Reviewing $crvUSD's Liquidation Algorithm
Today, a proposal to deploy the $wstETH market for $crvUSD on Curve Finance passed, raising its debt ceiling from $10M to $150M - a 15x increase.
Effectively bringing the product into full swing, testing $crvUSD at scale. Is this LSD stablecoin any useful?
Let’s explore:
During the SEC drama against Binance and Coinbase early in the week, $ETH saw a price drop of 4% in 10 minutes, however, liquidation losses on $crvUSD loans only amounted to 0.6% on average, with the highest individual user loss at close to 0.8%.
*Charts from Curve Finance
Other lending protocols have implemented comparatively larger liquidation buffers that serve to incentivize and ensure profitability for liquidators to step in and close at-risk loans.
As seen thus far, crvUSD liquidations have yet to come remotely close to these levels.
Treatment of loan vaults has also commonly been harsh, with most protocols offering up the entire loan position for liquidation once LTV reaches its trigger, save for Aave which closes out 50% of the position each time.
Curve however, through its LLAMMA is able to softly liquidate positions across a price range, even restoring collateral should collateral price recover above the loan’s LTV threshold over time.
Curve’s Lending-Liquidating AMM Algorithm (LLAMMA) does this by spreading collateral into several bands of concentrated liquidity positions to be liquidated into crvUSD (and de-liquidated back into collateral) based on oracle prices.
This creates a much more forgiving loan environment for its users and allows for more efficient use of collateral especially in periods where price is keeping within a range over a period of time.
Interested parties may experiment with the LLAMMA at:
https://crvusd.0xreviews.xyz/
It is important to note however that soft liquidations are not the only kind of liquidation to happen on crvUSD.
In an event where price falls rapidly past a user’s liquidation range incurring material loss, hard liquidation kicks in, closing out the position entirely.
The difference here is that de-liquidation is no longer possible and liquidation losses may end up harsher (than what we’ve seen so far) on the borrower.
For now, how expensive this penalty is remains unknown until it is market tested or an estimate is offered by the team.
While the recent SEC’s news was harsh on crypto prices, it is far from the worst liquidation event crypto been through. How crvUSD holds up to events like these remains to be seen.
Regardless, with crvUSD and the LLAMMA, Curve Finance has opened up new grounds for lending market liquidation mechanisms, bringing about more possibilities and greater capital efficiency to DeFi.
As of right now, about 18 hours after launch, 4.32M of $crvUSD has been minted from the wstETH market.
Counting in crvUSD minted from sfrxETH, only 9.55% of the debt ceiling is being utilized so far.
For now, demand for crvUSD stays flat as it awaits utility.