CrvUSD is facing pressure to decouple. How does the founder of Curve respond through new proposals?

Author: Jiang Haibo, PANews
Following Aave’s GHO, Curve’s crvUSD also failed to withstand the pressure and experienced a slight decoupling.
On November 21, Curve founder Michael Egorov put forward a proposal in the governance forum, hoping to significantly increase the base interest rate (interest rate multiplier) of crvUSD rate0 to bring the price of crvUSD back to $1. As of 14:46 on November 28, Beijing time, voting on the proposal has ended on Curve DAO, with a support rate of 100%.
According to data from CoinMarketCap, crvUSD’s lowest price in the past seven days was around $0.99 and is currently at $0.996. Since the price of this type of stable currency is softly linked to 1 US dollar, when the price is higher than 1 US dollar, arbitrageurs will borrow crvUSD to sell in the market; when the price is lower than 1 US dollar, although there are also arbitrageurs to buy and wait for it to return to 1 US dollar, USD, but depending on the decoupling of stablecoins such as GHO, buying below $1 may not necessarily be effective. If there is no expectation that the price can be pegged to $1, users may not dare to hold this stablecoin for a long time.
On November 21, Curve founder Michael proposed a proposal at the Curve Governance Forum, hoping to adjust the interest rate multipliers in all crvUSD markets to better manage the peg of crvUSD to the U.S. dollar and the health of the entire lending market. To put it simply, by increasing the basic interest rate, users are encouraged to repay their loans, so that crvUSD can get rid of the current unfavorable situation of decoupling by about 0.5%.
crvUSD uses dynamic interest rates. These interest rates will be adjusted according to market conditions. The interest rate formula is as follows:
rate=rate0×exp(depeg/sigma)×exp(−pegkeeper_filling/(total_debt×target_f))
What Michael wants to adjust this time is the base interest rate rate0. Before the proposal takes effect, the base interest rate for the non-pledged ETH and BTC markets is 5.8%; for pledged ETH, the base interest rate is 8.6%. Michael hopes to increase the basic interest rate in all crvUSD markets. For non-pledged ETH and BTC, the basic interest rate will be increased to 11%; for pledged ETH, the basic interest rate will be increased to 15%.
In practice, before the proposal takes effect, the lending interest rate of crvUSD is 6.97% for non-pledged ETH, and the interest rates for pledged wstETH and sfrxETH are 11.3% and 11.86% respectively. After taking effect, with other parameters remaining unchanged, the lending rate of ETH will rise to 13.2%, and the lending rate of wstETH will rise to 19.7%.
But the final interest rate changes dynamically, and it does not only depend on the basic interest rate, but also depends on the price performance of crvUSD and the debt ratio of PegKeeper (pegged to the guardian). Each parameter affects each other. Currently, it is precisely because of the decoupling of the crvUSD price that the interest rate is higher than the base interest rate, and PegKeeper's debt is also zero.
The proposed impact on interest rates is expected to develop as follows:
First, the crvUSD lending rate is increased by adjusting the basic interest rate;
Under the pressure of high interest rates (such as wstETH annualized rate of 19.7%), lending users buy crvUSD to repay their loans;
As the price of crvUSD increases, the increase in interest rates caused by decoupling is reduced or even eliminated;
PegKeeper began to generate debt, and the borrowing rate of crvUSD dropped below the base rate.
After the proposal takes effect, if crvUSD can be returned to the $1 peg as expected, then the actual lending rate of crvUSD will be determined by PegKeeper's debt position. For non-pledged ETH and BTC, the interest rate is between 0.07% and 11%; for pledged ETH, the interest rate is between 0.1% and 15%. When PegKeeper's debt is zero, the interest rate upper limit is reached; when PegKeeper's debt is maximum, the interest rate lower limit is reached.
PegKeeper is a contract specifically designed to mint and absorb crvUSD debt, trading around the pegged price. Each PegKeeper targets a specific PegKeeper pool, allowing transactions between crvUSD and blue-chip stablecoins (USDC, USDT, TUSD, DAI). When the amount of crvUSD in the pool is too low, PegKeeper mints crvUSD and trades it into the associated pool; when the amount of crvUSD is too high, PegKeeper repurchases and destroys crvUSD. In this process, PegKeeper also has the effect of generating profits by buying low and selling high.
PegKeeper's debt is the amount of crvUSD minted by the contract itself and deposited into a specific pool. Its ratio to all crvUSD debt in the entire system is also a factor that affects the interest rate. If PegKeeper has no outstanding debt in the entire crvUSD system, PegKeeper's debt is zero at this time, reaching the interest rate ceiling. PegKeeper currently has no debt in any of the four PegKeeper pools. If the price returns to the peg, PegKeeper begins to incur debt, which will also cause crvUSD’s lending rate to fall.
Curve's governance is divided into two parts, Curve Governance Forum and Curve DAO. Discussions can be initiated on the Curve Governance Forum, and community members can evaluate proposals and make comments or suggestions. Each DAO proposal must have corresponding discussions on the Curve Governance Forum. Curve DAO is a platform for formally submitting proposals. It is also the only official way to implement protocol changes. CRV token holders can vote on Curve DAO. Voting has ended and the support rate is 100%.
The proposal has now taken effect, and the interest rate for borrowing crvUSD against wstETH has also increased to 19.94%, which is likely to force some users to repay their loans. But will the price of crvUSD be pegged at 1 US dollar in the long term? Could PegKeeper's debt rise, causing interest rates to fall again? Will these operations affect the application of crvUSD? This also requires continued observation.
(The above content is excerpted and reprinted with the authorization of our partner PANews, original text link)
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〈crvUSD is facing pressure to decouple, how does the founder of Curve respond through new proposals? 〉This article was first published in "Block Guest".