Forum Link: https://forum.inverse.finance/t/proposal-to-sunset-crvusd-lp-firm-markets-pending-demonstrated-crvusd-stability-under-yield-basis/641

Summary

This proposal initiates a phased collateral factor reduction and liquidation incentive increase across crvUSD-LP FiRM markets along with setting market ceilings to 0 in order to facilitate complete market wind-down and strengthen protocol resilience against ongoing crvUSD volatility and emerging infrastructure concerns. Until there is clear definition of credit line limits and demonstrated crvUSD stability under the new Yield Basis-dominated operational model, this adjustment represents a measured risk mitigation while preserving market functionality for existing borrowers.

Motivation

Recent market volatility has exposed structural pressures on crvUSD's peg stability mechanism, driven primarily by Yield Basis's rapid scaling and associated deleveraging dynamics. Concurrent observations of infrastructure stress during peak volatility periods have reinforced the need for proactive risk management measures to protect DOLA holders from potential contagion effects.

This proposal revisits the strategic direction initially proposed in Proposal 324 and subsequently remediated through Proposal 328, now with additional urgency warranted by material changes in the crvUSD risk landscape since those governance actions.

Background & Rationale

In October 2025, the Risk Working Group identified emerging systemic risks associated with crvUSD's integration with Yield Basis and proposed market deprecation through Proposal 324. That proposal sought to pause new borrows and wind down exposure across crvUSD-LP markets. When Proposal 324 did not pass governance, the TWG implemented a remediation strategy through Proposal 328, which maintained market operations while deploying a hedge position to offset FiRM's crvUSD collateral exposure.

The hedge strategy involved establishing a levered short position against crvUSD on Curve Lend, creating a mechanism to profit from crvUSD depreciation events. While this hedge has performed as designed during recent volatility, it does not constitute a complete risk transfer and leaves the protocol exposed to certain failure modes, particularly those involving oracle infrastructure or rapid price movements.

Current Risk Environment

Since the implementation of Proposal 328, several developments have materially elevated the risk profile of crvUSD exposure:

• PegKeeper Ammo: Curve's PegKeeper system - the automated liquidity provision mechanism designed to defend crvUSD's peg during stress events - became completely depleted and remains at zero capacity. PegKeepers operate identically to Inverse's Fed mechanism: they expand liquidity into AMM pools during normal conditions and contract during depeg events to restore parity. The depletion of this primary defense layer represents a fundamental shift in crvUSD's stability profile.
• Outstanding crvUSD Borrows: With PegKeepers exhausted, crvUSD's peg defense now relies entirely on the secondary mechanism: borrowers repaying crvUSD debt against hard-coded $1.00 valuations. When crvUSD depegs, borrowers can profitably purchase discounted crvUSD from the market and repay their loans, removing supply and supporting the peg. The system incentivizes this behavior by raising variable borrow rates. During last week's volatility, crvUSD variable rates spiked to 300% while crvUSD traded at $0.965, creating obvious arbitrage profits for borrowers. Borrows declined from 74M to 30M (a 60% reduction). This 25M represents the final defensive capacity available. Once exhausted through liquidations or repayments, no systematic peg defense mechanism remains operational.
• Oracle Reliability: During the February 6th market stress event, we observed block inclusion anomalies in the crvUSD-USD price feed consistent with conditions we have documented in past high-stress liquidation environments. Low liquidity coupled with high gas costs strains the liquidation route and opens the door to price feed update block inclusion issues, which in past instances have resulted in bundled negative price movements that exceeded our liquidation incentive buffer and resulted in protocol losses. Another market drawdown of equal or greater magnitude, particularly in an environment where PegKeeper capacity is depleted and crvUSD liquidity is fragmented across pools, creates conditions where these same dynamics could manifest more severely at precisely the moment when liquidation reliability is most critical.
• Yield Basis Credit Line Expansion: Yield Basis's crvUSD credit line has expanded from an initial 60M proposal to the current 1B allocation, with the founder proposing a further 10x increase alongside a complete liquidity migration to optimize pool mechanics under new Curve code. This open-ended expansion trajectory prevents reliable risk assessment. Each credit line increase or migration represents a structural modification to crvUSD's operational dynamics and stress behavior. Until Yield Basis demonstrates it can maintain stability under sustained market-wide volatility at its current scale, and until clear maximum credit line limits are established through governance, we cannot predict how crvUSD will behave during future stress events or establish appropriate risk parameters for our markets.

The fundamental issue is that crvUSD has transitioned from a stablecoin with understood peg defense mechanisms and predictable behavior to one whose stability depends on the experimental scaling of Yield Basis infrastructure. Given our protocol's commitment to DOLA health as the paramount objective, the RWG has determined that collateral factor reductions represent a prudent risk management action at this juncture.

On-Chain Actions

The following adjustments are proposed across the two crvUSD-LP FiRM markets:

• CF from 90% to 87.5%
• LI from 5% to 6.5%
• Market Ceiling to 0 DOLA