Uptober 24, 2023: The Whale Playground 🐋🛝
In the midst of "it's so over," I found there was, within me, an invincible "we're so back."
Overheard:
“We are so back. I'm not sure of the level of this back. It's a new kind of back. I'm tryna measure it relative to the level of backs we have experienced in this cycle of backs and overs and it seems this is way more back than the other backs but still different than most.”
Green candles like this had been snuffed into the ashes of our subconscious. We’ve never enjoyed the opportunity to write an article about how $crvUSD fares in an up-only market. Let’s see how the whales fared in yesterday’s big market moves.
Hard Times
$crvUSD is designed to give very comfy protections against sudden market downswings. It works well — even in massive downturns. Even risky positions can generally survive a couple of days without incident.
Where some people get caught by surprise is the return trip. When your position is in “soft liquidation,” your collateral is available for trade in an AMM, which carries a small trading fee. You might only see 1-2% of your collateral get nibbled away, but when your health is just a couple of percentage points this can be enough to push your collateral into hard liquidation.
The best way to prevent this is to use the default (or larger) number of bands when you take out your loan. If you absolutely must go max degen (N=4), then even repaying a small fraction of your loan in soft liquidation can help forestall hard liquidation.
Here’s the position Mich describes as being “at similar risk.”
Although liquidations are always the worst case scenario for borrowers in nearly every lending platform, within $crvUSD hard liquidations remain blessedly rare and are generally difficult to trigger.
Liquity
However, while issa bull market for most people, Liquity’s had a rough 24 hours.
Why, you might ask, isn’t the extremely decentralized stablecoin joining the bull parade? In this case, it’s not an issue with liquidations, but with redemptions.
In other words, when users want to redeem and get their ETH back, it has to come from someplace. Liquity is turning into a game of musical chairs, as exceedingly healthy loans (200% collateralized) are falling next in line.
This is precisely what’s playing out. Famed Cetaleporidae Tetranode took the opportunity to rebalance his portfolio away from $LUSD in favor of $crvUSD.
Incidentally, this user experience may also afflict Prisma Finance, which forks Liquity’s codebase. Prisma did not reply to request for comment on the subject. The protocol is otherwise engaged in preparation for a debt ceiling increase. (DISCLAIMER: Author is an investor in $PRISMA)
Taking his first hit of an LSD-backed $crvUSD loan, Tetra discovered the liquidation mechanism is even softer than the sensibilities of his most easily offended critics.
The $crvUSD experience is designed to be exceedingly friendly to borrowers. However, there’s no free lunches in this world. The chief drawback to $crvUSD borrowing is the variable borrow rate. The borrow rate fluctuates wildly, but hovers around 5-6% for wstETH, just a tick above the token’s native yield.
Squirming through periods of 10% borrow rate is a challenge deliberately designed to induce repayments. Notably, the recent influx of Tetra and other users borrowing $crvUSD sent rates soaring again.
How does the whealthy and whascawwy whabbit plan to beat the elevated borrow rates? Silo, who reaped a bonanza from attracting Mich to their platform, is petitioning to expand their protocol into a full-fledged whale playground.
Tetra’s loan remains eminently healthy at present, safe from soft liquidation down to $ETH prices not seen since January of this year.
Tetra’s primarily used his $crvUSD loan to close his Liquity position and hold $ETH. Is $ETH the trade to make? Despite a slight runup in $ETH price, the ETH/BTC ratio has been dismal lately amidst the Bitcoin ETF frenzy.
