crvUSD is a Curve launched collateralized-debt-position (CDP) stablecoin pegged to the US Dollar. It is launched on Ethereum as an ERC-20 token.
In the way it works, users deposit collateral in order to take a loan in crvUSD. Initially, it's expected that ETH will be accepted as collateral, similar to DAI by MakerDAO, and eventually, liquidity pool (LP) positions might be included as collateral options. A key part of the system is the liquidation process. LLAMMA, the proprietary technology from Curve, sets specific price bands to liquidate portions of the collateral instead of liquidating fully at a certain liquidation price. This mechanism means that as the price of the collateral falls, collateral is being sold for crvUSD. If the collateral value hits the liquidation point, there will already be enough crvUSD to cover the loan value, thereby averting a typical liquidation scenario. Conversely, when the price of the collateral recovers, crvUSD is converted back to the collateral posted.
That said, there have been concerns raised in the DeFi community that LLAMMA could potentially lock in losses for the user in the event of a large price swing. However, tests from Curve have shown that with a price swing of 10% below the liquidation threshold over a period of 3 days, only 1% of collateral was lost.
The creation of crvUSD is significant for Curve Finance because it could attract more liquidity providers to offer liquidity in Curve’s LPs, thereby achieving greater capital efficiency. The reduced risk of liquidations with LLAMMA may also appeal to more risk-averse users looking to incorporate elements of leverage in their DeFi strategy. Furthermore, the constant rebalancing of users’ collateral by LLAMA will generate more trading volume in Curve’s pools, producing more fees for the protocol and veCRV token holders. In addition, crvUSD loans will likely also incur borrowing fees, creating a new revenue stream for the protocol and their veCRV token holders. This is expected to reintroduce new capital to the protocol.
In summary, the launch of crvUSD could be a crucial catalyst for Curve Finance, enabling the protocol to stand strong against its competitors in the DeFi space.