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Compensating lenders for their liquidity inside Curvance
Interest rates within the platform are dynamic, adjusting in real-time to meet market demand within each lending pool. Inspired by models like Fraxlend, Rari, and Kashi, Curvance’s rates are determined by factors including pool utilization, usage multiplier, and time decay, ensuring stability and flexibility as conditions change.
Pool Utilization: This metric reflects the proportion of total funds in a lending pool actively borrowed by users. A higher pool utilization rate indicates that a larger portion of the pool’s funds are being borrowed, while a lower rate shows more lending capacity.
Interest Rate Dynamics: As pool utilization increases and nears maximum capacity, interest rates progressively rise, significantly beyond a set “vertex point.” This vertex point serves as a threshold where rates begin to accelerate, responding dynamically to increased demand and incentivizing liquidity supply.
Time Decay: Interest rates adjust with a gradual decay over regular intervals (currently set to every 4 hours). If utilization drops below the target rate, the vertex multiplier lowers, leading to a decrease in rates to maintain stability.
Initial State: A lending pool contains 1,000,000 USDC, of which 800,000 USDC is borrowed, resulting in an 80% utilization rate with an interest rate of 2%.
Surge in Utilization: If a large borrower enters and takes an additional 200,000 USDC, pushing utilization to 100%, the interest rate rises significantly due to exceeding the 85% vertex point. In this scenario, rates increase to 8%, which then double every 4 hours until utilization decreases.
This dynamic adjustment encourages borrowers to consider repayment while incentivizing suppliers to add more USDC to the pool, helping balance demand and maintain liquidity. The system’s responsiveness promotes an equilibrium within the lending ecosystem, supporting stability and addressing the evolving needs of the protocol users.
Credit lines for depositors inside Curvance
A user’s borrowing capacity within Curvance is determined by two key factors: the collateralization ratio set by the Curvance DAO and the available liquidity within the isolated market.
1. Collateralization Ratio
The collateralization ratio defines the maximum borrowing threshold for each asset, reflecting its specific risk profile. Assets with lower risk have higher collateralization ratios. For example, an asset with a 75% collateralization ratio allows a user to borrow up to $0.75 for every $1.00 of the asset deposited as collateral.
Curvance calculates each user’s borrowing limit as a blended collateralization ratio across various assets within an isolated market. This blended Loan-to-Value (LTV) ratio represents the maximum amount users can borrow based on the combined collateral they’ve supplied.
Example: A user deposits $100 of WETH/wstETH LP tokens, which earns an APR of approximately 4%. Leveraging the ERC-4626 architecture, Curvance directs the LP tokens to an underlying protocol to capture yield. With a collateralization ratio of 80%, the user can borrow up to $80 in assets, against their LP tokens.
2. Available Liquidity
A user’s ability to borrow also depends on the pool’s liquidity. If the requested loan amount exceeds the available liquidity in a given pool, borrowing may not be possible.
Example: A user deposits $1000 of cbBTC into a market with $50 in available USDC liquidity on the lending side. With a collateralization ratio of 90%, the user can borrow up to $900 in assets against their wrapped bitcoin. Still, with only $50 in available liquidity, the user can only borrow up to 50 USDC even though the Protocol Risk Engine would support a larger debt position.
To close a debt position, users must repay the borrowed amount and any accrued interest costs in the same asset initially borrowed. This can be done via the Curvance front end or directly through smart contracts. After repayment, users can redeem their collateral and underlying assets by returning the pTokens received at the time of the initial deposit.
The Curvance protocol enables users to earn yield by supplying assets to borrowers in its peer-to-peer lending markets. Depending on the market, most deposits can be used as collateral, allowing users the ability to borrow against their holdings. Assets supplied solely for lending, however, cannot be borrowed against.
Common Borrowable Assets:
Stablecoins: Stablecoins are commonly borrowed by users who want to improve their net DeFi strategy yields.
Volatile Non-Yield-Bearing Tokens: Volatile Non-Yield-Bearing Assets are commonly borrowed by users who want to create cross-token strategies such as longing BTCETH or farming staked ether yield.
