crvUSD is a CDP-style stablecoin built on Curve, which allows users to mint it by depositing volatile collateral (e.g., ETH or liquid staked derivatives of ETH) and borrowing crvUSD against it. Unlike other overcollateralized stablecoins, crvUSD features a novel liquidation mechanism called LLAMMA (Lending-Liquidating AMM Algorithm). LLAMMA enables soft, continuous liquidations for borrowers as the collateral value falls in relation to the debt position, rather than complete, discrete liquidations typical on other platforms. This mechanism limits potential losses faced by the borrower and reduces the risk of bad debt for the protocol.
For instance, when a borrower deposits ETH collateral and borrows crvUSD, the collateral remains in ETH. However, if the price of ETH declines, the protocol gradually converts a portion of the collateral to crvUSD. If the price recovers, the cash can be used to re-collateralize or “de-liquidate” the borrower's LP position by repurchasing ETH using crvUSD. If the price of ETH falls significantly and the collateral approaches the liquidation threshold, the entire collateral position may be converted into crvUSD to cover the borrower's debt.
LLAMMA's specialty-AMM is similar to Uniswap V3 pools, where liquidity can be concentrated across segments or intervals (referred to as bands on Curve). The key difference is that Uniswap allows users to specify their concentrated liquidity ranges, whereas Curve algorithmically concentrates liquidity around an internal oracle price.
