The technique of transferring uncompensated losses, is Curve's new work Yield Basis a financial innovation or a Ponzi trap?

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 it was Ethena and the yield anchoring paradigm it represents that broke through the encirclement of USDT/USDC. It not only avoids the inefficiencies caused by excessive staking but also leverages the native yield characteristics to open up the DeFi market.

In contrast, the Curve system, after relying on stablecoin trading to open up the DEX market, has 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 USD, 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 get a share of the stablecoin market, starting with cyclical leveraged lending, but this time through trading, hoping to eliminate the chronic disease of AMM DEX - impermanent loss (IL, Impermanent Loss).

Unilateralism eliminates uncompensated losses

The latest masterpiece of Curve, now your BTC is mine, hold on to your YB for guard duty.

Yield Basis represents the Renaissance, in a project, you can see liquidity mining, pre-mining, Curve War, stake, veToken, LP Token and circular lending, it can be said to be a culmination of DeFi development.

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

The large-scale trading of stablecoins has established Curve's position in the on-chain "lending" market for early stablecoins like 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 Curve's liquidity withdrawal.

In token economics, the veToken model, along with the subsequent "bribery" mechanism of Convex, has made veCRV a truly functional asset. However, after a four-year lock-up period, most $CRV holders are filled with unspoken pain.

After the rise of Pendle and Ethena, Curve's market position is no longer secure, mainly because for USDe, the hedging comes from CEX contracts, and the flow uses sUSDe to capture yields, making the importance of stablecoin trading itself not significant anymore.

The counterattack from the Curve ecosystem first came from Resupply, launched jointly by the two old giants Convex and Yearn Fi in 2024, followed by an expected explosion, marking the first failure of the Curve ecosystem's attempt.

Resupply has encountered issues. Although it is not an official Curve project, it’s like breaking a bone and connecting the tendons. If Curve does not retaliate 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 others. Yield Basis does not target stablecoins or the lending market, but rather the impermanent loss issue in AMM DEX. However, let me clarify: the true purpose of Yield Basis has never been to eliminate impermanent loss, but to promote a surge in the issuance of crvUSD.

But still starting from the mechanism of the occurrence of impermanent loss, LP (liquidity providers) replace traditional market makers, and under the incentive of fee sharing, provide "bilateral liquidity" for AMM DEX trading pairs. 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, and we agree that p=y/x. At this point, if the price of BTC changes, for example, increases by 100% to 2 USD, an arbitrage situation will occur:

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

Pool B: Sell within Pool B when the value reaches 2 USD, arbitrageurs net earn 2-1=1 USD.

The profit of arbitrageurs essentially comes from the losses of LP in pool A. To quantify this loss, one can first calculate the value of LP after the arbitrage occurs as LP(p) = 2√p (where x and y are 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 obtained that 2√p < p + 1, 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, while 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 market.

Image description: Impermanent loss

Image source: @yieldbasis

From the perspective of the entire blockchain economic system, impermanent loss can be viewed as a kind of "expectation". Once an LP chooses to provide liquidity, they can no longer demand the returns from their holdings. Therefore, impermanent loss is essentially more of an "accounting" loss rather than 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 and raising the fee proportion, but rather focus on "market-making efficiency." As mentioned earlier, compared to holding p+1, LP's 2√p can 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 dollars. The "yield" for each dollar is 2√p/2 = √p. Do you remember that p is the price of 1 BTC? So if you simply hold, then p is your asset's yield.

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

2√2 USD (arbitrageurs will take the difference)

√2 USD

Yield Basis takes an approach from the perspective of asset returns, allowing √p to become p, which can ensure LP fees while retaining holding income. This is very simple; √p² is sufficient. From a financial perspective, it requires a fixed 2x leverage, as too high or too low will lead to the collapse of the economic system.

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

Image source: @zuoyeweb3

This allows 1 BTC to exhibit double the market-making efficiency, inherently not corresponding to the crvUSD participation in fee sharing. BTC is left only with its own participation in 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 shows that some VCs believed in it.

However! LPs must add liquidity corresponding to the BTC/crvUSD trading pair; if the pool is filled with BTC, it cannot operate. Llama Lend and crvUSD have leveraged this opportunity to launch a dual lending mechanism:

1. The user deposits (cbBTC/tBTC/wBTC) 500 BTC, and YB (Yield Basis) uses 500 BTC to borrow an equivalent of 500 crvUSD. Note that this is an equivalent amount, utilizing the flash loan mechanism, not a complete CDP (originally about 200% stake ratio).

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

3. YB uses the LP share worth 1000U as collateral to borrow 500 crvUSD through the CDP mechanism at Llama Lend and repays the initial equivalent loan.

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

Image description: YB operation process Image 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 was borrowed by YB, acting as the most crucial intermediary; essentially, YB is taking on the remaining 500 U loan share from Llama Lend, so YB also has to share the Curve's transaction fees.

