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How does crvUSD address the three issues of traditional stablecoins?

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Maintaining anchored interest rates, decentralization, and scalable capital efficiency.

Original Title: "Introduction to crvUSD Part 2: Three birds with one stone."

Original Author: DeFi Made Here

Original Translation: Kxp, BlockBeats

I will introduce Curve's native stablecoin crvUSD in this article, which will solve three problems at once.

Creating a native Stablecoin for a protocol is essentially providing liquidity to the protocol. They only need to allow users to borrow and lend by collateralizing their personal or external positions and charging a fixed percentage of minting/repayment fees annually. Many protocols have realized this and have already deployed their own Stablecoins or are in the process of doing so. For example, Aave has released its own Stablecoin, GHO.

Currently, there are nearly 1 billion Stablecoins borrowed on Aave. If we assume that GHO will occupy 1/5 of the Aave Stablecoin market share at an annual interest rate of 2%, it will have an additional income of $4 million per year. During a bull market, the income may be even higher.

However, Curve Finance does not require another Collateralized Debt Position (CDP) Stablecoin, even if its Total Value Locked (TVL) decreases with the price of CRV.

Source: Token Terminal

With the decrease of liquidity, the efficiency of swaps will also decrease, because:

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・Decrease in trading volume.The cost reduction generated.

・The attractiveness of CRV is decreasing.・TVL Decrease

Therefore, Curve plans to address the following three aspects through the design of crvUSD:

・Get more liquidity
・Increase trading volume

・Increase the yield of veCRV.

So, how will crvUSD solve these three problems? As the whitepaper did not clarify all the details, I will make some assumptions in the analysis below.

1. Get more liquidity

We are not yet sure what collateral can be used to mint crvUSD (currently it seems only ETH is accepted), but I believe that in the future, positions of liquidity providers (3 CRV, tricrypto, etc.) can also be used for minting.

Introducing CDPStablecoin with a clearing-anti-clearing mechanism can stabilize liquidity and build a massive crypto world. Additionally, if liquidity providers can collateralize their positions for borrowing, Curve's liquidity pool will have a higher TVL.

2. Increase Trading Volume

LLAMMA - a unique lending-clearing automated market maker algorithm that allows users to borrow using collateral without the risk of liquidation. At the same time, the continuous rebalancing of the asset portfolio increases trading volume and fees in the liquidity pool.

LLAMMA solves the liquidation problem by gradually liquidating/anti-liquidating users' collateral and constantly converting collateral and stablecoins.

・When the collateral price falls, LLAMMA will sell the collateral and buy crvUSD.

・When the collateral price rises again, LLAMMA will repurchase the collateral.

The algorithm divides the collateral price into different intervals, so that the liquidation price of the collateral will fluctuate within a certain range, rather than a specific value.

Source: curvecap.lens

(Note: The content is already in English, so no translation is needed.)

This is completely different from traditional clearing engines (such as Aave, Compound, Maker, etc.), because in them:

・When the price drops, your collateral will be sold.・When the price rises, you will hold the US dollar at the bottom price.

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In LLAMMA:

・When the price drops, your collateral will be sold.

・When the price rises, your collateral will be bought.

However, LLAMMA also has its drawbacks: the automated asset portfolio rebalancing system can result in permanent losses. Simply put, LLAMMA will always sell low and buy high each time it rebalances. Of course, this loss is inevitable in order to avoid losing all collateral.

According to the crvUSD whitepaper, the amount of loss incurred in this section is relatively low - when the price drops by 10% within three days and falls below the liquidation threshold, only 1% of the collateral will be liquidated.

Curve still has high Gas costs, which raises a question: how will the Gas fees and slippage costs be paid during the constant rebalancing process?

3. Increase the yield of veCRV

Curve relies heavily on CRV, and it requires people to lock in as much CRV as possible to reduce selling pressure from the daily emission of approximately 530,000 CRV.

Although there are many bundled financial products containing veCRV and hype around "perpetual cash" in the market, investors have now realized the issues with Curve and are not locking up as much CRV as before, resulting in a decrease in the percentage of veCRV.

With the launch of crvUSD, veCRV holders will have new fee expenses:

・The borrowing cost of crvUSD

・LLAMMA increased trading volume.

In the next article, we will delve deeper into these numbers to see if crvUSD can significantly increase the income of veCRV holders.

Another important thing is how crvUSD will stabilize its pegged exchange rate. For example, LUSD always trades above its pegged exchange rate, and if people don't mint more LUSD using ETH, the demand for the coin cannot be met.

When the anchored exchange rate exceeds 1 US dollar, Beanstalk will increase its supply, but when the anchored exchange rate is below 1 US dollar, Beanstalk cannot reduce its supply and relies on loans to restore the anchored exchange rate. In the case of crvUSD, when its anchored exchange rate exceeds 1 US dollar, crvUSD expands its supply through an algorithm (unsecured minting), and when the anchored exchange rate is below 1 US dollar, it also reduces its supply through burning.

In this case, monetary policy will allow the anchor interest rate to be maintained without relying on large PSM, third-party arbitrage, credit, or partial reserve systems.

Conclusion

What really surprised me is that Michael Egorov did not choose to create a brand new Stablecoin, but instead optimized the design based on previous Tokens, which is exactly what Curve needed.

At the same time, crvUSD is solving the three major problems of Stablecoin:

Anchor interest rate maintenance・Decentralization

・Scalability of capital efficiency

Now we just need to wait for the final launch of crvUSD and hope that liquidity providers' positions can be used for collateral. Before that, you can also read the first part of the introduction to crvUSD.