Curve Conspiracy Sequel Yield Basis Stablecoin Yield New Paradigm

The Path of Stablecoin Trading Expansion Beyond Ethena

After the collapse of Luna-UST, stablecoins completely bid farewell to the era of stability. The CDP mechanism (DAI, GHO, crvUSD) once became the hope of the entire village, but ultimately the ones that broke through the encirclement of USDT/USDC were Ethena and the yield anchoring paradigm it represents, which not only avoids the inefficiency of over-collateralization but also opens up the DeFi market with its native yield characteristics.

In contrast to the Curve system, which opened the DEX market relying on stablecoin trading, it gradually ventured into the lending market with Llama Lend and the stablecoin market with crvUSD. However, under the brilliance of the Aave system, the issuance of crvUSD has long hovered around 100 million dollars, basically only serving as a backdrop.

However, after the flywheel of Ethena/Aave/Pendle is launched, Curve's new project Yield Basis also wants to take a share of the stablecoin market, starting with circular leveraged loans, but this time through trading. They hope to eliminate the chronic issue of AMM DEX—Impermanent Loss (IL) through trading.

Unilateralism Eliminates Non-compensable Losses

Curve's latest masterpiece, now your BTC is mine, hold your YB steady.

Yield Basis represents a renaissance, where you can see liquidity mining, pre-mining, Curve War, staking, veToken, LP Token, and circular loans in one project. It can be said to be a culmination of DeFi development.

Michael Egorov, the founder of Curve, is an early beneficiary of DEX development. He improved upon Uniswap's classic AMM algorithm x*y=k and successively launched the stableswap and cryptoswap algorithms to support more "stablecoin trading" and more efficient universal algorithms.

The large-scale trading of stablecoins has laid the foundation for Curve's "borrowing" market for early stablecoins such as USDC/USDT/DAI. Curve has also become the most important on-chain infrastructure for stablecoins before the Pendle era, and even the collapse of UST directly stemmed from the moment of liquidity withdrawal from Curve.

In terms of token economics, the veToken model and the subsequent "bribery" mechanism of Convex have made veCRV a truly functional asset. However, after a four-year lock-up period, the majority of $CRV holders suffer in silence, a pain not meant to be shared with outsiders.

After the rise of Pendle and Ethena, the market position of the Curve system is no longer secure. The core issue for USDe is that the hedging comes from CEX contracts, and the use of sUSDe to capture yields has made the importance of stablecoin trading itself less significant.

The counterattack of the Curve system first came from Resupply, launching in 2024 in collaboration with two early giants, Convex and Yearn Fi, followed by an unexpected collapse, marking the first failed attempt of the Curve system.

Resupply has gone wrong. Although it is not an official Curve project, it is like breaking a bone and connecting it with tendons. If Curve does not counterattack soon, it will be difficult to buy a ticket to the future in the new era of stablecoins.

When an expert takes action, it is indeed different from the rest. Yield Basis does not target stablecoins or the lending market, but rather the impermanent loss issue in AMM DEX. However, let me state first: The true purpose of Yield Basis has never been to eliminate impermanent loss, but rather to promote a surge in the issuance of crvUSD.

But still starting from the mechanism of impermanent loss, LP (liquidity provider) replaces traditional market makers, and under the incentive of fee sharing, provides "two-sided liquidity" for the trading pairs of AMM DEX. For example, in the BTC/crvUSD trading pair, LP needs to provide 1 BTC and 1 crvUSD (assuming 1 BTC = 1 USD), at this time the total value of LP is 2 USD.

Correspondingly, the price p of 1 BTC can also be expressed as y/x. We define p=y/x. At this point, if the price of BTC changes, for example, rising by 100% to 2 dollars, an arbitrage situation will occur:

A pool: Arbitrageurs will use 1 US dollar to buy 1 BTC, at which point LP needs to sell BTC to obtain 2 US dollars.

Pool B: Sell in Pool B when the value reaches 2 dollars, the arbitrageur nets 2-1=1 dollar.

The profit of arbitrageurs is essentially the loss of LP in pool A. To quantify this loss, we can first calculate the value of LP after the arbitrage occurs as LP(p) = 2√p (with x and y both represented by p). However, if LP simply holds 1 BTC and 1 crvUSD, it is considered to have no loss, which can be represented as LP~hold~(p) = p + 1.

