After the collapse of Luna-UST, stablecoins bid farewell to the era of calculated stability. The CDP mechanism (DAI, GHO, crvUSD) once became the hope of the whole village, but in the end, it was Ethena and the yield anchoring paradigm it represented that broke through the siege of USDT/USDC. It not only avoided the problem of low capital efficiency caused by over-collateralization, but also opened up the DeFi market with its native yield characteristics.

In contrast, after opening up the DEX market by relying on stablecoin transactions, the Curve system has gradually entered the lending market Llama Lend and the stablecoin market crvUSD. However, under the spotlight of the Aave system, the issuance volume of crvUSD has long hovered around US$100 million, and it can basically only be regarded as a background board.

However, after the flywheel of Ethena/Aave/Pendle was launched, Curve's new project Yield Basis also wanted to share a piece of the stablecoin market, also starting with circular leveraged loans, but this time it is trading, hoping to use trading to eliminate the chronic disease of AMM DEX - impermanent loss (IL).

Unilateralism eliminates uncompensated losses

Curve’s latest masterpiece, now your BTC is mine, hold your YB and stand guard.

Yield Basis represents the Renaissance. In one project, you can see liquidity mining, pre-mining, Curve War, staking, veToken, LP Token and revolving loans. It can be said to be the culmination of DeFi development.

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

Large-scale transactions of stablecoins laid the foundation for Curve's on-chain "borrowing" market for early stablecoins such as USDC/USDT/DAI. Curve also became the most important on-chain infrastructure for stablecoins in the pre-Pendle era. Even the collapse of UST was directly caused by the withdrawal of Curve's liquidity.

In terms of token economics, the veToken model and the subsequent "bribery" mechanism Convex made veCRV a truly practical asset in one fell swoop. However, after a four-year lock-up period, the pain in the hearts of most $CRV holders is unspeakable.

After the rise of Pendle and Ethena, Curve's market position is no longer secure. The core reason is that for USDe, hedging comes from CEX contracts, and traffic is diverted to using sUSDe to capture profits. The importance of stablecoin transactions themselves is no longer important.

The Curve system's counterattack first came from Resupply, which was launched in 2024 in collaboration with two old giants, Convex and Yearn Fi. Then, as expected, it collapsed, and the Curve system's first attempt failed.

The incident with Resupply, although not an official Curve project, is a matter of life and death. If Curve does not fight back, it will be difficult to buy a ticket to the future in the new era of stablecoins.

The expert's move is indeed unique. Yield Basis is not targeting stablecoins or the lending market, but the problem of uncompensated losses in AMM DEX. However, let me make it clear first: the real purpose of Yield Basis has never been to eliminate uncompensated losses, but to promote a surge in the issuance of crvUSD.

But let’s start from the mechanism of uncompensated losses. LP (liquidity provider) replaces traditional market makers and provides "bilateral liquidity" for AMM DEX trading pairs under the stimulation of commission sharing. For example, in the BTC/crvUSD trading pair, LP needs to provide 1 BTC and 1 crvUSD (assuming 1BTC = 1USD). 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 agree that p=y/x. At this time, if the BTC price changes, for example, it rises 100% to $2, arbitrage will occur:

Pool A: Arbitrageurs will use $1 to buy 1 BTC, and LPs need to sell BTC to get $2.

Pool B: Selling in Pool B when the value reaches $2, the arbitrageur earns $2-1=$1

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

According to the inequality, when p>0 and is not 1, 2√p < p + 1 is always obtained, and the income of arbitrageurs essentially comes from the losses of LPs. Therefore, under the stimulation of economic interests, LPs tend to withdraw liquidity and hold cryptocurrencies, and AMM protocols must retain LPs through higher fee sharing and token incentives. This is also the fundamental reason why CEX can maintain its advantage over DEX in the spot field.

