Curve And Llamalend — Founder Explains Liquidation Innovation

Key Takeaways

• Curve Finance introduced the veCRV model in 2020, pioneering a governance and incentive mechanism.
• LlamaLend has received positive attention because of its soft liquidation mechanism.
• Curve founder Michael Egorov discusses these features and plans with CCN.

Curve Finance is a leading Decentralized Finance (DeFi) platform known for pioneering vested token models to better align user incentives and distribute rewards more fairly.

One of its standout lending markets, LlamaLend, has recently attracted attention for its innovative soft liquidation mechanism, which helps protect users from sudden market swings.

In this interview, Curve founder Michael Egorov breaks down how LlamaLend works—and shares his perspective on what it means for the future of decentralized finance.

Curve’s Resupply Launch

Resupply is a decentralized stablecoin built by contributors from Convex and Yearn. It is backed by Collateralized Debt Positions, which can be borrowed against crvUSD.

The protocol leverages both Curve’s Llamalend and Frax lending markets.

Resupply maximizes yield returns by having the borrowing rate be half the lending rate or half the risk-free rate of two percent, whichever is greater.

Resupply also benefits CRV and vested CRV (veCRV) holders by increasing the protocol’s revenue.

Resupply significantly boosted Curve’s Llamalend Total Value Locked (TVL) and increased the crvUSD supply.

The LlamaLend TVL increase is exciting since it has recovered admirably and is close to its all-time high.

Its performance starkly contrasts with the Curve Protocol, which is nowhere close to its all-time high.

The difference in CRV (blue) and veCRV (orange) growth reflects this. The decline of veCRV has reduced its dominance relative to CRV.

Nevertheless, the ve-tokenomics model promotes long-term alignment through token locking for governance and rewards, unlike buy-and-burn, which passively reduces supply.

veCRV consistently locks more tokens than burning would remove, making it a more sustainable model for DeFi.

LlamaLend’s Soft Liquidation

LlamaLend has made the rounds recently through its soft liquidation mechanism, which is advantageous compared to other protocols for opening leveraged positions.

LlamaLend is Curve’s native lending market that uses crvUSD. It has its own unique LLAMMA (Lending-Liquidating AMM Algorithm) model.

Compared to traditional lending, where capital is idle and gets liquidated if its value drops too much, LLAMMA trades your collateral actively based on price movements.

LLAMA works by selling a portion of your collateral to repay your loan once it starts declining, preventing it from becoming undercollateralized.

Afterward, it can rebuy the collateral if the price moves in your favor, restoring the original position.

Most of the capital in LlamaLend is in crvUSD, while the protocol operates mainly on the Ethereum blockchain.

While great against sudden market movements, this mechanism runs the risk of depleting your collateral little by little through extensive buying and selling during market chop.

So, while the users do not immediately lose their collateral, it can be depleted while fees and slippage gradually eat at it.

In low volatility environments, a position could stay in the Liquidating Protection Zone (LPZ). A position would only suffer cumulative losses and possibly get liquidated if the market is choppy and the position is in the LPZ while the user does not take any action.

Michael Egorov Discusses the Mechanism

In an exclusive interview with CCN, Curve founder Michael Egorov discussed the novel liquidation mechanism.

Egorov stated that there are two fundamental differences between Curve’s liquidation mechanism and those of other DeFi platforms, such as Aave or Compound.

Firstly, the mechanism is smoother and more scalable, providing efficiency bonuses. The second is much more significant since the mechanism is reversible, protecting against abrupt price declines.

Egorov stated that Curve’s model has a significant edge against other similar platforms:

LLAMMA handles liquidation in a smoother, gradual fashion, which means we can support higher loan-to-value ratios. That’s a big plus when it comes to capital efficiency.

More importantly, we have the concept of de-liquidation, which is unique in itself. By giving borrowers a safety net, Curve makes the entire borrowing experience more forgiving and user-friendly. 

In the future, Egorov said the focus will be on explaining things more clearly so users can adequately grasp the benefits they receive from LLAMMA while expanding the model into more advanced structures such as rehypothecation.

Finally, Egorov stated that CRV holders benefit from the LLAMMA mechanism. CRV directly benefits from crvUSD fees, and LLAMMA’s unique liquidation approach makes borrowing more attractive, creating tangible returns for CRV holders.

Innovative Liquidation Mechanism

Curve’s LLAMA mechanism offers a novel mechanism for liquidation, which is smoother and reversible.

Compared to other DeFi platforms, it improves capital efficiency and borrower protection.

This has made borrowing more attractive, driving crvUSD adoption and providing value to CRV holders.