According to the inequality, when p > 0 and not equal to 1, it can always be derived that 2√p < p + 1. The income of arbitrageurs essentially comes from the losses of LPs, so under the stimulus of economic benefits, LPs tend to withdraw liquidity and hold cryptocurrencies. AMM protocols must retain LPs through higher fee sharing and token incentives, which is also the fundamental reason why CEX can maintain an advantage over DEX in the spot market.

Image description: impermanent loss

Image source: @yieldbasis

From the perspective of the entire on-chain economic system, impermanent loss can be seen as a kind of "expectation". Once an LP chooses to provide liquidity, they can no longer demand the returns from holding. Therefore, impermanent loss is essentially more of an "accounting" type of bookkeeping loss and should not be considered a real economic loss. Compared to holding BTC, LPs can also earn transaction fees.

Yield Basis does not think so. They do not eliminate LP's expected losses by increasing liquidity or the transaction fee ratio, but start from "market-making efficiency." As mentioned earlier, compared to holding p+1, LP's 2√p can never outperform. However, from the output ratio of an initial investment of 1 dollar, with an initial investment of 2 dollars, the current price is 2√p dollars, and the "yield" for each dollar is 2√p/2 = √p. Do you still remember that p is the price of 1 BTC? So if you simply hold, then p is your asset yield.

Assuming an initial investment of 2 dollars, the LP yield changes as follows after a 100% increase:

2√2 USD (Arbitrageurs will take the difference) √2 USD

Yield Basis approaches from the perspective of asset return rates, allowing √p to become p, which can ensure LP fees while retaining holding returns. This is very simple, √p² will suffice. From a financial perspective, it requires a fixed 2x leverage; excessive or insufficient leverage will cause the economic system to collapse.

Image description: Comparison of LP Value Scaling of p and √p

Image source: @zuoyeweb3

This allows 1 BTC to exert double the market-making efficiency, and there is naturally no corresponding crvUSD participation in fee sharing. BTC is left with only its own yield comparison, transforming from √p to p itself.

Whether you believe it or not, in February, Yield Basis officially announced a financing of 5 million USD, which means that some VCs believed in it.

However! LP must add liquidity to the corresponding BTC/crvUSD trading pair; if the pool only contains BTC, it cannot operate. Llama Lend and crvUSD are responding accordingly by launching a dual lending mechanism:

1. 1. The user deposits 500 BTC (cbBTC/tBTC/wBTC), and YB (Yield Basis) borrows an equivalent of 500 crvUSD using 500 BTC. Note that this is an equivalent value, utilizing a flash loan mechanism, not a complete CDP (originally about 200% collateralization ratio).
2. 2. YB will deposit 500 BTC/500 crvUSD into the corresponding BTC/crvUSD trading pool on Curve and mint it as $ybBTC representative shares.
3. 3. YB uses the LP share valued at 1000U as collateral to borrow 500 crvUSD through the CDP mechanism on Llama Lend and repays the initial equivalent loan.
4. 4. The user receives ybBTC representing 1000U, Llama Lend obtains 1000U in collateral and eliminates the first equivalent loan, and the Curve pool receives 500BTC/500 crvUSD liquidity.

Image description: YB operation flow chart source: @yieldbasis. In the end, 500 BTC "eliminated" its own loan and received 1000 U in LP shares, achieving a 2x leverage effect. However, please note that the equivalent loan is lent out by YB, serving as the most critical intermediary. Essentially, YB undertakes the remaining 500 U loan share to Llama Lend, so YB also has to share the Curve transaction fees.

If users think that 500U of BTC can generate a fee profit of 1000U, then they are correct, but thinking that all of it goes to themselves is a bit impolite. To put it simply, it’s not just a 50-50 split; YB's intention lies in a pixel-level tribute to Curve.

Let's calculate the original earnings:

Among them, 2x Fee means that users can generate 1000 U in transaction fee profit by investing 500U equivalent BTC. Borrow_APR represents the rate of Llama_Lend, and Rebalance_Fee represents the cost for arbitrageurs to maintain the 2x leverage, which essentially still has to be borne by LP.

