May 15, 2023: Back of the Envelope ✉️🧮
Early returns from first three $crvUSD deployments
This weekend, $crvUSD redeployed for its fourth and potentially final time.
We’ve been reassured by midwits and leftwits that four deployments are evidence of a grievous error and reasons to dump. So why is the right side of the bell curve jubilant?
It has to do with some quick “back-of-the-envelope” math. As always, Adam Cochran sports the sharpest threads.
In this thread, ser Cochran notes that, extrapolated forward, this results in roughly a 6x boost to fees for veCRV lockers on $70MM in annual fees.
It’s a similar range as calculated by other armchair mathematicians:
To the final question, the ultimate topline for this project indeed depends on the total $crvUSD locked. In a surprise interview on Leviathan News, Curve founder Michael Egorov provided a possible bound, expressing hope this could be $1B by year’s end, which would rank $crvUSD firmly as a top 10 stablecoin.
Of course, TVL is itself a function of both market demand and the upper limits set by what the DAO sets as borrowing caps for various forms of collateral.
For comparison, $LUSD, another stablecoin created by lending Ethereum currently sits in tenth place with a market cap of $250MM. Egorov has expressed his interest in using other forms of collateral in addition to Ethereum.
Egorov has also expressed his interest in using the $CRV token itself, albeit at a very small borrowing limit proportionally. Fully endogenously backed stablecoins remain a particularly frightening memory in the wake of $UST, but tasteful amounts of $CRV as collateral is interesting, particularly given its solid DEX liquidity.
Before people get too optimistic about the quick math, we’d urge further caution. The fees were great in this case, but this test also involved just a single user, Curve founder Egorov, who also happened to take out just about the riskiest possible position and let his position enter soft liquidation as Ethereum prices fell. It was an intentional test of soft liquidation in real-world circumstances.
Not every $crvUSD position will necessarily be so risky, nor will degens necessarily allow their position to enter liquidation without putting up a fight. Positions outside of liquidation range would earn closer to borrowing fees of around 2%.
Nonetheless, the novel $crvUSD liquidation mechanism does open up new hedging strategies for $ETH. One unusual facet of the “soft liquidation” is that the AMM trades collateral for $crvUSD as the prices drop. If prices remain depressed, traders may actually find themselves in a profit, making $crvUSD a hedging strategy.
And so the envelope is both “pushed” while also finding its backside utilized for equations.
WORD NERD ASIDE: It got us mildly curious whether people prefer their quick math to take place on the backs of envelopes or napkins. The former is a phrase attributed heavily to physicist Enrico Fermi, who was talented at explaining complex formulas in such a way they could fit on the back of an envelope.
In America the phrase “back of the napkin” is also popular. Even though I couldn’t find info about its origins, I’ve more often seen this actually enacted in the real world, often in context of people discussing a startup idea over a meal, and using a napkin as the only available source of paper to make some quick projections on market cap or revenue. Zoomers don’t use snail mail, so we expect the former term may fall out of fashion.
British English, which may as well be a foreign language, uses yet another phrase that sounds quite filthy to decent Americans.
To tie it all back to $CRV, the three “tests in prod” provided a great demonstration to the small subset of crypto people who are paying attention to $crvUSD’s release.
The above is a good question. Perhaps it’s the case that Curve is cursed to remain mired in obscurity to a small subset of crypto Twitter who bother to dig in. Or perhaps we’re the crazy ones, and the $PEPE traders are the real big brains.
Our bias is of course towards the former. We tie it to the trading mindset: disgruntled short-term thinkers who hoped for a quick pump on release. Most degens have a one week max time horizon, a phenomenon occasionally dubbed “Alunara’s Law.”
Whatever the cause, we interpret the phenomenon as alfa. It’s a possible gift to the people who take the time to dig in. It’s remarkable in our view that the details of this have been public for several months and it’s still relatively poorly understood, but those who have done their homework may appreciate the magnitude of what’s to come.
Then again, if you’ve been ignoring our frequent and explicit rejoinder that “none of this is financial advice,” then you’ve been duly rewarded by losing about two thirds of your net worth since our outset. We encourage you to find a registered financial advisor and hope they have a ready supply of envelopes.
