CrvUSD Proposal Aims to Increase Rates and Restore $1 Peg

The Curve community is currently voting on a proposal to raise interest rates for its decentralized stablecoin, crvUSD, in a bid to restore the token’s peg.

A Nov. 21 governance proposal advocates for increasing the protocol’s interest rate multiplier from 5.8% to 11% for Ether and BTC tokens and from 8.6% to 15% for staked ETH. The author estimates the changes would facilitate borrowing rates ranging between 0.1% and 15% for staked ETH and from 0.07% to 11% for ETH and BTC.

The move is intended to drive the price of crvUSD back up to $1 in response to the token trending toward $0.99 throughout November, according to CoinGecko. The token last changed hands for $0.9927.

Voting began two days ago and will remain open until Nov. 28. The proposal has garnered unanimous support so far, although few votes have been cast.

Decentralized stablecoin landscape

The proposal comes as the decentralized stablecoin sector is shaking up.

DAI, the third-largest stablecoin with a $5.3B market cap, has fallen out of favor among many decentralization devotees due to its heavy reliance on centralized collateral assets, creating opportunities for other stablecoins boasting decentralized backing.

Curve sought to step up to the plate with crvUSD in May, allowing users to mint the token against assets deposited to the protocol. CrvUSD now ranks as the 16th-largest stablecoin with a $156M market cap.

Aave also sought to cash-in with the launch of its GHO stablecoin in July, which similarly allows Aave users to mint the token against deposits. However, GHO’s adoption has been hindered by its poor price performance, with the token trading near $0.96 in recent weeks.

GHO’s price continued to trend downward despite the Oct. 31 launch of a “liquidity committee” tasked with managing GHO’s on-chain liquidity to restore its peg. GHO ranks 30th among stablecoins with a $32.4M market cap.

FRAX remains the second-largest decentralized stablecoin with $669M market cap, ranking it eighth overall. FRAX transitioned from a partially algorithmic design to embrace full collateralization following a governance vote in February.

Liquity’s LUSD token ranks as the 12th-largest stablecoin with $210M despite suffering an 86% drawdown from its 2021 highs. The token has posted modest growth of 15% since the year began, but has tumbled 27.5% in three months. Despite boasting a highly decentralized design, LUSD’s high and inefficient collateral requirements hinder its adoption.

Prisma’s liquid staking token-backed mkUSD rocketed through the stablecoin ranking following its Sept. 1 launch, currently ranking 13th with a $166.7M valuation. However, its growth was propelled by native token incentives, meaning the sustainability of its high market cap remains to be seen.

Alchemix’s ALUSD also remains a contender, ranking 14th among stables with a $166.6M capitalization. However, with the token minted through long-term self-repaying loans, its niche design serves as a barrier to widespread adoption.

CrvUSD volume surges

CrvUSD recently enjoyed a surge in volume coinciding with a spike in soft liquidations suffered by crvUSD holders.

The protocol’s LLAMMA liquidation mechanism gradually converts a user’s collateral assets into stablecoins when a position approaches its liquidation price, and automatically convert the user’s assets back to the original collateral as prices rise. The system is designed to mitigate the impact of liquidation on borrowers, but incurs a small cost to users in the form of slippage and trading fees.

Data from Dune Analytics shows crvUSD volume on Curve jumping from a few hundred thousand throughout most of October to several million over the past four weeks. Total trading volume similarly spiked from between $3M and $10M in early October to between $8M and $67.6M during the past 30 days, including an all-time high on Oct. 24.

DefiMoon, a popular web3 analyst, estimated that LLAMMA liquidations accounted for half of the token’s daily volume on several occasions this month.

CrvUSD ranks ninth among stablecoins by 24-hour volume with $40M, according to CoinGecko. DAI is the only decentralized token ranked above it, coming in sixth with $313M.