There is now good news and bad news:

• • Good news: The lending income from Llama Lend is fully returned to the Curve pool, which passively increases LP earnings.
• • Bad news: The Curve pool's fees are fixed, with 50% going to the pool itself, meaning that both LP and YB have to share the remaining 50% of the fees.

However, the fees allocated to veYB are dynamic and are actually divided dynamically among ybBTC and veYB holders, with veYB having a fixed minimum guaranteed share of 10%. This means that even if no one stakes ybBTC, they can only receive 45% of the original total revenue, while veYB, which is YB itself, can receive 5% of the total revenue.

A miraculous result occurs, where even if users do not stake ybBTC for YB, they can only receive 45% of the fees. If they choose to stake ybBTC, they will receive YB Token but must give up the fees. If they want both, they can continue to stake YB in exchange for veYB, which allows them to earn the fees.

Image description: ybBTC and veYB revenue sharing

Image source: @yieldbasis

Impermanent loss never goes away, it just shifts.

You might think that using 500U equivalent BTC can achieve a market-making effect of 1000U, but YB didn't say that all the market-making profits go to you. Moreover, after you stake into veYB, you need to unstake twice, from veYB to YB and from ybBTC to wBTC, to get back your original funds and profits.

But if you want to obtain the full voting rights of veYB, which is the bribery mechanism, then congratulations, you have secured a four-year lock-up period. Otherwise, the voting rights and收益 will gradually decrease with the staking period. Whether the收益 of a four-year lock-up and giving up BTC liquidity to obtain YB is worth it ultimately depends on personal consideration.

As mentioned earlier, impermanent loss is an accounting loss; as long as liquidity is not withdrawn, it is a floating loss. Now, the elimination plan of YB is essentially "accounting income," giving you a sense of floating profit from anchored holdings, and then cultivating its own economic system.

You want to leverage a fee income of 1000U with 500U, and YB wants to "lock" your BTC and sell their own YB to you.

Embracing the Growth Flywheel through Multi-Party Negotiation

In the era of great returns, come if you have a dream.

Based on Curve, using crvUSD, although it will empower $CRV, it also launches the Yield Basis protocol and the token $YB. Will YB be able to maintain its value and appreciate after four years? I'm afraid...

Beyond the complex economic mechanisms of Yield Basis, the focus is on the market expansion path of crvUSD.

Llama Lend is essentially part of Curve, but it is quite bold for the Curve founder to propose issuing 60 million dollars worth of crvUSD to provide initial liquidity for YB.

Image description: YB is unchanged, crvUSD has been sent first. Image source: @newmichwill YB will provide benefits to Curve and $veCRV holders as planned, but the core issue is the pricing and appreciation of YB Token. Ultimately, crvUSD is U, so is YB really an appreciating asset?

Not to mention the occurrence of another ReSupply event, which would directly affect the Curve itself.

Therefore, this article does not analyze the token linkage and profit-sharing plan between YB and Curve. The example of $CRV is not far off, and $YB is destined to be worthless, wasting bytes is meaningless.

However, in the defense of issuing more for himself, one can glimpse Michael's ingenious ideas. Users' deposited BTC will "issue" an equivalent amount of crvUSD. The benefit is that it increases the supply of crvUSD, and each crvUSD will be put into the pool to earn transaction fees, which represents a real trading scenario.

But essentially this part of the crvUSD reserves is equivalent rather than excessive. If the reserve ratio cannot be increased, then increasing the profit effect of crvUSD is also a way. Do you remember the relative yield of funds?

According to Michael's vision, the borrowed crvUSD will efficiently collaborate with the existing trading pools, for example, wBTC/crvUSD will interact with crvUSD/USDC, promoting the trading volume of the former and also increasing the trading volume of the latter.

The transaction fees for the crvUSD/USDC trading pair will be split 50% to $veCRV holders, with the remaining 50% going to LP.

It can be said that this is a very dangerous assumption. The crvUSD lent to YB by Llama Lend mentioned earlier is for single pool exclusive use, but pools like crvUSD/USDC have no entry restrictions. At this point, crvUSD essentially lacks sufficient reserves, and once the coin value fluctuates, it can easily be exploited by arbitrageurs, leading to the familiar death spiral. If crvUSD encounters problems, it will also affect YB and Llama Lend, ultimately impacting the entire Curve ecosystem.

