Why is Curve Finance launching stablecoins?

Currently, the business situation of Curve is very unfavorable, and the revenue from DEX transactions will decrease significantly in 2023.

The decline in market value and demand of some large decentralized stablecoins (such as MIM, FRAX, UST, DAI, etc.) explains the downward trend in Curve's trading volume and revenue mentioned earlier.

Therefore, when events such as MIM decoupling or UST decoupling occur, the trading volume on Curve starts to decline sharply.

In addition, as mentioned above, DAI (currently the largest decentralized stablecoin) is not widely used on DEX, especially on Curve.

Based on the aforementioned trading volume, Curve only earned about $9 million in revenue for veCRV stakers in the first 6 months of 2023. At the same time, the current FDV of the CRV token is about $2.3 billion (calculated at a price of $0.7/CRV), which is excessive compared to the aforementioned revenue.

In the past, bribes (paying fees to projects holding veCRV such as Convex, Yearn Finance, StakeDAO, etc., for weighted voting) indirectly contributed to the need for accumulating CRV.

Bribes brought additional revenue to these projects. Then, the development team would find ways to accumulate more CRV.

In the current context, the attractiveness of Curve War has decreased because the current DAO no longer needs to promote Curve's liquidity by accumulating more CRV, CVX, or related tokens. This is reflected in the significant reduction in funds involved in bribery mentioned above.

This has led to a decrease in the attractiveness of Curve.

From the perspective of AMM revenue alone, Curve Finance still has a relatively high price-earnings ratio.

In 2022, the project's price-earnings ratio (calculated based on the annual average CRV price) will reach 1.

00 . According to annual income data provided by DefiLlama, the price-to-earnings ratio will reach 205.14 . Therefore, it can be seen that the current valuation of CRV is still quite high. In addition, there are currently a large number of CRV tokens being used as collateral, borrowing stablecoins on AAVE and other platforms. Furthermore, based on the current operating model, Curve Finance heavily relies on the price of CRV tokens to ensure a complete cycle. Due to decreasing AMM revenue and the aforementioned risks, Curve Finance has introduced crvUSD to increase project income and maintain a virtuous cycle of CRV tokens. Additionally, the circulating supply of CRV tokens is currently decreasing, so Curve will have to find a solution to ensure that CRV tokens and the project do not enter a negative feedback loop. Because when the price of CRV declines, the attractiveness of using CRV tokens for yield farming also decreases. The DAO will lose motivation to hold veCRV (or CVX, sdCRV, etc.) for liquidity mining. In fact, the trend of %veCRV is currently declining. This proves that the incentive to collateralize CRV is weakening. Therefore, stablecoins will be the solution to help Curve collect more fees and increase demand for CRV ownership. Currently, according to data from Token Terminal, the following project types have the highest absolute income (excluding blockchain) based on revenue calculations. -

 DEX

CDP

NFT Marketplace

Marketplace

Among the above products, Curve can choose to develop LSD or CDP based on the following factors:

• Decent revenue.

• Curve AMM is also a good infrastructure that can provide liquidity for collateral tokens like stETH, rETH, etc.

• Resources to utilize liquidity mining to increase the demand for mint token.

Curve chose CDP because it has higher revenue. LSD would have to distribute most of the revenue to ETH stakers (similar to Lido, where 90% of the revenue goes to stakers).

Therefore, Curve chose CDP because it has higher revenue and doesn't require building as much infrastructure related to staking hardware. Additionally, for LSD, the project would also have to share most of the revenue with stakers (similar to how Lido currently shares 90% of the revenue with stakers).

Therefore, for the same Total Value Locked (TVL), the CDP mode brings more revenue to Curve:

• CDP mode: Assuming a TVL of 1 billion USD and an annual interest rate of 1.5%, Curve has the potential to generate 15 million USD in revenue.

• LSD Mode: Assuming a total lock-up value of $1 billion, the product employs ETH collateral, with an interest rate of approximately 5.6%, and distributes 90% of the earnings to ETH collateral providers. Curve will receive $5.6 million, not to mention the significant costs associated with the collateral infrastructure.

Therefore, in November 2022, Curve published the crvUSD whitepaper, which was officially implemented by the end of May 2023.

Currently, the average interest rates for crvUSD collateral sfrxETH, wstETH, WBTC, and WETH are 3.89%, 4.95%, 4.55%, and 3.94%, respectively.

If crvUSD is fully minted up to the current debt ceiling (a total of 560 million crvUSD), Curve's annual income from stablecoins would be approximately $24.2 million (average interest rate of 4.33% - the average of the four aforementioned rates).

