If there are many liquidations going on, increasing crvUSD supply too much, does that mean PegKeepers would burn the liquidated collateral to maintain peg?
If so, how much would that cut into protocol revenue?
First question: I assume you mean that supply would be increased because a sudden cascade of liquidations would lead to borrowers manually purchasing crvUSD on the open market to repay their loans, in a potentially price insensitive manner, therefore causing Peg Keepers to create new crvUSD and sell it above $1?
Collateral is sold to repay loans, not burned. Liquidators (usually keeper bots) buy out the collateral like in MakerDAO liquidations.
Yes, liquidations reduce outstanding loans and therefore protocol revenue. The borrowers may be wiped out and have no appetite or ability to borrow in DeFi during their 'refractory period' or permanently. Second order affects of falling prices (which trigger liquidations) is reduced appetite to borrow due to belief that prices may continue to fall.
No, that's not what I meant. My understanding is that during soft liquidations, collateral is liquidated and converted to crvUSD. So the scenario where there are thousands or millions of soft liquidations occurring, that would create a lot more crvUSD, even though each individual user is only losing a portion of their deposit. That created crvUSD is storing the value of the liquidation, I think by the protocol. If there are enough liquidations to inflate supply, it might depeg crvUSD to less than $1. Then PegKeepers starts burning crvUSD to bring the price back up. Then the protocol loses some of that created crvUSD to the burn, taking a further haircut on the liquidation.
Or is the hope that any inflated supply of crvUSD or depeg would be used by worried borrowers to repay their loans and balance the system?
Maybe a rephrasing of the question: given total loans of $X and $Y circulating crvUSD, what % of loans need to be liquidated to break the crvUSD conversion that occurs during soft liquidations?
> the scenario where there are thousands or millions of soft liquidations occurring, that would create a lot more crvUSD
the LLAMMA would purchase this crvUSD by selling the collateral for crvUSD, not by minting new crvUSD, so total supply doesn't change / increase with liquidations.
That makes a lot more sense. If I understand correctly now, all that crvUSD buying would put upwards pressure on crvUSD, in addition to anyone buying to repay a loan, so a more likely outcome is a depeg >$1. That would help limit losses on the liquidations, since PegKeepers would sell at >$1 and the protocol would benefit from maintaining peg.
If there are many liquidations going on, increasing crvUSD supply too much, does that mean PegKeepers would burn the liquidated collateral to maintain peg?
If so, how much would that cut into protocol revenue?
First question: I assume you mean that supply would be increased because a sudden cascade of liquidations would lead to borrowers manually purchasing crvUSD on the open market to repay their loans, in a potentially price insensitive manner, therefore causing Peg Keepers to create new crvUSD and sell it above $1?
Collateral is sold to repay loans, not burned. Liquidators (usually keeper bots) buy out the collateral like in MakerDAO liquidations.
Yes, liquidations reduce outstanding loans and therefore protocol revenue. The borrowers may be wiped out and have no appetite or ability to borrow in DeFi during their 'refractory period' or permanently. Second order affects of falling prices (which trigger liquidations) is reduced appetite to borrow due to belief that prices may continue to fall.
No, that's not what I meant. My understanding is that during soft liquidations, collateral is liquidated and converted to crvUSD. So the scenario where there are thousands or millions of soft liquidations occurring, that would create a lot more crvUSD, even though each individual user is only losing a portion of their deposit. That created crvUSD is storing the value of the liquidation, I think by the protocol. If there are enough liquidations to inflate supply, it might depeg crvUSD to less than $1. Then PegKeepers starts burning crvUSD to bring the price back up. Then the protocol loses some of that created crvUSD to the burn, taking a further haircut on the liquidation.
Or is the hope that any inflated supply of crvUSD or depeg would be used by worried borrowers to repay their loans and balance the system?
Maybe a rephrasing of the question: given total loans of $X and $Y circulating crvUSD, what % of loans need to be liquidated to break the crvUSD conversion that occurs during soft liquidations?
> the scenario where there are thousands or millions of soft liquidations occurring, that would create a lot more crvUSD
the LLAMMA would purchase this crvUSD by selling the collateral for crvUSD, not by minting new crvUSD, so total supply doesn't change / increase with liquidations.
That makes a lot more sense. If I understand correctly now, all that crvUSD buying would put upwards pressure on crvUSD, in addition to anyone buying to repay a loan, so a more likely outcome is a depeg >$1. That would help limit losses on the liquidations, since PegKeepers would sell at >$1 and the protocol would benefit from maintaining peg.
"However, surely many of the DAOs that participated in the Curve wars by purchasing large amounts of CRV are licking their wounds."
It looks like this is still on, although this is buying at the bottom so maybe a better play- https://www.dlnews.com/articles/defi/reserve-spends-20m-to-boost-liquidity-for-its-stablecoins/
What do you guys think about CVX at these prices given its role in curve ecosystem?