Liquity (LQTY)
Liquity is a decentralized borrowing protocol operating on various blockchains, including Ethereum. It is designed to facilitate interest-free loans backed by Ethereum collateral, disbursed in LUSD, a stablecoin. The protocol is non-custodial, immutable, and operates without governance, ensuring a secure and transparent borrowing process.
Overview
Liquity was founded in December 2019 by Robert Lauko and Rick Pardoe. It operates as a borrowing system where loans are issued in LUSD, a USD-pegged stablecoin, with a minimum collateral ratio of 110%. The protocol does not have its own frontend, allowing users to choose from third-party operators, promoting decentralization. Liquity addresses the need for stable-value assets in Ethereum applications by offering an efficient and user-friendly way to borrow stablecoins.
| Ticker | LQTY |
| Category | Decentralized Finance (DeFi) |
| Website | https://www.liquity.org/ |
| @LiquityProtocol | |
| Contract Addresses | |
|---|---|
| ethereum | 0x6d...4d Copied! |
| arbitrum-one | 0xfb...49Copied! |
Stability pool
The Stability Pool is crucial for managing Liquity's solvency, providing liquidity to repay debts from liquidated Troves and supporting the overall LUSD supply. During a Trove liquidation, the Stability Pool uses its LUSD balance to cover the debt and acquire the collateral. Users, known as Stability Providers, fund the pool by depositing LUSD, expecting to gain more collateral relative to the debt settled. This setup offers potential liquidation gains and rewards in LQTY tokens.
Liquidations
Liquidations occur when Troves fall below a 110% collateral ratio, ensuring the stablecoin supply remains fully backed. In a liquidation, the Stability Pool absorbs the Trove's debt, and the collateral is distributed to Stability Providers. Trove owners retain the borrowed LUSD but incur a 10% loss. Liquidations can be initiated by anyone, who receives gas compensation funded by a Liquidation Reserve.
Redemptions
Redemptions involve exchanging LUSD for ETH at a nominal rate of $1 per LUSD. Users can redeem LUSD for ETH without restrictions, though a redemption fee may apply. The dynamic base rate, which influences the fee, increases with each redemption and decays over time. Redemptions aim to convert LUSD to ETH, distinct from debt repayment, which adjusts a Trove's debt and collateral.
Price stability
Liquity maintains stability through hard and soft peg mechanisms. Hard pegs ensure LUSD can be redeemed for ETH at $1, with a redemption fee to prevent excessive redemptions. Soft pegs align LUSD with USD, using Trove collateral ratios to establish parity. The protocol also employs an algorithmically determined issuance fee to manage LUSD creation and stabilize supply and demand. The Stability Pool acts as a reserve supporting LUSD's value.
Oracles: Chainlink and Tellor
Liquity uses Chainlink as its primary oracle and Tellor as a secondary oracle for reliability and decentralization. Both oracles use a proxy-logic pattern for upgrades. If both oracles fail, Liquity relies on the last reliable price and seeks recovery, ensuring system stability with a dual-oracle design.
Frontend operators
Frontend operators facilitate user interaction with Liquity via web interfaces, receiving LQTY token rewards. The Kickback Rate set by operators determines LQTY distribution among Stability Pool depositors and users. Running a frontend involves using the Liquity frontend launch kit or integrating the protocol through the Frontend SDK.
Liquity v2
Liquity v2 introduces principal protection to enhance hedging positions and includes a secondary market to manage liabilities. Hedging positions are perpetual and not subject to liquidation, allowing users to exit and claim reserves based on price movements.
Principal protection
Principal protection in Liquity V2 aims to make hedging products more attractive by shielding users from losses during market downturns. Users receive assurance that they can sell their position for at least its principal amount. This feature enhances leverage products by offering upside potential and downside protection. Liquity V2 collects premiums through an auction-like mechanism to maintain overcollateralization.
Subsidizing secondary market sales
The secondary market in Liquity V2 allows users to trade hedging positions, aiming to prevent bank run scenarios. If no buyers are present, the protocol subsidizes sales using collected premiums, ensuring stability and decentralization.
Tokenomics
Liquity USD Token (LUSD)
LUSD is an ERC-20 stablecoin that powers the Liquity borrowing protocol. It requires users to maintain a Trove with ETH collateral and a 110% collateral rate. LUSD can be exchanged directly for fiat or other tokens like USDT.
Liquity Token (LQTY)
LQTY is a secondary token that captures fee revenue and incentivizes Stability Providers. With a capped supply of 100,000,000 tokens, LQTY is not a governance token. It rewards those depositing LUSD, facilitating Stability Pool deposits, and providing liquidity.
Allocation
LQTY tokens are allocated as follows:
- Liquity Community: 35.3%
- Team and Advisors: 23.7%
- Investors: 33.9%
- Liquity AG Endowment: 6.1%
- Service Providers: 1%
Distribution schedule
LQTY issuance follows an annual halving schedule, offering favorable incentives for early adopters while ensuring long-term sustainability.
Investors
Key investors in Liquity include:
- Polychain Capital
- Tomahawk.vc
- Lemniscap
- 1kx
- A Capital
- Alex Pack
- Robot Ventures
- DFINITY Ecosystem Fund
- Pantera Capital
- Nima Capital
- Alameda Research
- Greenfield.one
- IOSG
- Angel DAO