral token of Frax Finance, while sfrxETH is the re-collateralized token of frxETH.

Furthermore, when users choose the number of bands, the more bands the collateral assets are allocated to, the earlier the liquidation process begins. However, the lower the price to liquidate all assets.

To simulate the actual borrowing scenario, users can use the crvUSD simulator to manually adjust prices and observe changes in asset liquidation.

Price Anchoring Mechanism PegKeeper for Curve Stablecoin crvUSD

After explaining the liquidation mechanism of crvUSD, let's look at the PegKeeper mechanism that anchors crvUSD to 1 USD.

  • crvUSD price > 1 USD: Indicates a shortage of crvUSD in Curve's liquidity pool. PegKeeper can mint new crvUSD without collateral and add it to the Curve liquidity pool to increase the supply of crvUSD in the market.
  • crvUSD price < 1 USD: Indicates an excess of crvUSD in Curve's liquidity pool. PegKeeper can withdraw previously minted crvUSD from the Curve liquidity pool and destroy it to reduce the supply of crvUSD in the market.

However, what if PegKeeper has destroyed all uncollateralized crvUSD and the price of crvUSD remains below 1 USD?

At this point, Curve will quickly raise the borrowing interest rate of crvUSD through monetary policy to increase the liquidation risk and encourage borrowers to repay. After reclaiming excess crvUSD from the market, the price stabilizes back to 1 USD.

Current Status of Curve Stablecoin crvUSD

Following the official launch of the crvUSD borrowing interface today, the frontend page of Curve now displays data on the crvUSD liquidity pools, with the TVL of each liquidity pool currently ranging between 500,000 to 600,000 USD.

In addition, data engineer MarcoV has created a Dune data dashboard to view borrowing and liquidity pool data related to crvUSD.