Title: crvUSD Stablecoin Depeg Coverage Activation
Scope: New Cover Product Offering
Authors: Jas Singh, Sujith Sizon, Vithuran K.
Summary
Web: https://crvusd.curve.fi/#/ethereum/markets
Twitter: https://twitter.com/curvefinance
Telegram: Telegram: Contact @curvefi
Curve Finance has issued their own protocol native stablecoin competing with the likes of Maker’s DAI and Aave’s GHO stablecoins. CrvUSD is a unique twist on overcollateralized stablecoins.
Stablecoin Mechanics:
The crvUSD stablecoin is a crypto collateralized stablecoin meaning every crvUSD is backed by an overcollateralized position of a crypto asset. In this case, the collateral of choice is sfrxETH and wstETH. sfrxETH is a liquid staking derivative representing staked ETH through Frax’s vault. In other words, sfrxETH is Frax’s answer to Lido’ss stETH. Users can deposit ETH into the Frax ETH vault to earn up to 6.5% from staking their ETH with Frax Validators. wstETH is a wrapped version of Lido Staked Ether which accumulates staking yield from Lido’s network of validators.
Other forms of collateral are open to consideration by the Curve DAO.
What makes crvUSD unique is their low health risk threshold, and their soft-liquidation module.
CrvUSD allows users to have a health factor of 110% without being liquidated. This allows users to borrow up to 90% of the value of their collateral in crvUSD. Whereas other platforms like Compound and Aave generally require a health factor of 150%.
Another difference between other overcollateralized stablecoins is how the liquidation mechanism is structured. When a CDP’s health factor drops below 110%, the position enters a soft-liquidation mode. If the collateral price continues to fall, the system automatically sells off portions of the collateral for crvUSD. The soft liquidation is bound by bands of price for the collateral, each band selling off more portions of collateral for crvUSD. Curve introduces a novel AMM which handles the partial liquidations. Lending-liquidating AMM Algorithm or LLAMMA is an AMM for liquidating bad debt from lending markets while making the least market impact as possible. The soft-liquidation module is a better liquidation engine than traditional liquidation engines since the partial sales of collateral allow for less volatile price movements in sfrxETH, wstETH, and crvUSD; which lead to more stable crvUSD prices.
Other Risks
When a CDP enters soft-liquidation mode, users will not be able to top up collateral or withdraw. By design, it is impossible to adjust collateral even when not in soft-liquidation mode. Once the collateral is deposited and crvUSD is minted, it’s up to users to manage their CDP. The only interaction which is allowed by the smart contract is to self-liquidate the entire position. When a CDP has already entered self-liquidation mode gradually increases in price, the LLAMMA will sell crvUSD back to the market to purchase the collateral used - the opposite of when the collateral price continued to decline after entering self-liquidation mode. However, since LLAMMA is based on an AMM, there are additional risks where the principal deposited as collateral will not fully be made whole during the liquidation and de-liquidation process due to slippage and impermanent loss.
Risks in sfrxETH and wstETH
When users deposit ETH into the frxETH vault, corresponding frxETH tokens are minted. The frxETH vault is an LSD of staked Ether which too generates yield. ETH that has been deposited into this vault is used to run ETH validator nodes operated by Frax ETH validators. To automatically accrue staking yield, users can deposit their frxETH into the sfrxETH vault which exchanges frxETH to sfrxETH 1:1. sfrxETH utilizes the ERC-4626 standard which is generally a safe method of auto-compounding yields in vaults. Over time, Frax ETH validators will mint frxETH using their staking rewards to allow sfrxETH holders to redeem their frxETH. This also means the price between sfrxETH and frxETH deviate based on accumulation of rewards over time. Currently Frax ETH validators are earning an estimated 6.51% APY. More information on the performance of Frax ETH validators can be found here: https://www.rated.network/o/Frax?network=mainnet&timeWindow=1d
Wrapped Staked Ether operates on a similar principle of having Ether staked but also liquid. The key difference here is that sfrxETH is an auto compounding vault using the ERC-4626 standard, whereas wstETH is just stETH that is wrapped allowing it to easily integrate with DeFi protocols. Similar to how WETH is used in DEX trades vs ETH, wstETH allows for better composability. In terms of security, wstETH operates on the same premise of any wrapped token and is generally safe to interact with. ETH deposited on Lido, mints stETH for the user to hold in their wallet. stETH accumulates ETH rewards which are generated from Lido’s network of ETH validators. As a single entity, Lido has the largest network penetration out of any other entity, with 195k validators averaging 4.88% APY. More information on the performance of Lido ETH validators can be found here: https://www.rated.network/o/Lido?network=mainnet&timeWindow=1d&viewBy=operator&page=1
Coverage:
Premium: 1.35% APY
Policy Terms:
Stablecoin Depeg coverage will follow the same guideline found in our Gitbook. The policy will cover losses on the following conditions:
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the loss is a direct result of crvUSD trading below the threshold TWAP of $0.88 USD in at least a 10 day window
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the claim is submitted during the cover period or within 7 days after the cover expires
Conclusion and futher steps:
Curve’s novel LLAMMA model makes the stability of crvUSD superior than its counterparts. However, since sfrxETH is a relatively new ETH LSD compared to stETH, the risk of crvUSD depegging must factor in smart contract risks of the sfrxETH vault. Even though smart contract risks exist, it is very minimal because of the adoption of ERC-4626 standard which is a safe and tested token standard. Furthermore, there aren’t any external integrations of frxETH or sfrxETH outside of the Frax ecosystem besides crvUSD. This greatly reduces attack surface.