Curve changes DeFi lending model with Llamalend v2 upgrade

Curve Finance has launched Llamalend v2 on Optimism with support for isolated lending markets and non-crvUSD borrowing pairs, opening the first phase of a lending system upgrade ahead of a planned Ethereum mainnet rollout later this year.

According to Curve Finance, the new version removes a key limitation from Llamalend v1, which was built around crvUSD as the borrowed asset. Markets can now be created using supported assets on both sides of a lending pair, subject to governance approval, allowing collateral and borrowed assets to be selected without requiring crvUSD.

The deployment begins on Optimism, where Curve said users will initially be able to access three isolated markets: ETH against wstETH, wstETH against USDC, and WBTC against USDC.

All three markets will launch with borrow caps set at zero, meaning users can lend assets but cannot borrow until governance approves debt limits through a DAO vote expected to take about seven days.

LP tokens can now support borrowing activity

Alongside the expansion beyond crvUSD markets, Curve has introduced support for LP tokens as collateral. According to the protocol, liquidity providers can deposit Curve LP tokens, continue earning trading fees from liquidity pools, and borrow against those positions simultaneously.

The update ties lending activity more closely to Curve’s exchange infrastructure. Curve said the framework could also support other productive collateral types in the future, including yield-bearing vault assets and principal tokens used in fixed-yield strategies.

Llamalend v2 retains the liquidation model introduced with the original protocol in early 2024. Rather than liquidating a position at a single price point, the system uses a liquidation range that gradually converts collateral into the borrowed asset as prices move through predefined levels.

Curve previously said the design was created to reduce concentrated liquidation pressure during periods of market stress and give borrowers more time to manage positions.

Risk controls remain separated on a market-by-market basis. According to Curve, each lending market carries its own collateral asset, borrowed asset, oracle configuration, borrowing limits, and risk parameters. Borrow caps start at zero and must receive governance approval before debt can accumulate.

LlamaRisk reviews markets before borrowing begins

For the initial rollout, Curve said LlamaRisk will review proposed collateral assets and oversee market assessments before markets move through governance. The protocol noted that isolated markets reduce the possibility of risks spreading between unrelated lending pairs.

Support for the launch includes a 250,000 OP token grant from the Optimism Foundation, according to Curve’s announcement. The incentives are expected to be distributed over roughly two months to encourage liquidity and participation.

Curve’s technical documentation also states that an initial incentives campaign will distribute 100,000 OP tokens through Merkl across the first markets.

Before enabling borrowing, Curve said it chose to deploy on Optimism to observe contract behavior, integrations, and user activity in a lower-risk environment. A launch on the Ethereum Mainnet is expected during the second half of the year.

The rollout follows other recent lending-related initiatives from Curve. As previously reported by crypto.news, the protocol introduced a bad-debt recovery framework for LlamaLend markets that converts distressed lending positions into tradable on-chain claims.

Curve founder Michael Egorov described that mechanism as an investment tool that could eventually be applied to other markets if successful.