Adding New Supported Tokens: New tokens can be introduced as lending options by the Curvance DAO, expanding opportunities.
When users deposit tokens into Curvance as lenders, they receive a proportionate amount of eTokens (earn tokens), representing their share in the lending pool. Earned interest is automatically compounded, increasing the user’s overall position over time.
Instant Yield Access: Users can deposit into earning positions for no cost and immediately earn yield on their assets.
Automatically Reinvested Yield: Interest on outstanding debt is managed by automation across all positions for all users simultaneously, continuously reinvesting accrued interest back into all user's positions.
Instant Liquidity Access: After a 20-minute cooldown period, lent liquidity can be redeemed at any time unless there is 100% utilization in that particular market.
Curvance offers users on the demand side various options to generate yield and access liquidity by borrowing against their deposited assets. Deposited assets are routed to all supported yield opportunities. Users can then use them as collateral to access new liquidity.
Common Depositable Assets:
Interest-Bearing Stablecoins: Stablecoins are commonly borrowed by users who want to improve their net DeFi strategy yields.
Liquid Staked/Restaked Tokens: Assets such as LSTs are natively supported, offering streamlined yield generation.
LP Tokens: More complex assets, such as LP tokens for AMMs, Perps, CLOBs, etc., benefit from auto-compounding, optimized yield generation, and improved user experience.
Adding New Supported Tokens: New tokens can be introduced as deposit options by the Curvance DAO, expanding opportunities.
When users deposit tokens into Curvance, they receive a proportionate amount of pTokens (position tokens), representing their share in the managed vault. Earned yield is automatically compounded, increasing the user’s overall position over time.
Instant Yield Access: Users can deposit into earning positions for no cost and begin earning yield on their assets immediately.
Instant Liquidity Access: Deposited assets can, in most cases, be collateralized, allowing access to borrowed liquidity against the market value of deposited assets.
Automatically Reinvested Yield: Yield on deposited assets is managed by automation across all positions for all users simultaneously, continuously reinvesting accrued yield into all users' positions.
Economies of Scale: By pooling all users' positions together, any managed actions are executed for all users simultaneously, minimizing automated management costs. For example, If 10,000 users deposit into a particular asset vault, auto compounding operations are executed for all 10,000 positions at once, reducing user costs by (9999 / 10000) 99.99%.
To enable an asset as collateral, users can follow these steps:
Go to the main dashboard to view all deposited assets.
Locate the assets to be used as collateral.
Enable the desired assets as collateral using the "Increase Collateral" button.
Note: When enabled, the corresponding deposited assets continue to earn yield, ensuring efficient capital utilization across DeFi.
Liquidations play a vital role in maintaining the stability and integrity of the Curvance protocol by protecting lenders from potential losses. Liquidations are triggered when the value of a borrower’s collateral falls below a defined threshold, known as the Health Factor.
The Health Factor measures an account’s stability and capacity to cover borrowed funds. Calculated as:
Health Factor = Collateral / (Debt * Debt Multiplier)
Where:
Collateral = User's Collateral Value inside the Market
Debt = User's Debt Value inside the Market
Debt Multiplier = Additional requirement to manage market collateral
A Health Factor above 1 signifies sufficient collateral value and a safe position.
A Health Factor below 1 indicates insufficient collateral value, triggering Curvance’s liquidation processes.
The liquidation engine is proactive and designed to protect borrowers from hard liquidations by implementing a linear scale between "soft" and "hard" liquidation levels. The severity of liquidations is continuous as collateral runs out and travels along a linear curve from soft liquidation to hard liquidation. The severity of a liquidation is calculated from a user's lFactor or liquidation factor. A liquidation factor of 0 indicates that no liquidation is possible, whereas a liquidation factor of 1 indicates a full hard liquidation.
Soft Liquidation: A partial liquidation occurs with a small penalty, preserving more of the user's collateral, making Curvance more forgiving during times of low volatility.
Hard Liquidation: Full liquidation with a high penalty if the Health Factor is critically low, meaning Curvance can shed risk faster than other lending protocols in times of high volatility.
