Curve Finance implements soft liquidation model to aid borrowers

Getting liquidated in DeFi has traditionally felt like stepping on a trapdoor. Curve Finance decided that was a design problem worth solving, and its answer, called LLAMMA, treats liquidation less like a cliff and more like a gentle slope. The Lending-Liquidating AMM Algorithm, launched in 2023 as part of Curve’s crvUSD stablecoin system, introduces what the protocol calls “soft liquidation.” Rather than nuking a borrower’s collateral the instant a price drops below a set level, LLAMMA splits that collateral across multiple price bands and gradually converts it into crvUSD as the market moves against the borrower. If prices recover, the process reverses. Hard liquidation only kicks in when loan health drops all the way to 0%. How the price band system actually works When a borrower takes out a loan, their collateral gets distributed across a set of price bands. The default is 10 bands, but users can adjust anywhere from 4 to 50 depending on how much granularity they want in their risk management. Soft liquidation begins only when the oracle price enters the borrower’s defined range. At that point, the system starts converting collateral into crvUSD incrementally. If the market boun...