crvUSD: Projections for Curve’s Decentralized Stablecoin

Introduction

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In June of 2023, Curve Finance, a crucial piece of DeFi’s liquidity infrastructure, began offering crvUSD. A collateralized debt position (CDP) based stablecoin, crvUSD’s “soft” liquidation mechanism offers a more borrower-friendly alternative to existing CDP stablecoin models. Borrower collateral is distributed over a range of prices rather than having a single liquidation price. As the price of the collateral moves, the collateral is gradually converted between crvUSD and the collateral asset to maintain a healthy loan-to-value ratio (LTV).

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Like any other CDP, crvUSD borrowers begin by putting up collateral, currently in the form of wstETH, WBTC, ETH, sfrxETH, and tBTC. New collateral types can be introduced via $CRV governance. The minting and position management process is detailed as follows:
- User deposits collateral (e.g., ETH), borrowing crvUSD against it (up to ~85% LTV) and specifying their number of price bands
- Collateral is spread across those price bands in LLAMMA (Lending-Liquidating AMM Algorithm)
- If the price of ETH decreases against the price of crvUSD, a position automatically enters soft-liquidation mode, automatically converting some of the ETH to crvUSD
- If the price of ETH increases against the price of crvUSD, the opposite occurs; collateral is reclaimed by converting crvUSD back to ETH

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This soft liquidation process is one of the key improvements over traditional CDP-based protocols. Other protocols define a single liquidation point based on LTV. Curve’s soft liquidation process is entirely passive, with loans automatically managing themselves. Users can improve loan health by repaying crvUSD, but not by adding new collateral.

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If a loan’s health drops below 0%, it becomes eligible for hard liquidation. This process sells off the remaining collateral and only occurs in more severe price fluctuations. Peg Keepers help throughout this process by minting new crvUSD and absorbing debt in crvUSD to keep the price at parity with various USD stablecoins (USDC, USDT, TUSD, USDP).

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Borrow rates paid by crvUSD minters to collateral lenders help to incentivize ample liquidity. Fees generated by crvUSD pools and Peg Keepers are distributed to veCRV holders, driving value back to the original governance token and integrating it more closely within the broader Curve ecosystem. This system holistically offers a decentralized alternative to popular stablecoins today - with the potential to meet demand at scale in the right market conditions.

Methodology

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Using on-chain data, we attempted to project different scenarios for collateral liquidity over the next 5 years. Our growth projection started with the current annual growth rate derived from a linear regression analysis of historical data. Recognizing the potential for market maturation and diminishing returns over time, we conservatively adjusted the growth rates for future years. Instead of applying the historical growth rate uniformly across the next five years, we reduced the growth rate by 15% each year, due to our belief that collateral (denominated in ETH) will continue to grow, albeit at decreasing rates in later years.

Three core scenarios were considered, bear, bull, and base. The base case uses the models as is while the bull and bear cases have multipliers to account for varying biases.

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To account for the potential addition of new collateral types, a bucket for miscellaneous collateral was included as a percentage of the total - starting from the year one projections and increasing slightly every year. These projections help paint a picture of where crvUSD could stand among the stablecoin wars in the future.

All told, our projections show total crvUSD TVL somewhere between about ~375,000 and ~1.5m ETH ($907.5m - $3.63b at current ETH prices) across the three primary scenarios after five years. With a current overall loan-to-value ratio of 61% (derived from crvUSD supply/TVL), the crvUSD market cap will sit somewhere between ~230,000 - 915,000 ETH ($557m - $2.2b). Compared to today’s stablecoins, this would put crvUSD somewhere between fifth and eighth place by market cap (currently sitting at number 18).

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The bulk of the growth on a percentage basis is expected to occur in the next year, given crvUSD is still a young stable coin (first launched in May 2023). Yearly growth is projected to be somewhere between 68% and 130%, with the later years showing no more than 30% growth even in the most bullish scenario.

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The largest collateral type is currently WBTC, with wstETH closely behind. However, due to WETH’s rapid growth since its addition, it’s expected that it will overtake all other collateral types between years two and three, despite it being the second smallest currently. wstETH currently makes up for over twice as much liquidity in crvUSD than sfrxETH - yet the two are expected to reach parity and even have sfrxETH overtake wstETH in the bull case due to wstETH’s low growth.

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The miscellaneous collateral bucket models the addition of new collateral types as 5% percent of the total. crvUSD first went live with only wstETH as supported collateral - nine months later four additional assets have been added, we expect more to be added as the system matures and more assets present themselves as viable options.

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The projections above attempt to paint a picture purely in ETH terms, with scenarios we viewed as realistic bull/bear cases. However, a more comprehensive range of multipliers and accounting for changes in ETH price can help provide a more nuanced range of projections, where different biases against both crvUSD and ETH can be considered.

The exhibit above sensitizes the base case multiplier (ie, multiple of base case growth rate) and projected year 5 price of ETH. Assuming our base case (1.0x multiplier) and a year 5 ETH price of $3,000 would imply collateral backing crvUSD of $1.8B. A 0.5x multiplier (growth rates half of what’s assumed in the base case) and ETH price of $2,000 would imply $611M of collateral backing crvUSD in 5 years - only a ~3.5x increase from today in USD terms. A more optimistic view with growth rates of 3x our base case and ETH at $8,000 would imply $14.6B of collateral backing crvUSD in 5 years - almost a 9x increase.

Considerations

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While our findings present an interesting view into what crvUSD could look like years from now, they only provide a small portion of the overall picture. The growth of DeFi overall can be unpredictable and volatile, with myriad innovations and regular exploits that can drastically change the status quo.

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In addition, growth models on systems as young as crvUSD can be incomplete, due to the rapid early onset growth followed by diminishing returns in the years following. We tried our best to model this in different scenarios, but at the end of the day, growing a stablecoin from $10m to $100m is a drastically different challenge from growing it from $100m to $1b. New collateral types, changes in existing ones, changes in the rest of the stablecoin market, and more are all external factors that could alter the rate of growth observed in crvUSD.

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