Recommendation: Maintaining a Health Factor above 1, ideally at 1.5 or higher during market volatility, is advised to reduce liquidation risk.
Most lending protocols set single-point liquidation levels, creating a trade-off:
Overly Conservative Liquidation Levels: This can lead to premature liquidations, making the user experience less favorable.
Overly Generous Liquidation Levels: This may increase the risk of bad debt within the protocol.
Other lending protocols also tend to only look at three different factors to determine liquidations:
Collateralization Ratio: Determines the maximum borrowing threshold for each asset.
Liquidation Threshold: Equivalent to the Curvance protocol's Hard Liquidation Threshold, this looks at when a position should be liquidated by half or in full.
Liquidation Fee: A fee on the user's collateral value during a liquidation that goes back to the protocol in the form of revenue.
The Dynamic Liquidation Engine allows for more flexibility in determining liquidation thresholds, how much of a position gets liquidated, the fee associated with that liquidation, and the incentives for liquidators in each scenario. This is done using the following configurable values:
Collateralization Ratio: Determines the maximum borrowing amount per $1 of collateral for each asset.
Soft Collateral Requirement: The premium of excess collateral required to avoid triggering a soft liquidation.
Hard Collateral Requirement: The premium of excess collateral required to avoid triggering a hard liquidation.
Soft Liquidation Incentive: The base incentive to liquidate a user position.
Hard Liquidation Incentive: The maximum incentive to liquidate a user position.
Liquidation Fee: The fee the protocol takes from a user's collateral during a liquidation.
Base Close Factor: The % of outstanding user debt that can be closed for a user position.
Liquidation Scenario: Tony has $1,000 of ETH posted as collateral with $900 in outstanding debt. Soft Collateral Requirement = 120%
Hard Collateral Requirement = 110%
Soft Liquidation Incentive = 4%
Hard Liquidation Incentive = 6%
Liquidation Fee = 0%
Base Close Factor = 20% Tony is below their collateral requirement to avoid soft liquidation (1000 / 120% = $833.33 < $900 but avoids a full hard liquidation (1000 / 110% = $909 !< $900)
Tony has a current lFactor = (900 - (1000 / 120%)) / ((1000 / 110%) - (1000 - 120%)) = 88% This results in a liquidation amount of 20% + (100% - 20%) * 88% = 90.4%,
with a liquidation penalty of 4% + (6% - 4%) * 88% = 5.76% Any address could then liquidate Tony by repaying $900 * 90.4% = $813.6 of their outstanding debt and receive $813.6 * 105.76% = $860.46 in ETH from Tony.
This approach balances the user experience and protocol stability, minimizing the risk of sudden liquidations for borrowers while protecting the protocol and lenders against bad debt.
Bad debt socialization is a critical mechanism within the Curvance protocol, designed to maintain market stability and manage risk in cases where borrowers default on their loans, leaving a shortfall in collateral. For example, if a borrower owes $500 but has collateral worth only $300, a $200 shortfall arises.
Bad debt socialization addresses isolated and cross-margin scenarios, providing a nuanced solution that differentiates it from other protocols.
When an undercollateralized position is liquidated, and a shortfall remains (e.g., $200), the deficit is socialized across the entire lender market to protect market health. This process involves an adjustment to the exchange rate of each lender’s token, allowing the shortfall to be absorbed proportionally by all lenders:
Proportional Distribution: The shortfall is distributed across all lenders within the affected market. Each lender’s token value for redemption is slightly reduced to cover the debt, ensuring that the impact on each lender is proportional to their market participation.
Exchange Rate Adjustment: Adjusting the exchange rate systematically distributes the deficit, preventing any single lender from bearing an excessive share of the loss. This method stabilizes the market and keeps it operational, even in significant default events.
Bad debt socialization aligns with the inherent risks lenders assume when participating in the protocol. Since lenders are exposed to borrower defaults, sharing the impact of bad debt across all participants is an equitable solution. This approach decreases risk to lenders and strengthens the protocol’s resilience by preventing bad debt accumulation that could destabilize the market.