 Image Caption: Uncompensated Loss

 Image source: @yieldbasis

From the perspective of the entire on-chain economic system, uncompensated losses can be regarded as an "expectation". Once LPs choose to provide liquidity, they can no longer demand returns from holdings. Therefore, in essence, uncompensated losses are more of an "accounting" loss and should not be regarded as a real economic loss. Compared to holding BTC, LPs can also obtain transaction fees.

Yield Basis doesn't think so. They don't eliminate LPs' expected losses by increasing liquidity or raising the fee ratio, but instead start with "market-making efficiency." As mentioned earlier, compared to the p+1 held, the LP's 2√p will never outperform. However, from the perspective of the output ratio of a $1 investment, the initial investment is $2, and the current price is $2√p. The "yield" of each dollar is 2√p/2 = √p. Remember that p is the price of 1 BTC, so if you simply hold, then p is your asset return rate.

Assuming an initial investment of $2, after a 100% increase, the LP returns change as follows:

• Absolute value added: 2 USD = 1 BTC (1 USD) + 1 crvUSD -> 2√2 USD (arbitrageurs take the difference)

• Relative yield: 2 USD = 1 BTC (1 USD) + 1 crvUSD -> √2 USD

Yield Basis starts from the perspective of asset return. By changing √p to p, we can ensure LP fees while retaining holding income. This is very simple, just √p². From a financial perspective, it means 2x leverage, and it must be a fixed 2x leverage. Too high or too low will cause the economic system to collapse.

 Image Caption: Comparison of LP Value Scaling for p and √p

 Image source: @zuoyeweb3

That is to say, 1 BTC can achieve twice its market-making efficiency. Naturally, there is no corresponding crvUSD participating in the fee sharing. BTC only participates in the yield comparison, that is, it transforms from √p to p itself.

Believe it or not, Yield Basis officially announced in February that it had raised $5 million in funding, indicating that some VCs believed it.

However, LPs must add liquidity to the corresponding BTC/crvUSD trading pair. If the pool is filled with only BTC, it will not work. Llama Lend and crvUSD took advantage of this trend and launched a dual lending mechanism:

1. A user deposits 500 BTC (cbBTC/tBTC/wBTC). YB (Yield Basis) uses the 500 BTC to lend out 500 crvUSD equivalent. Note that this is equal value, using the flash loan mechanism, not a full CDP (originally around a 200% collateralization ratio).

2. YB deposits 500 BTC/500 crvUSD into Curve’s corresponding BTC/crvUSD trading pool and mints it into $ybBTC representative shares

3. YB uses LP shares worth 1000U as collateral and then goes to Llama Lend to borrow 500 crvUSD through the CDP mechanism and repay the initial equivalent loan

4. The user receives ybBTC representing 1000U, Llama Lend obtains the 1000U collateral and eliminates the first equivalent loan, and the Curve pool obtains 500BTC/500 crvUSD liquidity

 Image Caption: YB Operation Process Image Source: @yieldbasis

Ultimately, the 500 BTC "eliminated" its own loan and also received an LP share of 1,000 U, achieving a 2x leverage effect. However, please note that the equivalent loan was provided by YB, acting as the crucial middleman. Essentially, YB is assuming the remaining 500 U loan share from Llama Lend, so YB also receives a share of Curve's transaction fees.

If users think that 500U of BTC can generate 1000U of transaction fee profit, then they are right, but if they think that all of it should be given to themselves, that would be a bit rude. In short, it is more than a 50-50 split. YB's little idea is to pay pixel-level tribute to Curve.

Let's calculate the original profit:

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

Now there is good news and bad news:

• Good news: All the lending income of Llama Lend goes back to the Curve pool, which is equivalent to passively increasing LP income

• Bad news: Curve pool’s transaction fees are fixed at 50% for the pool itself, which means both LP and YB have to share the remaining 50% of the transaction fees.

However, the transaction fees allocated to veYB are dynamic. In fact, they are dynamically divided among ybBTC and veYB holders, with veYB receiving a fixed minimum guaranteed share of 10%. That is to say, even if no one pledges ybBTC, they can only obtain 45% of the original total income, while veYB, or YB itself, can obtain 5% of the total income.

