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Detecting Depegs: Towards Safer Passive Liquidity Provision on Curve Finance

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  • Thomas N. Cintra
  • Maxwell P. Holloway

Abstract

We consider a liquidity provider's (LP's) exposure to stablecoin and liquid staking derivative (LSD) depegs on Curve's StableSwap pools. We construct a suite of metrics designed to detect potential asset depegs based on price and trading data. Using our metrics, we fine-tune a Bayesian Online Changepoint Detection (BOCD) algorithm to alert LPs of potential depegs before or as they occur. We train and test our changepoint detection algorithm against Curve LP token prices for 13 StableSwap pools throughout 2022 and 2023, focusing on relevant stablecoin and LSD depegs. We show that our model, trained on 2022 UST data, is able to detect the USDC depeg in March of 2023 at 9pm UTC on March 10th, approximately 5 hours before USDC dips below 99 cents, with few false alarms in the 17 months on which it is tested. Finally, we describe how this research may be used by Curve's liquidity providers, and how it may be extended to dynamically de-risk Curve pools by modifying parameters in anticipation of potential depegs. This research underpins an API developed to alert Curve LPs, in real-time, when their positions might be at risk.

Suggested Citation

  • Thomas N. Cintra & Maxwell P. Holloway, 2023. "Detecting Depegs: Towards Safer Passive Liquidity Provision on Curve Finance," Papers 2306.10612, arXiv.org.
    • Handle: RePEc:arx:papers:2306.10612
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    File URL: http://arxiv.org/pdf/2306.10612
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    References listed on IDEAS

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    1. Easley, David & Hvidkjaer, Soeren & O’Hara, Maureen, 2010. "Factoring Information into Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(2), pages 293-309, April.
    2. Foucault, Thierry & Pagano, Marco & Roell, Ailsa, 2013. "Market Liquidity: Theory, Evidence, and Policy," OUP Catalogue, Oxford University Press, number 9780199936243, Decembrie.
    3. Andreas A. Aigner & Gurvinder Dhaliwal, 2021. "UNISWAP: Impermanent Loss and Risk Profile of a Liquidity Provider," Papers 2106.14404, arXiv.org.
    4. Imran Yousaf & Shoaib Ali & Wing-Keung Wong, 2020. "An Empirical Analysis of the Volatility Spillover Effect between World-Leading and the Asian Stock Markets: Implications for Portfolio Management," JRFM, MDPI, vol. 13(10), pages 1-28, September.
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    Cited by:

    1. Papa Ousseynou Diop & Julien Chevallier & Bilel Sanhaji, 2024. "Collapse of Silicon Valley Bank and USDC Depegging: A Machine Learning Experiment," FinTech, MDPI, vol. 3(4), pages 1-22, December.
    2. Yuval Boneh, 2024. "Autonomous Money Supply Strategy Utilizing Control Theory," Papers 2407.13232, arXiv.org.

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