What is LLAMMA in CurveUSD?

TL;DR: LLAMMA is an AMM for continuous (de)liquidation, intentionally creating arbitrage spaces as incentives for arbitrage bots to rebalance the collateral assets in the pool. Bots are essentially performing partial (aka soft) liquidations that work both ways.

LLAMMA is a new type of AMM introduced by the Curve team that incentivizes arbitrage bots to liquidate the collateral in the active band (price range) LINK by increasing (or decreasing) the P_AMM price (the price of collateral in the pool) faster than the P_ORACLE (market price).

Let's examine both scenarios:

Case 1: Oracle price decrease (P_AMM < P_ORACLE). If the oracle price of the collateral starts to fall, the algorithm will make the AMM price decrease faster, creating an arbitrage opportunity to deposit $crvUSD into the pool and withdraw the collateral asset (e.g. ETH). This results in collateral being liquidated to $crvUSD.

Case 2: Oracle price increase (P_AMM > P_ORACLE). If the oracle price of the collateral starts to rise, the algorithm will make the AMM price increase faster, creating an arbitrage opportunity to deposit ETH into the pool and withdraw $crvUSD. This results in collateral being shifted back to ETH.

Keep in mind that there is no debt repayment during the process of soft liquidation. The collateral asset is just rebalanced by shifting it from a volatile asset (e.g. ETH) to the stable asset $crvUSD, and vice versa. The more non-volatile collateral, the healthier the position.