Minimizing systemic risk
Collateral caps are used as a core safeguard for the lending markets, setting specific restrictions on the amount of each asset that can be used as collateral. This mechanism is essential for protecting the protocol against bad debt and unintentionally incentivizing market manipulation by bad actors.
While the protocol allows unlimited vault deposits to earn yield, only a percentage of total assets in each market can be used as collateral for borrowing. By setting these collateral caps, the Curvance protocol minimizes the risks posed by market volatility and sudden price shifts, aligning with industry risk management principles to ensure the platform’s stability.
Mitigating Overexposure: Collateral caps prevent overexposure to specific assets within isolated markets, reducing potential adverse impacts during volatile market conditions.
Ensuring Controlled Borrowing: Collateral caps create an over-collateralized borrowing environment, mitigating systemic risk while providing users with a secure lending and borrowing experience.
Collateral caps are determined by a third-party risk management group elected by Curvance DAO participants known as the Curvance Collective. These caps are based on an asset’s on-chain liquidity across various pairs within the network. The elected third party also evaluates offside liquidity (liquidity distributed across asset pairs within the protocol) and sets caps to ensure stability.
Example: If USDY constitutes 80% of a skewed stable pool, with USDC making up 20%, the collateral cap for USDY is calculated based on USDC’s liquidity. If total offside liquidity is $10 million (with $8 million in USDY and $2 million in USDC) and Curvance allows a cap of 40% of offside liquidity, the collateral cap would be 40% of $2 million, or $800,000, translated into tokens based on asset value.
Shortly after the Curvance DAO launches, the Curvance Collective will vote to select their preferred third-party risk management group. This group will be tasked with determining risk parameters for all supported assets. Together, the Curvance DAO and the elected group will regularly review and adjust collateral caps in response to changes in offside liquidity, ensuring alignment with on-chain liquidity. This dynamic approach to risk management helps mitigate systemic risks and maintain stability within the protocol's lending markets.
Consider $100 million in sDAI within the Curvance protocol, earning native gauge emissions. With a focus on on-chain liquidity, the protocol caps collateralization for sDAI at approximately 10 million tokens. This cap means that no more than 10 million sDAI can be used as collateral, ensuring controlled asset exposure while minimizing systemic risk.
By carefully linking collateral caps to liquidity dynamics and adjusting them via DAO governance, the protocol can provide a robust, stable approach to collateralized borrowing. This method aligns user security with broader protocol health, allowing users to scale responsibly within DeFi.
Pricing assets inside Curvance
To enhance security, the protocol primarily uses a Dual Oracle system, leveraging data from various sources such as Redstone, Chainsight, Pyth, Chainlink, API3, Chronicle, and more. While most assets utilize two independent oracle sources to ensure accurate pricing and protect against manipulation and volatility, the protocol can support assets with a single oracle when appropriate. For instance, assets like wstETH, which are redeemable for stETH, may not require a second oracle due to their inherent price stability and transparency.
If the price data from both oracles diverges significantly—due to either manipulation or extreme market fluctuations— The Curvance protocol can pause borrowing and redemptions for that asset. Preset parameters trigger this pause, allowing time for Oracle prices to stabilize and converge.
In the event of an abnormal pricing discrepancy between oracle feeds, typically seen during flash loan or oracle attacks, the creation of new debt and redemptions are halted while liquidations are still allowed to be processed.
If an extreme discrepancy is detected, the creation of new debt, redemptions, and liquidations are all halted.
Together, these measures form the protocol's Circuit Breaker System, which safeguards users during market anomalies.
Lender Protection and Price Favorability
To provide additional security for lenders, the dual oracle system uses the most favorable oracle-reported price when calculating the final asset price in user liquidity checks, optimizing protection against bad debt.
Example:
If one oracle reports an asset price of $100 while another reports $101, the collateral value is set at $100 for borrowing calculations, ensuring conservative collateral valuation and protecting borrowers from taking more debt than they should.
If a user risks liquidation and stablecoin oracle prices differ, e.g., $1 and $1.01, the system will evaluate the position at the higher $1.01 price, providing added security for lenders.