Difference between revisions of "Liquity"
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The troves are the equivalent of MakerDAO's vaults. It's the contract enabling the user to lock its ETH in order to borrow LUSD. While the protocol is operating normally, a '''minimal collateralization ratio of 110% is required''', meaning users can borrow at max about 90% of the value of their ETH in LUSD. When a given troves goes below a collateralization ratio of 110% (or 150% in Recovery Mode), it can be liquidated. | The troves are the equivalent of MakerDAO's vaults. It's the contract enabling the user to lock its ETH in order to borrow LUSD. While the protocol is operating normally, a '''minimal collateralization ratio of 110% is required''', meaning users can borrow at max about 90% of the value of their ETH in LUSD. When a given troves goes below a collateralization ratio of 110% (or 150% in Recovery Mode), it can be liquidated. | ||
Troves can be managed by end-user directly through one of the several Liquity front- | Troves can be managed by end-user directly through one of the several Liquity front-ends. However, Liquity is also supported by service providers such as DeFiSaver<ref>https://app.defisaver.com/liquity/manage</ref> or InstaDapp<ref>https://defi.instadapp.io/liquity</ref>, enabling users to conveniently manage their troves and set up automated strategies to avoid liquidations. | ||
=== Liquidations === | === Liquidations === | ||
=== | === Stability Pool === | ||
The Stability Pool serves as a liquidity backstop for the protocol. It's a pool made of LUSD deposited by users and used to ensure liquidations can happen when needed. | |||
Users staking LUSD in the Stability Pool earn a yield in LQTY, Liquity's native token. During a liquidation, the debt of the Trove is canceled and absorbed by the Stability Pool, and its collateral is distributed among its suppliers. | |||
Therefore, over time Stability Pool depositors lose a pro-rata share of their LUSD deposits, while gaining a pro-rata share of the liquidated collateral (ETH). | |||
=== Recovery Mode === | === Recovery Mode === | ||
=== Redemption === | |||
=== Dual Oracles + Fallback system === | === Dual Oracles + Fallback system === | ||
Revision as of 19:24, 21 April 2022
Liquity is a smart contract lending service enabling users to take out over-collateralized loans by locking ETH as collateral to borrow LUSD, a stablecoin pegged to the U.S. dollar. Once generated, LUSD can serve diverse usage: a hedge against volatility, a tool to get leverage on ETH, or even access yields through DeFi applications.
Launched in April 2021, the platform grew to a total value locked of $1.15 billion as of April 2022.[1]
The service provided by Liquity is similar to MakerDAO, but the protocol has several specificities, the main one being that Liquity and LUSD are fully unstoppable: the services are enabled thanks to smart contracts that have no administrative functions. It means that just like Uniswap, the Liquity protocol cannot be modified in any way and will operate as long as the Ethereum network synchronizes.
The LUSD Stablecoin
The LUSD stablecoin is a decentralized, unstoppable, and collateral-backed cryptocurrency soft-pegged to the US Dollar. LUSD is created when users borrow against locked collateral. LUSD tokens are destroyed upon repayment, freeing a corresponding amount of the underlying collateral.
Collateral
Liquity is only a borrowing service: there are no lenders. Instead, the protocol itself acts as the counter party of the borrow, just like with MakerDAO.
The only token accepted as collateral on Liquity is Ether (ETH). While it is restricting, it also allows the protocol to avoid frequent trustlessness pitfalls observed in other decentralized stablecoins, such as DAI or FRAX, whose majority of the collateral backing them are centralized and censurable stablecoins such as USDC.
Service Fees
The fee structure on Liquity differs from the usual interest rate charged to borrowers on Maker or Aave. Instead, Liquity provides interest-free borrowing: a unique one-time borrowing fee is paid while minting LUSD.
The base rate is 0.50% of the borrowed amount. However, this figure can dynamically increase to preserve the protocol's equilibrium during periods with large demands for LUSD minting or redemptions.
Usecases
Since Liquity provides interest-free borrowing, it is particularly cost-effective for long-term positions. Borrowing on Liquity can serve various use-cases, including:
- To earn income on ETH, users can mint LUSD to deposit them in the Stability Pool or other DeFi services in order to earn yields.
- Borrowing against collateral instead of selling it can have benefits when it comes to tax.
- Recursive borrowing to achieve leverage on an ETH position (Deposit ETH > Borrow LUSD > Swap to ETH > Loop)
LUSD in DeFi
The primary source of liquidity for LUSD is the LUSD/3pool on Curve.[2] It has a corresponding Yearn Vault, and it's also available through Convex.
LUSD is also available in the Saddle D4 pool, along with alUSD, FEI and FRAX.[3]
Finally, DAOs such as the OlympusDAO also took interest in LUSD: its desirable resiliency draw the DAO to accumulate it as an alternative reserve asset. Thanks to bonds, about 12 millions LUSD are part of the OHM/LUSD SushiSwap pool (Olympus protocol owned liquidity). OlympusDAO also owns about 23 millions LUSD staked in the Stability Pool.[4]
Holders of LUSD can also earn LQTY yields by depositing in the Stability Pool detailed in the next section.
Liquity Protocol
Troves
The troves are the equivalent of MakerDAO's vaults. It's the contract enabling the user to lock its ETH in order to borrow LUSD. While the protocol is operating normally, a minimal collateralization ratio of 110% is required, meaning users can borrow at max about 90% of the value of their ETH in LUSD. When a given troves goes below a collateralization ratio of 110% (or 150% in Recovery Mode), it can be liquidated.
Troves can be managed by end-user directly through one of the several Liquity front-ends. However, Liquity is also supported by service providers such as DeFiSaver[5] or InstaDapp[6], enabling users to conveniently manage their troves and set up automated strategies to avoid liquidations.
Liquidations
Stability Pool
The Stability Pool serves as a liquidity backstop for the protocol. It's a pool made of LUSD deposited by users and used to ensure liquidations can happen when needed.
Users staking LUSD in the Stability Pool earn a yield in LQTY, Liquity's native token. During a liquidation, the debt of the Trove is canceled and absorbed by the Stability Pool, and its collateral is distributed among its suppliers.
Therefore, over time Stability Pool depositors lose a pro-rata share of their LUSD deposits, while gaining a pro-rata share of the liquidated collateral (ETH).