From LLAMMA to Band, the most comprehensive knowledge about crvUSD

Original author: Poopman, a cryptocurrency researcher.

Translated by: Leo, BlockBeats.

crvUSD was launched a month and a half ago, and there may be many discussions and articles about it. This article, written by cryptocurrency researcher Poopman, is one of the more comprehensive and detailed ones. The article introduces crvUSD, LLAMMA, band, Uniswap V3 and LLAMMA, as well as the connection and stability of crvUSD. The following is a translation by BlockBeats:

crvUSD is the most hardcore stablecoin ever. When borrowing from CDP, there is no need to face full liquidation, and crvUSD introduces the LLAMMA mechanism, an algorithm that uses soft liquidation to reduce impermanent loss during large liquidation periods. Here is a very in-depth introduction to crvUSD.

crvUSD, a stablecoin, was launched about a month and a half ago. Among all the collateral currently available, sfrxETH was the first to be accepted for minting crvUSD, followed by wstETH and WBTC. So far, crvUSD has attracted over $67.9 million in TVL, and it is clear that user interest in stablecoins is continuing to grow.

What is crvUSD?

crvUSD is a type of CDP (Collateralized Debt Position, such as DAI), which allows users to deposit collateral and borrow crvUSD stable assets. So far, crvUSD accepts four types of collateral, including: sfrxETH, wstETH, wBTC, and wETH.

What is LLAMMA?

LLAMMA represents the lending and clearing AMM algorithm. Simply put, the model functions like an AMM, allowing for gradual soft liquidation of collateral portfolios instead of complete position liquidation.

To understand the working principle of crvUSD, we need to understand the model and its purpose. Next, we will explain soft liquidation and LLAMMA.

Soft Clearing

First, the user deposits sfrxETH or other collateral and borrows crvUSD at a collateralization ratio of over 117%. Then, LLAMMA converts the user's collateral into LP positions in a specialized AMM. As prices fluctuate, the user's crvUSD and sfrxETH ratio will change.

Use Case 1: sfrxETH Price Decline

When a user deposits sfrxETH to borrow crvUSD, the collateral is entirely sfrxETH. However, when the price of sfrxETH drops, LLAMMA converts a portion of the collateral into crvUSD, creating a collateral position that includes both sfrxETH and crvUSD.

Use Case 2: sfrxETH Price Rebounds and Rises

When the price of sfrxETH falls and enters the recovery phase, LLAMMA repurchases sfrxETH through crvUSD to restore the collateral to a full sfrxETH position.

This process is called soft liquidation, which is the process of temporarily rebalancing the collateral composition of users based on price fluctuations. So how is this "soft liquidation" actually implemented?

What is Band?

The "secret" behind the implementation of Soft Liquidation lies in a specialized AMM within a price range called "bands". A band is a price/liquidity segment, and users can choose the number of bands to allocate their collateral within the selected range.

In a band, there are upper and lower limits. 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 mint/borrow crvUSD, they need to choose the number of bands they want to store their collateral in. For example, if there are 5 bands in the 10 sfrxETH collateral deposit, each band stores 2ETH collateral for liquidation at a specific price.

Dynamic:

If you choose a higher range (such as N=30), it means that your collateral will be liquidated soon but the process will be slower. If you choose a shorter range (such as N=5), the liquidation will happen more suddenly but later compared to the higher range.

Uniswap V3 vs LLAMMA

Up to now, the entire AMM system may appear similar to Uniswap V3, but there are some key differences:

-Liquidity Concentration

-AMM Design

-Predictive Oracle Prices

流动性集中

translates to

Concentration of Liquidity

Uni V3: Users can customize their concentrated liquidity range.

Curve: Automatic liquidity aggregation around the internal price of the oracle.

Therefore, by sacrificing the user's customizability, liquidity depth near the price is deepened.

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 low, sell high". If the price drops, ni will own more crvUSD with 1. If the price rises, you will have more ETH.

Through this mechanism, crvUSD can reduce its exposure to ETH when the price falls, while also benefiting from the upward potential 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

-Arbitrage Incentive

ETH/USD External Price

The external price actually comes from four sources, which are:

Uniswap TWAP Oracle

Chainlink

TriCrypto

ETH/USD Exponential Moving Average (EMA)

This form of diversified data sources can reduce the manipulation risk that may occur when using a single data source.

套利激励

translates to

Arbitrage Incentives

in English.

The blue line represents the oracle price. The red line represents the AMM price of LLAMMA. In order to attract arbitrageurs to rebalance the fund pool faster than others.

The design of LLAMMA's AMM is such that the rate at which the price (in red) changes in the AMM is faster than that in Uniswap (in blue). When the ETH price in Uniswap drops, the price in the AMM drops even faster, creating opportunities for arbitrageurs to repay crvUSD and exchange ETH collateral.

Advantages: In the process of large-scale liquidation, liquidation can cause significant market volatility, resulting in significant impermanent losses for LPs. Through soft liquidation, assets can be gradually sold to avoid sudden liquidation and reduce impermanent losses.

Disadvantages: That being said, LPs may suffer losses during the constant rebalancing process (due to greater deviation). Additionally, during periods of high gas fees, arbitrageurs may not be incentivized as gas costs may reduce their profitability.

挂钩和稳定性

Hooks and Stability

LLAMMA is the first line of defense. However, in order to ensure the stability of crvUSD peg, Curve Finance has also prepared two peg mechanisms:

-Pegkeeper

-Interest rate

Pegkeeper

Pegkeeper: Similar to Frax AMO.

When crvUSD is greater than 1 US dollar, pegkeeper releases unpledged crvUSD to increase the supply.

When crvUSD is less than 1 USD, the pegkeeper destroys the minted crvUSD to reduce the supply.

Currently, there are 4 types of Pegkeepers that help maintain price stability.

Interest Rate

When crvUSD deviates from around 1 US dollar, it incentivizes/prevents users from borrowing. When crvUSD > 1 US dollar, the interest rate increases to encourage users to repay their loans. When crvUSD is less than 1 US dollar, the interest rate decreases to encourage users to mint and borrow.

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