A magical result appeared. Even if users do not pledge ybBTC to YB, they can only get 45% of the transaction fee. If they choose to pledge ybBTC, they can get YB Token, but they have to give up the transaction fee. If they want both, they can continue to pledge YB and exchange it for veYB, then they can get the transaction fee.

 Image caption: ybBTC and veYB revenue sharing

 Image source: @yieldbasis

Uncompensated losses never go away, they just shift.

You think you can use 500U equivalent to BTC to achieve the market-making effect of 1000U, but YB does not say that all the market-making profits will be given to you. Moreover, after you pledge it into veYB, you have to unstake it twice, veYB->YB, ybBTC->wBTC, to get back the original funds and profits.

However, if you want to obtain full voting rights of veYB, that is, the bribery mechanism, then congratulations, you have obtained a four-year lock-up period. Otherwise, the voting rights and income will gradually decrease with the staking period. So whether it is worth locking up for four years and giving up BTC liquidity to obtain YB depends on personal consideration.

As mentioned earlier, uncompensated losses are a type of bookkeeping loss, and as long as liquidity is not withdrawn, it is a floating loss. Now YB's elimination plan is essentially also "bookkeeping income", giving you a floating profit anchored by the income you hold, and then cultivating your own economic system.

You want to use 500U to leverage the transaction fee income of 1000U, and YB wants to "lock" your BTC and sell its own YB to you.

Multi-party negotiation embraces the growth flywheel

In this era of great profits, come if you have a dream.

Based on Curve and using crvUSD, while it will empower $CRV, it also opens up a new Yield Basis protocol and token, $YB. So, will YB be able to maintain and increase its value in four years? I’m afraid…

In addition to the complex economic mechanism of Yield Basis, the focus is on the market expansion path of crvUSD.

Llama Lend is essentially a part of Curve, but the founder of Curve actually proposed to issue an additional $60 million of crvUSD to provide initial liquidity for YB, which is a bit bold.

 Image caption: YB has not moved, crvUSD has been released first. Image source: @newmichwill

YB will give benefits to Curve and $veCRV holders as planned, but the core issue is the pricing and appreciation of YB Token. After all, crvUSD is U, so is YB really an asset with value?

Not to mention that if there is another ReSupply incident, it will affect the Curve itself.

Therefore, this article does not analyze the token linkage and profit-sharing plan between YB and Curve. $CRV is a lesson not far away, $YB is destined to be worthless, and there is no point in wasting bytes.

However, in his defense of the additional issuance, we can get a glimpse of Michael's brilliant ideas. The BTC deposited by users will "increase" the equivalent value of crvUSD. The benefit is that the supply of crvUSD will be increased, and each crvUSD will be put into the pool to earn transaction fees. This is a real trading scenario.

But in essence, this part of the crvUSD reserve is equal rather than excessive. If the reserve ratio cannot be increased, then increasing the crvUSD profit effect is also a way. Do you remember the relative rate of return of funds?

According to Michael's vision, the borrowed crvUSD will work efficiently with the existing trading pool. For example, wBTC/crvUSD will be linked 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 pair will be divided 50% to $veCRV holders and the remaining 50% to LPs.

It can be said that this is a very dangerous assumption. The crvUSD that Llama Lend mentioned above lent to YB is for exclusive use in a single pool, but pools such as crvUSD/USDC are not accessible. At this time, crvUSD is essentially insufficient in reserves. Once the currency value fluctuates, it is very easy for arbitrageurs to fleece it, followed by the familiar death spiral. Problems with crvUSD will affect YB and Llama Lend, and ultimately affect the entire Curve ecosystem.

It is important to note that crvUSD and YB are tied together. 50% of the newly issued liquidity must enter the YB ecosystem. The crvUSD used by YB is isolated in issuance, but not in use. This is the biggest potential point of collapse.

