Understanding Curve Lend: Unveiling Its Liquidation Protection Mechanism

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Curve Lend (also known as Llama Lend) is a lending platform developed by the creators of the decentralized exchange Curve Finance. As of this writing, the service is fully operational on the Ethereum mainnet, as well as on Arbitrum and Fraxtal networks. New markets are being introduced in Optimism and Sonic.

Curve Lend allows users to borrow the stablecoin crvUSD using any token as collateral (and vice versa) through an innovative liquidation protection mechanism. Users on the platform can earn by providing loans.

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Curve Lend was created by the team behind the decentralized protocol Curve Finance. The project’s ecosystem also includes the Curve DAO governance token (CRV), the crvUSD stablecoin, and its yield-generating version, scrvUSD.

In late February 2024, the Curve Finance team launched the smart contracts for Llama Lend, and in mid-March, they unveiled the platform’s user interface.

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Liquidation protection is a process that automatically converts collateral into crvUSD if its value declines. Conversely, if the value increases, it converts back to the collateral asset.

This mechanism is based on the concept known as LLAMMA (Lending-Liquidating Automated Market Maker Algorithm), introduced in 2022 by Curve Finance founder Mikhail Egorov in the white paper for crvUSD.

The fundamental goal of LLAMMA is to provide users with a safer way to use cryptocurrency as collateral for loans and margin trading. Unlike traditional solutions that may partially or completely liquidate collateral when prices fall, LLAMMA automatically converts it into a borrowable asset to prevent such losses. If the collateral price rises, the system reverses the process and restores it to its original state.

Example: Bob deposits 1 ETH into the LLAMMA pool at an oracle price of $2000, evenly distributing collateral from $1900 to $1881 across five ranges.

When the AMM price reaches $1900, the liquidation protection mechanism triggers. The oracle price within the $1990 to $1980 range is $1899, and the LLAMMA pool price is $1897. The arbitrage profits in this range would be: ($1899–$1897) / $1899 = 0.1% ($2).

If the oracle price drops to $1880 within the $1900–1881 range, Bob’s 1 ETH gets converted into crvUSD.

When the AMM price rises above $1881, a de-liquidation occurs: crvUSD is converted back into ETH. At an oracle price of $1991 within the $1900–$1881 range, Bob’s stablecoins will be exchanged for collateral tokens.

“In contrast to typical lending platforms that immediately liquidate collateral upon price drops, Curve Lend gradually sells and repurchases it during price increases. This allows users to endure significant dips, whether lasting weeks or even years, depending on their risk tolerance,” commented Mikhail Egorov.

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Available markets are showcased on the main page of Curve Lend. These markets operate in isolation, meaning they receive collateral and provide loans in a single asset. Anyone can launch new markets as long as they have a suitable oracle.

To borrow an asset, users need to connect their wallet by clicking the Connect Wallet button and selecting a market in the Borrow tab, such as borrowing crvUSD against CRV.

For every market, the following information is displayed:

Users can enable Advanced mode to select anywhere from four to 50 ranges for their loans. When Advanced mode is off, 10 ranges will apply.

When providing collateral, users must specify:

Based on the chosen parameters, Curve Lend will calculate ranges, allocate funds, and issue crvUSD to the user.

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To provide liquidity in Curve Lend, users should go to the Supply tab on the main page of the platform.

For each vault, the following is displayed:

Curve Lend utilizes vaults that are compliant with ERC-4626 standards: they offer automatic yield generation without requiring the minting of rewards. Users receive shares upon depositing assets. These shares increase in value in line with interest rate fluctuations and can be transferred to other users.

To withdraw tokens from the vault, users need to navigate to the Withdraw tab. Curve Lend will burn the shares and convert them back into the base asset.