EP 57 LQTY Stable Coin | Solving Maker's DAI Problem and No Governance

Liquity Protocol.

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General Conclusion

Liquity is a decentralised borrowing protocol similar to the Maker DAO. In the Liquity protocol, users lock collateral to open collateralised debt positions (CDPs, in Liquity called troves). The system then lends the user $LUSD from the system - a stablecoin pegged to $1.

The two main and essential components of the project are $LUSD — stablecoin and $LQTY — revenue token:

  • $LUSD is a stablecoin that is collateralised only by $ETH and is kept stable at peg 1 $LUSD = 1 $USD.

  • Liquity ($LQTY) is the project's utility token, only used for staking and earning protocol revenue generated during borrowing and redeeming $LUSD.

Classifying Stablecoins

We look at them in four different ways:

  1. Mechanism

  2. Peg

  3. Collateral amount

  4. Collateral type

About $LUSD

It uses two mechanisms, a dual-token and a reserve. It's soft pegged to USD and the collateral amount is over-collateralised. It uses just $ETH as collateral type.

Dual-Token Model

There are two tokens in the system, $LUSD, which is a stablecoin soft pegged to USD and the other one is $LQTY which is not a governance token but purely a value accrual token. When we talk about value accrual there is a liquidation fee that is generated from the system. The $LQTY holders will be receiving this liquidation fee which is the profits from the system. You hold $LUSD when you want to be using it, creating it, and paying people in it and you hold $LQTY when you want to receive accrual from the system.

Reserves

Reserves are over-collateralised. Ideally, it is 150% over-collateralised, but the entire system is 200% over-collateralised. The lower bound or the lowest amount that can be over-collateralised is 110% and below that you'll be liquidated. It uses $ETH as collateral.

What Else Did You Miss?

  • How Do We Create $LUSD?

  • $LQTY Token

  • Maintaining Stability

    • Auto Liquidation Method

    • Anyone Can Liquidate

  • Liquidation Mechanism Explained In Depth

    • Mechanism 1: Stability pool

    • Mechanism 2: Redemption interest rate

  • Zero Governance

  • Importance of Decentralisation

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TLDR:

As a debt protocol, Liquity's goal is naturally to expand the demand for $LUSD. When the demand for $LUSD increases, the protocol revenue earned from mint and redeem activities will also be larger.

$LUSD is an over-collateralised stablecoin with a minimum collateralised ratio of 110%, but the actual collateralisation of the system is around 250%. Liquity is one of a number of recent prominent lending projects. After more than 2 months of development, the project has achieved many notable achievements. $LUSD is currently the 8th largest market capitalisation stablecoin according to Coingecko's statistics. However, $LUSD's DeFi integrations and use cases are very limited.