Therefore, although still in the testing phase (because the current debt ceiling is relatively low compared to the on-chain liquidity of the mentioned assets), the relatively calculated numbers show a significant level of potential income, which is very attractive compared to the past AMM sales.

Additionally, launching crvUSD can also revive Curve's voting activities and bring more demand for CRV.

If crvUSD can achieve a market capitalization of $350 million in 2023, the project's price-to-earnings ratio (relatively) remains quite high (approximately 137.09).

However, if crvUSD's development leads to Curve's AMM revenue recovering to the $500 million mark during the period from 2021 to 2022, its price-to-earnings ratio will be significantly reduced (approximately 44.64).

In short, the growth of crvUSD will make a significant contribution to the valuation of CRV and help the project maintain a positive cycle.

crvUSD's operation model

Operation Mode of crvUSD

Product Overview crvUSD

crvUSD is a new product of Curve Finance. It is a stablecoin that operates under a mechanism similar to MakerDAO or Liquity's CDP.

The difference between crvUSD and other CDP platforms lies in the process of collateral liquidation.

For example, when the price of collateral (such as ETH) reaches the liquidation threshold and the borrower fails to repay the debt, MakerDAO will auction off the borrower's assets.

After the auction process in MakerDAO is completed, the borrower will lose the collateral and cannot recover it.

As for crvUSD, when the collateral price reaches the liquidation mark, their assets will not be immediately liquidated (causing the borrower to lose the collateral). Instead, Curve Finance uses a mechanism called LLAMMA for a soft liquidation.

When the asset price rebounds (reaching the liquidation level), the borrower will not lose the assets. However, if the asset price surpasses a certain threshold, triggering a hard liquidation, the borrower's collateral will also be confiscated.

This mechanism will benefit borrowers by making their capital more efficient (the same amount of assets can borrow more stablecoins compared to other platforms like MakerDAO). Additionally, as analyzed above, Curve Finance will also have additional sources of income.

The product design details of crvUSD include various components: [specific product design details should be provided here, but they are not available].

Therefore, each part has its own responsibilities to ensure the stable operation of the system, including:

• LLAMMA is responsible for liquidating borrower's assets (to ensure that crvUSD always has sufficient collateral).

• The role of Peg Keeper is to stabilize the price of crvUSD (pegged to 1 USD).

• The Stable Pool is the main source of liquidity for crvUSD (allowing users to exchange crvUSD for other stablecoins such as USDT or USDC).

• Controller and monetary policy are responsible for managing loan interest rates to adjust the supply and demand of crvUSD. In addition, these two departments will work with Peg Keeper to ensure price stability of crvUSD.

LLAMMA

When users deposit collateral into Curve Finance to mint crvUSD, the assets will be sent to LLAMMA.

LLAMMA acts as an automated market maker (AMM) with two assets in each pool, crvUSD and collateral (such as ETH). This department is responsible for managing debt positions and liquidating collateral when the price reaches the liquidation threshold.

Unlike other CDP platforms with fixed price liquidation, LLAMMA gradually liquidates borrowers' assets within a certain price range (in case of price decline).

Assuming user A collateralizes ETH (current ETH price is $1,800/ETH) to borrow 1,000 crvUSD

Curve Finance will deposit ETH into LLAMMA and calculate the liquidation price range (assuming it is $1,200 to $1,500 in this example).

When the Ethereum (ETH) price is above $1,500, the user's borrowing position has not been liquidated. When the asset price fluctuates within the range of (1200 - 1500), the user's debt position will be gradually liquidated.

Specifically, if the Ethereum price fluctuates within this price range, the user's assets will be exchanged by LLAMMA between ETH and crvUSD (exchanged to ETH when the price rises, exchanged to crvUSD when the price falls, similar to the mechanism when providing liquidity in an AMM account).

The whole process is called a soft liquidation. Therefore, if the price rebounds above $1,500, all assets will be exchanged back to ETH. Conversely, if the price falls below $1,200, the user's entire position will be liquidated (at this point, the assetsThe content you provided contains HTML tags, so here is your translated text:

Crv will be replaced with crvUSD).

This process is very similar to users providing liquidity in Uniswap v 3 (Centralized Liquidity - CLMM) at a price range of $1200 - $1500.

However, due to Curve's oracle mechanism, users will suffer permanent loss (rather than temporary loss). This means that if the price of collateral (e.g. ETH mentioned above) fluctuates between $1,200 and $1,500 and rebounds above $1,500, the borrower's assets will incur minor losses.

