Summary

LlamaRisk is an independent risk and research organization with a proven track record in providing insightful and in-depth risk analysis for industry-leading protocols. We wish to support the growth of Sturdy V2 by creating and managing an Aggregator centered around crvUSD and crvUSD stableswap LPs.

Lenders can deposit crvUSD to the Aggregator, which will be allocated between four initial markets to optimize yield. We plan for the proposed Aggregator to include the following markets and will add/remove/modify participating markets with alternative crvUSD stableswap LPs as appropriate:

Collateral	Borrowable Asset	Initial Weight	Max LTV	Liq. fee
crvUSD/USDC Convex LP	crvUSD	30%	90%	3%
crvUSD/USDT Convex LP	crvUSD	30%	90%	3%
crvUSD/FRAX Convex LP	crvUSD	20%	90%	3%
crvUSD/mkUSD Convex LP	crvUSD	20%	80%	5%

There will be a 0% management fee and a 20% performance fee on interest from crvUSD.

Proposal Details

As the crvUSD LP Aggregator Manager, LlamaRisk will oversee the creation, monitoring, and optimization of the crvUSD LP Aggregator. We will apply our risk assessment experience and market knowledge to balance responsible risk management practices with attractive yield optimization for Sturdy users.

crvUSD LP Aggregator

The highlights are:

• Sturdy will deploy isolated lending pools with crvUSD for lending and various crvUSD stableswap LPs as collateral.
• A crvUSD aggregator will be deployed that allocates assets across these lending pools to optimize yields to lenders.
• LlamaRisk, serving as the Aggregator manager, can whitelist silos, set allocation ratios, set fees, and determine risk parameters.
• Curve DAO and contributors from Sturdy have been in discussion to allocate co-incentives to bootstrap crvUSD deposits with 550,000 CRV and 500,000 STRDY over 120 days, targeting $20M crvUSD deposits. Sturdy's incentives will be allocated from unclaimed airdrop tokens for the Sturdy Surge campaign.

Borrowable Asset: crvUSD

crvUSD is the native stablecoin of Curve Finance, launched earlier this year. It has amassed a market cap of over $150m in a short time, overcollateralized by a basket of assets, including ETH LSTs and tokenized BTC. Its major innovation is the LLAMMA liquidation algorithm, which gradually liquidates positions through arbitrage, shifting the borrowed position bidirectionally between collateral and crvUSD. This allows users to increase their leverage while minimizing the risk of an abrupt and expensive liquidation event.

Collateral Assets: crvUSD StableSwap LPs

The initial basket of Curve LP collateral types within the Aggregator includes the most liquid crvUSD stableswap pairs (USDC, USDT, FRAX & mkUSD). All LPs included in the Aggregator (both initial and future) will only be stableswap LPs paired with crvUSD. This will substantially reduce the liquidation risk and impermanent loss to LP depositors.

Curve stableswap pools concentrate liquidity around the peg to reduce slippage on large swaps with the assumption that assets in the pool are mean reverting. The proposed Curve pools have an "A" of 100-500, which determines how concentrated liquidity is around $1. Most crvUSD pools have a meager fee of 0.01% to facilitate arbitrage and encourage crvUSD minting, as the fee model is focused on crvUSD borrowing APR. Several proposed LPs (USDC and USDT) have crvUSD pegkeepers, the protocol's automated strategy to arb the peg when crvUSD trades over $1.

Users will deposit Curve LPs to the respective Sturdy silo, which will be subsequently wrapped as Convex shares under the hood. These are Curve LPs deposited to the Curve gauge through Convex Finance to provide boosted rewards to depositors, thanks to Convex's stockpile of veCRV. Rewards accrue to depositors as a combination of Curve swap fees, CRV, CVX, and additional rewards tokens (e.g., Convex crvUSD/mkUSD earn PRISMA). This allows users to benefit from boosted yield while providing LPs as collateral to borrow crvUSD.

Pricing crvUSD

crvUSD/USD Chainlink Feed: crvUSD has a verified CL feed with a deviation threshold of 0.5% and a 24 hour heartbeat. It has been onboarded as a verified price feed since a recent integration with Aave.

crvUSD Aggregated Price Contract: This is an alternative source to price crvUSD. crvUSD uses this aggregated price contract to price crvUSD for internal protocol use. It uses crvUSD/USDC, crvUSD/USDT, crvUSD/TUSD, and crvUSD/USDP pool oracle prices to compute a crvUSD price in USD.

Pricing crvUSD LPs

LP pricing can use the method recommended by Chainlink in this blog post to take the CL-reported price of each asset in the pool and pass the min value multiplied by the virtual_price of the pool. This is suitable for assets that have a CL feed. Alternatively, each crvUSD LP has an EMA price_oracle that can be used to derive the asset's price paired with crvUSD.

USDC/USD and USDT/USD have verified CL feeds with a 0.25% deviation threshold and 24-hour heartbeat.

FRAX/USD has a CL feed marked as provisional and with a more significant deviation threshold of 1%, along with a 1-hour heartbeat. Alternatively, the crvUSD/FRAX pool has an EMA price oracle with a ma_exp_time of 10 minutes.

mkUSD does not have a CL feed. The crvUSD/mkUSD pool has an EMA price oracle with a ma_exp_time of 10 minutes.

Framework

A relatively restrictive subset of asset types is eligible for inclusion in the proposed Aggregator. Onboarded collateral must meet the following criteria:

• Collateral must be a Curve stableswap LP paired with crvUSD.
• Minimum pool liquidity must be within two standard deviations of the mean of the existing basket.
• Fiat-redeemable stablecoins in the LP must provide regular reserves attestations with a portfolio breakdown.
• Stablecoins under two years of maturity must undergo a risk review published publicly by LlamaRisk before inclusion.

Our generalized collateral risk review framework, as presented to AMF in the public consultation round, covers the following risk vectors:

• Market Risk - Examine the asset's liquidity, price volatility, peg stability, and liquidation dynamics in stressed market conditions.

• Technological Risk - Review smart contract audits, developer activity, interactions, past incidents, scalability, oracles, and dependencies that could pose a technological risk.

• Counterparty Risk - Scrutinize administrator/developer team qualifications, governance model, token distribution, regulations, legal entity structure, licenses, enforcement actions, sanctions exposure, and liability risks.

The framework provides a comprehensive overview of potential risks from market, technological, and counterparty perspectives. This allows for a complete analysis to determine the overall risk profile of using the asset as collateral.

Conclusion

With our extensive expertise in protocol risk assessment, recent successes with managing risk for Prisma Finance, and a deep understanding of DeFi protocol architecture, LlamaLisk is uniquely positioned to contribute significantly to Sturdy V2. We look forward to participating in the Sturdy platform, taking on the challenge of balancing responsible risk management and optimizing growth opportunities for the benefit of Sturdy and its users.