Curve Stablecoin Mechanism Explained: How Internalized AMM Prevents User Liquidations?
TechFlow Selected TechFlow Selected
Curve Stablecoin Mechanism Explained: How Internalized AMM Prevents User Liquidations?
Curve launched their stablecoin today, called LLAMMA (Lending and Liquidating AMM Algorithm).
Navigating Web3 tides with focused insightsWritten by: Ignas.lens
Translated by: TechFlow
Today Curve launched their stablecoin called LLAMMA (Lending-Liquidating AMM Algorithm). How exactly does it work? This article will help you quickly understand the mechanism.
The current problem with CDP (collateralized debt position) stablecoins is that under-collateralized positions must be liquidated to maintain the peg.
Partial liquidations help, but they have two issues:
1. Expose CDPs to bad debt;
2. Punish users through liquidation;
Curve's core is a continuous liquidation or de-liquidation AMM. This lending-liquidating AMM converts between collateral (ETH) and the stablecoin. So when collateral price is high, users deposit fully in ETH, but as the price drops, ETH gets converted into USD.
To explain the chart: Pcenter is the price at which liquidity is formed. When the ETH price reaches Pcu, the AMM converts collateral into USD. When the ETH price rises and reaches Pcd, the AMM’s collateral is converted back fully into ETH.
This model prevents positions from being liquidated (they are simply unwound), and eliminates risk of bad debt. (By the way, does this mean the collateral is exposed to impermanent loss?)
Another important point is that LLAMMA uses ETH/USD as its price feed, while $crvUSD can trade above or below the peg. If the price trades above the peg, crvUSD will use an automatic stabilizer (similar to Frax’s AMO).
This automatic stabilizer (PegKeeper) mints crvUSD and deposits it directly into Curve pools. It increases crvUSD liquidity and generates trading fees.
If the price falls below the peg, crvUSD is withdrawn from the pool and burned, reducing the total supply of crvUSD.
Some may dislike this because it places more responsibility/risk on collateral holders—by internalizing the AMM, there could be risks of a death spiral.
Additional notes:
1. Not explicitly mentioned in the whitepaper, but it seems the “stablecoin” they have in mind is crvUSD itself. Therefore, in my understanding, LLAMMA could support USDT/crvUSD, USDC/crvUSD, or even 3pool/crvUSD pools.
2. There is no mention of $CRV anywhere.
Join TechFlow official community to stay tuned
Telegram:https://t.me/TechFlowDaily
X (Twitter):https://x.com/TechFlowPost
X (Twitter) EN:https://x.com/BlockFlow_News
Ignas | DeFi Research
