Curve Finance implements soft liquidation model to aid borrowers
The LLAMMA mechanism gradually converts collateral across price bands instead of wiping out positions at a single threshold, and it's quietly reshaping how DeFi handles risk.
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 bounces back, the conversion reverses, returning collateral to its original form.
In simulations, typical losses during soft liquidation run under 0.1% per day. Compare that to traditional hard liquidation systems on platforms like Aave or Compound, where a borrower can lose their entire position in a single transaction once the threshold is breached.
Borrowers also retain meaningful agency throughout the process. While their loan health stays above 0%, they can choose partial repayment, full repayment, or self-liquidation.
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Battle-tested during the June 2024 CRV stress event
LLAMMA got a real stress test in June 2024 during a market event tied to CRV token volatility. During that episode, the soft liquidation mechanism allowed for over-the-counter unwinds of positions rather than forcing everything through on-chain liquidation cascades. The result was noticeably less liquidation pressure on-chain, which helped prevent the kind of contagion spiral that has historically plagued DeFi lending protocols during sharp drawdowns.
LlamaLend V2 expands the model
LlamaLend V2, which has been rolling out progressively in 2026, expands the types of collateral the system accepts while retaining the core LLAMMA mechanism. The upgrade added support for LP tokens and yield-bearing assets, broadening the universe of positions that borrowers can use as collateral.
Following the V2 launch, LlamaLend experienced notable borrowing growth in August 2026, suggesting that the expanded collateral options combined with the soft liquidation model resonated with users looking for more sophisticated risk management tools.
Implications for the broader DeFi lending market
The soft liquidation model also changes the calculus for institutional and larger-scale DeFi participants. One of the persistent barriers to institutional adoption of on-chain lending has been the binary nature of liquidation risk. LLAMMA’s approach is structurally closer to what traditional finance participants expect from gradual margin call mechanics.
That said, the system isn’t risk-free. Curve’s own documentation emphasizes that continuous monitoring remains important, especially in volatile markets. Borrowers who ignore their positions during extended drawdowns can still reach 0% loan health and face hard liquidation.