This issue is caused by the participation of arbitrageurs. In LLAMMA, arbitrage traders ensure smooth soft liquidation and forced liquidation to secure collateral for crvUSD.

When the price of ETH (collateral) reaches $1,500 (market price obtained by Curve through a third-party oracle service - Chainlink), the oracle price in the LLAMMA system will be lower than $1,500.

Therefore, LLAMMA uses two independent oracles, where the oracle price in the LLAMMA system is more susceptible to fluctuations compared to the third-party oracle.

At this point, the user's collateral will enter a soft liquidation state. Arbitrageurs will buy ETH from LLAMMA at a price lower than the market price and sell it at the price of other liquidity sources, thus enjoying the price difference.

When the price rebounds, the oracle in LLAMMA will also give a higher ETH price than the market, thus creating conditions for arbitrageurs to buy ETH off-market and sell it in LLAMMA (to obtain crvUSD). In this way, when the price rebounds, only ETH (as collateral) will be in LLAMMA, and borrowers will no longer be subject to soft liquidation.

However, since arbitrageurs have profited from oracle arbitrage, when the price rebounds, the borrower's collateral will no longer be as valuable as before. This results in permanent losses for the borrowers.

These arbitrageurs are crucial for the crvUSD LLAMMA system as they act as liquidators. When arbitrage operations are stable, there is always enough collateral to secure crvUSD.

< strong > Anchoring Keepers (Peg Keepers) and Stable Pool < p dir = "ltr" > The Stable Pool can be understood as the original liquidity pool of crvUSD. Curve Finance has released 4 independent stable pools, including crvUSD and other stablecoins (USDT, USDC, TUSD, USDP). < p dir = "ltr" > In the case of stable and error-free operation of LLAMMA (arbitrageurs working normally and in a timely manner), the value of crvUSD will always have sufficient collateral. < p dir = "ltr" > However, the market price of crvUSD may fluctuate (depending on the amount of assets in the trading pool). At this time, the anchoring keepers will take over the task of keeping the market price of crvUSD close to 1 US dollar. < p dir = "ltr" > Note: there have been many stablecoins on the market that have deviated from the peg in a short period of time, but still have sufficient collateral. < p dir = "ltr" > Specifically, Peg Keeper is an intelligent contract developed by Curve for interacting with the Stable Pool. Peg Keeper can mint or burn a certain amount of crvUSD in the Stable Pool to ensure price stability: < ul style = "list-style-type: disc;" class = " list-paddingleft-2" >

When the crvUSD in the Stable Pool is greater than 1 US dollar, PegKeeper will mint more crvUSD and deposit it into the Stable Pool (one-way deposit). Due to the balancing mechanism of Curve's fund pool, the price will be pushed to the 1 US dollar mark.

On the contrary, when the crvUSD in the Stable Pool is less than 1 US dollar, PegKeeper will withdraw crvUSD (one-way withdrawal). Through the same mechanism, the price will also be pushed to the 1 US dollar mark.

Controller Monetary Policy

The Controller and Monetary Policy are two departments responsible for adjusting the crvUSD borrowing rate.

The crvUSD rate is calculated based on various parameters. You can find more detailed information in the project's whitepaper or refer to the simulated model of the crvUSD rate in the following tweet.

Generally speaking, the rate depends on two main factors:

• crvUSD price: When the crvUSD price is greater than 1 US dollar, the rate will decrease to encourage users to mint more crvUSD and sell it on the market to lower the price. On the contrary, when the crvUSD price is below 1 US dollar, the rate will increase to encourage buying crvUSD in the market to repay debts and thus push the price up again.

• PegKeeper- Debt-to-Total Debt Ratio: When this ratio decreases, interest rates increase, and vice versa. Basically, when PegKeeper's debt decreases, it means they need to withdraw crvUSD from StablePool (proving that crvUSD is below $1), so the interest rate must rise.

Therefore, both departments also serve as collateral for crvUSD.

Evaluating the Operational Model of crvUSD

The operational model of crvUSD aims to improve the capital efficiency of borrowers while not overly concerned with the liquidation risk of collateral.

As a result, with LLAMMA, the capital efficiency of crvUSD (expressed as the ratio of stablecoin to total locked value) will be higher than competitors (in theory).

Based on the data above, the collateralization ratio for generating DAI (currently the mainstream decentralized stablecoin) is 0.55, while the collateralization ratio for crvUSD is 0.7.

