LLAMMA

The Lending-Liquidating AMM Algorithm developed by Curve Finance founder Michael Egorov and deployed within Curve's crvUSD stablecoin system, a novel automated market maker design that performs continuous, gradual liquidations rather than the instantaneous full liquidations used by traditional DeFi lending protocols. In standard lending protocols, when a collateral position becomes undercollateralized, an external liquidator buys the entire collateral at a discount in a single transaction. LLAMMA instead places collateral into AMM price bands that automatically convert collateral to crvUSD as prices fall and convert back when prices recover, spreading liquidation risk across a price range rather than triggering a cliff-edge event. This mechanism, called soft liquidation, means borrowers in distress lose value gradually to AMM fees rather than all at once to a liquidator discount, and can recover their full collateral if prices rebound before full liquidation occurs. Example: During the March 2023 Ethereum price volatility, crvUSD borrowers whose positions entered LLAMMA's soft liquidation bands saw their collateral gradually converted to crvUSD as ETH prices fell, then automatically reconverted to ETH as prices recovered. Many positions that would have been fully liquidated in Aave or Compound survived intact because LLAMMA's gradual process gave prices time to recover before full liquidation thresholds were breached. Why it matters for DeFi: LLAMMA represents a genuine innovation in DeFi liquidation mechanics that meaningfully improves borrower experience and system stability. By eliminating cliff-edge liquidation events, it reduces the risk of liquidation cascades that amplify market volatility, and it returns more value to borrowers compared to the discount-based liquidation models that profit external liquidators. The mechanism has influenced the design of subsequent lending protocols exploring continuous liquidation approaches.

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