 Image Caption: Curve Profit Sharing Plan

 Image credit: @newmichwill

Michael’s plan is to use 25% of the YB Token issuance to bribe the stablecoin pool to maintain its depth. This is almost a joke. Asset security: BTC>crvUSD>CRV>YB. When the crisis comes, YB can’t even protect itself, so what else can it protect?

YB's own issuance is the product of the transaction fee sharing of the crvUSD/BTC trading pair. Remember, the same is true for Luna-UST. UST is an equivalent mintage of Luna's destroyed amount. The two rely on each other, and the same is true for YB Token<>crvUSD.

It can be even more similar. According to Michael's calculations, based on the BTC/USD trading volume and price performance over the past six years, he calculated that a 20% APR can be guaranteed, and a 10% rate of return can be achieved even in a bear market. The high point of the bull market in 2021 can reach 60%. If a little bit of power is given to crvUSD and scrvUSD, surpassing USDe and sUSDe is not a dream.

Because the amount of data is too large, I don’t have backtest data to verify its calculation ability, but don’t forget that UST also guaranteed a 20% return, and the Anchor + Abracadabra model has also been running for quite a long time. Could it be that the combination of YB+Curve+crvUSD will be different?

At least, UST frantically purchased BTC as a reserve before the collapse, and YB is directly based on BTC as a leveraged reserve, which is also a huge improvement.

Forgetting is betrayal.

Starting with Ethena, on-chain projects began to look for real returns rather than just looking at the market-to-dream ratio.

Ethena uses CEX to hedge ETH to capture profits, distributes profits through sUSDe, and uses the $ENA treasury strategy to maintain the trust of large investors and institutions. Only through multiple maneuvers can the USDe issuance volume of tens of billions of dollars be stabilized.

There is nothing wrong with YB seeking real trading returns, but arbitrage is different from lending. Transactions are more immediate. Every crvUSD is a joint liability of YB and Curve, and the collateral itself is borrowed from users, so the company’s own funds are very close to zero.

The current issuance volume of crvUSD is very small, and it is not difficult to maintain the growth flywheel and 20% return rate in the early stage. However, once the scale expands, the increase in YB price, the fluctuation in BTC price, and the decline in crvUSD's value capture ability will cause significant selling pressure.

The US dollar is an unanchored currency, and crvUSD will soon be one too.

However, the nested risks of DeFi have been priced into the overall systemic risk of the chain, so if it is a risk for everyone, it is not a risk. Instead, those who do not participate will passively share the losses of the collapse.

Conclusion

The world will give a person a chance to shine, and only those who can seize it are heroes.

The Yield Basis of traditional finance is the U.S. Treasury yield. Will the Yield Basis on the chain be BTC/crvUSD?

YB logic works only when the on-chain transactions are large enough, especially when Curve itself has a huge transaction volume. In this case, eliminating uncompensated losses makes sense. Here is an analogy:

• The amount of electricity generated is equal to the amount of electricity consumed. There is no static electricity. It is used as soon as it is generated.

• Trading volume is equal to market capitalization, every token is in circulation and can be bought and sold immediately

Only through continuous and sufficient transactions can the price of BTC be discovered, the value logic of crvUSD be closed, and additional issuance from BTC lending and profits from BTC transactions can be achieved. I am confident in the long-term rise of BTC.

BTC is the CMB (Cosmic Microwave Background) of the crypto universe. Since the financial big bang in 2008, as long as humans do not want to restart the world order through revolution or nuclear war, the overall trend of BTC will rise. This is not because of more consensus on the value of BTC, but because of confidence in the inflation of the US dollar and all fiat currencies.

But I have moderate confidence in the technical capabilities of the Curve team, and after ReSupply I have deep doubts about their ethics. However, it is difficult for other teams to dare to try in this direction. There is no choice but to lose money and lose those who are destined to benefit.

UST frantically bought BTC on the eve of its demise, switched to USDC during the fluctuation of USDe reserves, and Sky was even more frantic in embracing government bonds. This time, I wish Yield Basis good luck.