Apart from the surge in collateralization ratio for generating DAI in the second half of 2022, the average ratio of crvUSD has consistently been higher than that of DAI.

Currently, DAI is still backed by many stablecoins (if including risk equity assets such as government bonds) and a small amount of volatile assets (like ETH, WSTETH, or WBTC). Therefore, the crvUSD model has proven to be more efficient in terms of capital utilization.

Furthermore, the market value of crvUSD is approximately $82 million, with an average return of 4.33%, which means the product brings about $3.6 million in income to veCRV holders per year. And this number may further increase in the future.

However, when comparing our operations with MakerDAO, we can also see some drawbacks of crvUSD. Assuming an overload issue on the Ethereum blockchain or a failure of the oracle providing Curve Finance prices, this could pose risks in the liquidation process.

This would have a negative impact on the quality of collateral assets for crvUSD.

And the MakerDAO project has a Maker buffer, where the interest from DAI loans will be sent. This fund is used to cover any asset shortfall during the liquidation process (if any).

If the Maker Buffer does not have enough funds to repay the debt, MakerDAO will mint MKR tokens for auction to offset the debt.

As for crvUSD, the earned interest is directly distributed to veCRV holders. Therefore, Curve does not have a contingency plan for this situation.

Curve Finance also does not establish a general fund composed of operating income. All income is allocated to veCRV holders.

In the token economy of Curve Finance, only 5% of CRV tokens (about 165 million, worth $13.2 million, calculated at $0.8 per CRV) are used as community reserves.

Therefore, these tokens can potentially be used to compensate for potential losses when a black swan event occurs. However, in reality, Curve Finance does not have a compensation plan when risks actually occur, which is a drawback of this model.

For MakerDAO, the current value of the MakerDAO buffer is approximately $69.7 million (the MakerDAO buffer only contains DAI).

Furthermore, according to DefiLlama's data, MakerDAO's treasury also holds approximately $61.94 million worth of MKR tokens (price data updated until July 19, 2023).

Considering the liquidity factor of MKR tokens, according to DefiLlama's data, the total on-chain liquidity of MKR is approximately $25 million (updated until July 19, 2023).

Therefore, MakerDAO can offset risks of up to approximately $90 million in case of an unforeseen event.

Now let's take a look at 

However, currently, the on-chain liquidity of CRV is not sufficient to absorb the aforementioned selling pressure. This is one point where Curve is riskier than MakerDAO.

The largest liquidity pool for CRV has a value of only 27.2 million USD in ETH, and the total locked value of another pool on Uniswap v3 is less than 2.5 million USD.

One thing to note is that, compared to other projects, Curve has relatively low liquidation penalties. Therefore, Coin 98 Insights may conduct separate research articles on this topic in the future.

Is it possible to find investment opportunities through crvUSD?

Curve Finance is a project surrounded by many other affiliated projects. Due to its unique tokenomic model and significant influence on the DeFi market, Curve has become the foundation for the development of many other projects like Convex or Frax Finance.

During the Curve Wars in 2022, many projects' tokens also brought in significant profits by leveraging Curve Finance's veTokenomics model.

Therefore, if crvUSD has a significant market share in the stablecoin field, there may be development opportunities for related projects. This is possible because many projects aim to develop a strategy based on Curve and its ecosystem.

In fact, there might be even more projects revolving around Curve or related to it.

To monitor the development of crvUSD and find investment opportunities from this "narrative," we can observe the following indicators (in addition to conducting fundamental analysis on each project):

• The growth rate of crvUSD's market value needs to be considered, as well as the voting situation of liquidity pools related to crvUSD.

• The price of the CRV token and the prices of related tokens in the ecosystem (to understand cumulative demand and improve returns).

• The bribery situation of liquidity pools.

• DAO voting through Curve, paying attention to which projects plan to include stablecoins in liquidity pools (to earn CRV for the pool) and pair them with crvUSD.

• How implementing projects utilize Curve to bootstrap token liquidity (past projects like Terra and Frax spent a significant amount on bribery and accumulated CRV and CVX for their projects).

Overall, Curve Finance is the "DeFi OG" project in the market. In the past, it created a revolution in changing token economic models, leading to many projects now adopting veTokenomics.

Therefore, launching innovative and unique products like crvUSD could bring potential investment opportunities in the future.

Conclusion

Due to declining AMM revenues and facing the aforementioned risks, Curve Finance introduces crvUSD to increase project income. However, currently, CRV's on-chain liquidity is not abundant enough to fully absorb the selling pressure, which is a greater risk compared to MakerDAO.