The growth of stablecoins over the last two years has been astonishing - growing from under $1 billion as of January 2020 to over $100 billion today. As we have come to learn from the LUNA/UST debacle, not all stablecoins are the same.
As the Curve Finance ecosystem considers its next project, the crvUSD project has grabbed the attention of defi investors. This article will explore some of the potential features and advantages of the crvUSD offering.
First, it’s important to note that the final set of features and token structure has not been revealed. The one feature that’s been determined is that $crvUSD will be an over-collateralized stablecoin; how it differs from other algorithmic stablecoins has yet to be determined.
To date, the $CRV ecosystem has demonstrated success in creating highly liquid pools by incentivizing the accumulation of tokens through a ‘flywheel effect’ where holders have their rewards boosted by (i) staking LP tokens to control $CRV emissions, (ii) earning trading fees, and (ii) boosting rewards through Convex without locking up $CRV tokens.
One proposed theory proffers a win-win-win for lenders, borrowers, and $CRV/$CVX holders. In this scenario, LP holders can deposit their tokens in exchange for LLAMA as a proof-of-liquidity receipt on Curve. Protocols would then bribe LLAMA liquidity to their pools to improve their liquidity. Ultimately, this would incentivize protocols to buy and lock up $CRV/$CVX to create additional pool liquidity – another mechanism to bolster the ‘flywheel effect’.
Another proposed feature is that the $crvUSD will have is a “novel liquidation mechanism”, according to Curve’s founder Michael Egorov, that no protocol in DeFi has implemented to date. Given that the primary feature of Curve’s ecosystem is low transaction fees, minimizing transaction spreads and fees on liquidations could provide an edge relative to competing platforms. Further, potentially allowing platform users to share in the liquidation fees would incentivize an additional use case for the ecosystem.
CRV emission bribes could also become a competitive angle for alternative protocols. Platforms could incentivize borrowing $crvUSD by providing their platform tokens as collateral and bribing $veCRV/$CVX holders to direct $CRV emissions to borrowers.
$crvUSD could be another value driver for $CRV by providing any additional trading option that drives value to $CRV. In essence, this would mean additional trading fees and emissions would be passed on to support and expand the $crvUSD supply, it’s likely that the emissions could be boosted to incentivize use. Fee subsidization for $crvUSD could create a unique value driver in relation to other stablecoins.
With $CRV emissions declining 15% each year and the Curve ecosystem still maintaining its dominance in onchain liquidity, the fight for rewards is likely to intensify. The introduction of $crvUSD is likely aimed to diversify revenue channels that accrue value to $CRV tokens in a more sustainable structure.
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Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Do your own research.