Interpretation of the Curve stablecoin White Paper: Innovative Clearing Mechanism and Revenue Enhancement

The competition in the decentralized stablecoin sector is fierce, with many projects failing to survive in the long term. Even LUNA and UST, which once had a market value of hundreds of billions of dollars, collapsed rapidly. Against this backdrop, Curve, with a total locked value of $37 billion, has also begun to enter the stablecoin market.

Curve recently released its White Paper and code for the stablecoin. According to information from GitHub, the White Paper was completed in October and is currently not the final version. Although the name of the Curve stablecoin is not explicitly mentioned in the White Paper, the code shows that its full name is "Curve.Fi USD Stablecoin" and its abbreviation is "crvUSD". This initiative may help alleviate the pressure from CRV inflation by improving Curve's revenue situation through the stable fees of the stablecoin and the earnings from PegKeeper.

The White Paper highlights three major innovations of crvUSD: the Lending-Liquidation Automated Market Maker Algorithm (LLAMMA), PegKeeper, and monetary policy.

LLAMMA: A Smoother Settlement Mechanism

Traditional lending protocols often have a severe impact on the market during the liquidation process. To mitigate this impact, crvUSD employs the LLAMMA algorithm, which allows for a more gradual liquidation.

crvUSD still adopts an over-collateralized issuance method, but uses a dedicated AMM to replace traditional lending and liquidation processes. When the liquidation threshold is reached, liquidation is not completed in one go, but is a continuous liquidation/de-liquidation process.

For example, borrow crvUSD by using ETH as collateral. When the value of ETH is sufficient, the collateral remains unchanged. When the price of ETH drops into the liquidation range, ETH will be gradually sold off. If the price of ETH rises, Curve will use stablecoin to help users repurchase ETH. During fluctuations within the liquidation range, the process of liquidation and deleveraging will be repeated continuously.

This mechanism is similar to the impermanent loss hedge after providing liquidity in AMM. Compared to one-time liquidation lending protocols, LLAMMA can retain more value for users during market rebounds.

Automatic Stabilizers and Monetary Policy

crvUSD uses the PegKeeper mechanism to maintain price stability. When the price of crvUSD is above 1 dollar, PegKeeper can mint crvUSD without collateral and deposit it into the stablecoin exchange pool to bring the price down. When the price is below 1 dollar, PegKeeper can withdraw some crvUSD liquidity to push the price up.

Monetary policy adjusts the system by controlling the relationship between the debt of the stabilizer and the supply of crvUSD. For example, when the debt/supply ratio is too high, parameters can be adjusted to encourage borrowing and selling of stablecoins; when the ratio is too low, it encourages repayment to increase system debt.

Potential Advantages and Considerations

The Curve team controls a large amount of veCRV voting power, which helps guide the liquidity between crvUSD and other stablecoin pools, providing support for the initial development of crvUSD. Additionally, Curve uses its own DEX price oracle, which may limit the range of assets available for collateral but also reduces oracle-related costs.

The introduction of stability fees and PegKeeper is expected to improve Curve's revenue situation. Since Curve lends based on trading, if the borrowing limits and liquidation thresholds for each token can be controlled according to liquidity, it can theoretically effectively prevent bad debts caused by delayed liquidations.