It is important to note that crvUSD and YB are pegged together, and 50% of the newly issued liquidity must enter the YB ecosystem. The crvUSD used by YB is issued in isolation, but its usage is not isolated, which is the biggest potential risk point.

Image description: Curve profit-sharing plan

Image source: @newmichwill

Michael's plan is to use 25% of the issuance of YB Token to bribe the stablecoin pool to maintain depth, which is already close to being a joke. Asset security: BTC > crvUSD > CRV > YB. When a crisis strikes, if YB can't even protect itself, what can it protect?

The issuance of YB itself is a product of the fee-sharing from the crvUSD/BTC trading pair. Does it remind you of Luna-UST? UST is also a minted equivalent of the amount of Luna burned, with both relying on each other. YB Token<>crvUSD is the same.

It can be even more similar. According to Michael's calculations, based on the trading volume and price performance of BTC/USD over the past six years, he has calculated that it can guarantee a 20% APR, and ensure a return of 10% even in a bear market, with a peak of 60% during the bull market in 2021. If a little empowerment is given to crvUSD and scrvUSD, surpassing USDe and sUSDe is not a dream.

Due to the large amount of data, I do not have backtesting data to verify his calculation ability, but don't forget that UST also guaranteed a 20% return. The model of Anchor + Abracadabra has also been running for a considerable amount of time. Could it be that the combination of YB + Curve + crvUSD would be any different?

At least, UST crazily bought BTC as reserves before the collapse, and YB directly uses BTC to leverage reserves, which can be considered a significant advancement.

Forgetting is equivalent to betrayal.

Starting from Ethena, on-chain projects begin to look for real returns, rather than just focusing on market cap.

Ethena utilizes CEX to hedge ETH for yield capture, distributes profits through sUSDe, and employs the $ENA treasury strategy to maintain trust among large holders and institutions, while multi-party maneuvering stabilizes the $10 billion issuance of USDe.

YB wants to find real trading profits, which is not a problem in itself, but arbitrage and lending are not the same. Trading has a stronger immediacy; each crvUSD is a joint liability of YB and Curve, and the collateral itself is also borrowed from users, with available funds being close to zero.

The current issuance of crvUSD is very low, and maintaining the growth flywheel and a 20% return rate in the early stages is not difficult. However, once the scale expands, the increase in YB prices, fluctuations in BTC prices, and the decline in crvUSD's value capture ability could lead to significant selling pressure.

The US dollar is an unanchored currency, and crvUSD is about to become one as well.

However, the nested risk of DeFi has already been priced into the overall systemic risk on the chain, so the risk is not a risk for everyone; instead, those who do not participate will passively bear the losses from the collapse.

Conclusion

The world will give a person the opportunity to shine, and those who seize it are the heroes.

The Yield Basis in traditional finance is the yield on U.S. Treasury bonds. Will the Yield Basis on the blockchain be BTC/crvUSD?

The YB logic can hold if the on-chain transactions are large enough, especially since Curve itself has a huge trading volume. In this case, eliminating impermanent loss makes sense. We can draw an analogy:

• • The power generation equals the power consumption, and there is no static "electricity"; it is generated and used immediately.
• • Trading volume equals market cap, every token is liquid, can be bought and sold immediately.

Only through continuous and sufficient trading can the price of BTC be discovered, and the value logic of crvUSD can be closed looped, issuing from BTC lending and profiting from BTC trading. I am confident in the long-term rise of BTC.

BTC is the CMB (Cosmic Microwave Background) of the crypto microcosm. Since the financial explosion in 2008, as long as humanity does not wish to restart the world order through revolution or nuclear war, the overall trend of BTC will rise, not because of a greater consensus on the value of BTC, but due to confidence in the inflation of the dollar and all fiat currencies.

But I have moderate trust in the technical strength of the Curve team, and I hold deep doubts about their ethical standards after ReSupply. However, it is also difficult for other teams to dare to try in this direction. There is nothing we can do as money flows away, and there are no compensation losses for those who are fated.

UST frantically bought BTC on the eve of its demise, while USDe's reserves were converted to USDC during the fluctuations. Sky has even crazily embraced government bonds. This time, good luck to Yield Basis.