The cryptocurrency lending market has seen remarkable innovation and growth with up to $50B in TVL in august 2022 and sitting today around $30B, starting from modest peer-to-peer lending schemes to the sophisticated lending platforms that define today's landscape.
Two of the most significant players in this evolution have been Compound and AAVE, which pioneered the automated, trustless borrowing and over-collateralized lending mechanisms that are fundamental to DeFi.
Emerging from this well-established groundwork, the latest venture in the sector is LlamaLend. This new platform sets itself apart with three distinctive features: a soft-liquidation mechanism provided by the LLAMMA system, risk-isolated markets, and liquidity gauges. Will these innovations be sufficient for it to rise to the top of the lending industry?
Source : Curve Lend UI
What is Llamalend ?
Curve Lending provides a flexible lending solution where users can borrow crvUSD against any collateral token or vice versa. It features a soft-liquidation mechanism powered by LLAMMA that enhances the safety and efficiency of overcollateralized loans, improving both risk management and the user experience. This protocol is a spin-off and generalization of the mechanism behind crvUSD.
Risk Isolated markets and liquidity gauges
The platform offers multiple single-collateral markets where loans are made in a specific asset. Each market operates independently, and new markets can be created by anyone at any time, provided there is an appropriate price oracle. However, markets eligible for CRV rewards require a Liquidity Gauge approved by the Curve DAO and must receive sufficient gauge weight from veCRV holders, which influences the Reward APR based on the user’s boost factor.
Source : Silopedia
Soft liquidation
Borrowers take over collateralized loans and can manage their risk by selecting the number of bands for their collateral. These bands represent ranges for soft-liquidation, allowing for gradual trading of collateral to manage loan health effectively. Fewer bands mean a higher loan-to-value ratio but more aggressive trading during price drops, while more bands provide a buffer but dilute potential borrowing power. The novel mechanism of soft-liquidations not only mitigates the risks associated with price fluctuations but also allows for rebalancing collateral based on market conditions, providing a more stable and less stressful experience for borrowers compared to traditional hard-liquidation practices on other platforms.
Soft-liquidation example with a single band in an ETH/crvUSD LLAMMA market, source : Curve’s docs
Lending and liquidity incentive, the perfect combination
Isolated markets and soft liquidation are critical topics, yet the importance of liquidity gauges in lending markets is often overlooked. These gauges serve as a powerful tool to attract liquidity by allowing voters—and those incentivizing them—to capitalize on discrepancies between supply and demand across various markets. This mechanism is facilitated by the established tokenomics, enabling Curve stakeholders to bootstrap and/or subsidize high potential markets. The permissionless nature of LlamaLend further enhances this feature by allowing protocols to attract interest to their tokens by establishing their own lending markets and incentivizing participation through CRV emissions.
crvUSD blackhole
Moreover, an essential aspect of LlamaLend is its strategic use of crvUSD. By requiring the use of crvUSD, Curve aims to stimulate demand for its stablecoin, thereby offering users new utilities and sources of income. Furthermore, this strategy establishes crvUSD as debt denomination, which is the holy graal for every stablecoin, thereby strengthening its utility, creating durable sinks for more supply to be minted organically.
The liquidity gauges make LlamaLend an attractive venue for depositing crvUSD. For newcomers, the competitive yield relative to other lending markets are likely to increase demand for crvUSD. This creates a self-reinforcing cycle: as demand for crvUSD grows, it boosts revenues for veCRV holders, enhancing the value of holding CRV and leading to appreciation of CRV. This appreciation increases the value of CRV emissions, making LlamaLend's gauges even more appealing to new users, thereby continuously driving up demand for crvUSD.
Update on crvUSD
It has been nearly a year since the launch of crvUSD, which we initially discussed in Weekly Gauge #46. At that time, its supply was just 10 million, and the market was still determining whether the product was robust enough to compete with the top stablecoins. Fast forward to today, crvUSD boasts a supply exceeding 125 million and has proven to be one of the most resilient stablecoins, particularly in terms of maintaining its peg over the past year.
Source : Curve Monitor
The most remarkable aspect is undoubtedly how a consistent supply of only 100 million has accounted for more than 50% of Curve's revenue. This product has become a significant revenue generator, allowing Curve to maintain its leading position in the industry. This is precisely why LlamaLend is such a valuable addition to the Curve ecosystem, as it enhances every facet of the ecosystem. It scales the utility of veCRV by enabling liquidity gauges, extends the soft liquidation process from crvUSD to the lending markets, and all of this is fueled by crvUSD, which then promotes the growth of the stablecoin as previously mentioned. But also by acting as a supply sink for crvUSD, increasing its stability. As the borrow rates become more attractive, it draws more users to bolster the supply.
Source : Curve monitor
Conclusion
LlamaLend is a potentially transformative player in the lending market, poised to challenge the dominance of established platforms, especially in the niche of leveraging. Moreover, LlamaLend's strategic use of crvUSD not only bolsters the utility and demand for the stablecoin but also reinforces the entire Curve ecosystem by integrating liquidity measures that enhance user experience and DAO’s revenue. This synergy could well make LlamaLend a pivotal force for the Llamas.