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

Let's calculate the original收益:

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

There is now a good news and a 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 fees for the Curve pool are fixed at 50% for the pool itself, which means 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 distributed dynamically among ybBTC and veYB holders, with veYB having a fixed minimum of 10% guaranteed share. This means that even if no one stakes ybBTC, they can only receive 45% of the original total income, while veYB, which is YB itself, can receive 5% of the total income.

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

Image Description: ybBTC and veYB Revenue Sharing

Image source: @yieldbasis

Uncompensated losses will never disappear; they will only be transferred.

YB, ybBTC

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

As mentioned earlier, impermanent loss is an accounting loss that only manifests as a floating loss as long as liquidity is not withdrawn. Now, YB's elimination plan is essentially "accounting income," giving you a floating gain that anchors your holding returns, and then nurturing 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 YB to you.

Multi-party negotiations embrace the growth flywheel

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

Based on Curve, using crvUSD, although it will empower $CRV, it also opens a new Yield Basis protocol and token $YB. So, will YB maintain its value and appreciate after four years? I'm afraid...

Outside 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 the founder of Curve actually proposed to issue 60 million dollars of crvUSD to provide initial liquidity for YB, which is quite bold.

Image description: YB is unchanged, crvUSD is released 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. At the end of the day, crvUSD is U, so is YB really an appreciating asset?

Not to mention if a ReSupply event occurs again, 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 warning not to be ignored, and $YB is destined to be worthless; it is meaningless to waste bytes.

However, in defending his decision to issue more, one can glimpse Michael's creative ideas. The BTC deposited by users will "issue" an equivalent amount of crvUSD, which benefits by increasing the supply of crvUSD. Each crvUSD will be投入池中赚手续费, which is 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 profitability effect of crvUSD is also a method. 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 be linked with crvUSD/USDC, promoting the trading volume of the former, which will also increase the trading volume of the latter.

The transaction fees for the crvUSD/USDC trading pair will be distributed 50% to $veCRV holders, and the remaining 50% will be given to LP.

It can be said that this is a very dangerous assumption. The crvUSD lent by Llama Lend to YB mentioned earlier is designated for single pool usage, but pools like crvUSD/USDC are unrestricted. At this point, the crvUSD essentially has insufficient reserves. Once the currency value fluctuates, it can easily be exploited by arbitragers, leading to the familiar death spiral. If crvUSD encounters issues, it will also affect YB and Llama Lend, ultimately impacting the entire Curve ecosystem.

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

Image description: Curve Profit Sharing Plan

Image source: @newmichwill

The plan proposed by Michael is to bribe the stablecoin pool with 25% of the YB Token issuance 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?

YB's own issuance is the product of the fee-sharing from the crvUSD/BTC trading pair. Do you remember? Luna-UST is also like this, UST is the equivalent minting of the amount of Luna destroyed, the two rely on each other. YB Token<>crvUSD is also like this.

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 estimates that a 20% APR can be guaranteed, and a 10% yield can be achieved even in a bear market. The peak during the bull market in 2021 could reach 60%. 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 backtest data to validate his calculation ability, but don't forget that UST also guaranteed a 20% return, and the Anchor + Abracadabra model has been running for quite a long time. Is it possible that the combination of YB + Curve + crvUSD would be any different?

At least, UST madly bought BTC as reserves before the crash, and YB directly used BTC to leverage reserves, which is also a significant improvement.

Forgetting is betrayal.

Starting from Ethena, on-chain projects began to seek real returns, rather than just looking at market speculation.

Ethena utilizes CEX to hedge ETH for yield capture, distributes earnings through sUSDe, and employs the $ENA treasury strategy to maintain trust among large holders and institutions, with multiple maneuvers stabilizing the USDe issuance of ten billion dollars.

YB wants to seek real trading profits, which is not a problem in itself, but arbitrage and lending are different; 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 self-owned funds being close to zero.

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

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

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

Conclusion

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

The Yield Basis of traditional finance is the yield on U.S. Treasuries, will the Yield Basis on-chain be BTC/crvUSD?

The logic of YB 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, which can be compared to:

• The power generation equals the electricity consumption, and there is no static "electricity", it is generated and used immediately.

• The trading volume equals the market capitalization, and every token is in circulation, meaning it 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 reboot 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 USD and all fiat currencies.

However, I have a moderate level of trust in the technical capabilities of the Curve team, and I hold deep skepticism about their ethical standards after ReSupply. However, it is also difficult for other teams to dare to try in this direction; it is helpless as money flows away, and there are no-cost losses for those who are fated.

UST crazily bought BTC on the eve of its demise, converting reserves into USDC during the fluctuations of USDe, and Sky is even more crazily embracing government bonds. This time, good luck to Yield Basis.