Provided by Frogs Anon
April 18, 2023
Q1 2023 was marked by a number of new initiatives and integrations for Liquity, as well as some old narratives resurfacing in unexpected ways.
The holy trifecta required for borrowing protocols all hit for Liquity in Q1:
The supply, in particular, is an object lesson in the decentralization premium, as LUSD supply increased by around 50% while for most other stablecoins it decreased, or stayed nearly the same.
Since Q2 of 2022, both DeFi and the broader crypto ecosystem have been on a slow and at times bumpy path to recovery. Q1 was something of a turning point, as we saw increased volume across many protocols and exciting developments in the Ethereum ecosystem. The quarter was not entirely free from turbulence, however, as the TradFi banking failures we saw in mid-March produced contagion fears that ultimately led to significant stablecoin de-pegs.
As the issuer of LUSD - widely regarded as the most decentralized stablecoin in existence - Liquity saw notable inflows in response to these events. The protocol’s usage and growth also continued to strengthen throughout the quarter, with key metrics such as Trove count and TVL both experiencing double digit quarter-over-quarter growth. Driving factors included expansion in the layer 2 ecosystem, improved market sentiment for ETH, and the instability of centralized stablecoins. After growing steadily throughout the bearish conditions of 2022, usage has picked up considerably to begin 2023. What follows is a look at Liquity’s activities over Q1 and an analysis of protocol defining metrics.
First Optimism, now Arbitrum. While Liquity itself will always be on mainnet due to the immutability of its smart contracts, LUSD and LQTY as tokens can be bridged to layer 2. At this point the advantages of rollups don’t need to be restated, and Liquity has pursued them at every turn. This quarter saw an integration with Sonne Finance, the first lending platform on Optimism where LUSD was added as collateral, as well as Stargate Finance, a cross-chain bridge that facilitates rapid transfers of LUSD to and from L2s.
While these were major developments in themselves, there’s little doubt that Arbitrum stole the show. The L2’s growth has been center stage for quite some time now. With the launch of $ARB this quarter, there’s huge amounts of attention on the ecosystem, and Liquity received a 75,000 $ARB allocation from the Arbitrum Foundation. Camelot, an Arbitrum native Dex, has been a key partner for Liquity in its entrance to the ecosystem, with the LUSD/ETH pool amassing over $1M in liquidity for swaps. Additional venues for using LUSD on Arbitrum are on the way in Q2 as well.
This is significant for obvious reasons. Providing access to LUSD on Arbitrum opens up the door for additional use cases and expands the user base for Liquity’s tokens. With liquidity having been bootstrapped on the rollup, the need for a Chainlink oracle arose, to help facilitate LUSD integration in more sophisticated DeFi use cases on the chain.
Thanks to a push from both the Chainlink and Arbitrum communities for a truly decentralized stablecoin on Arbitrum, there is now an established Chainlink price feed for LUSD on Arbitrum.
With this in place, LUSD can potentially be used for purposes like options trading, and even in Arbitrum’s growing gaming ecosystem. Check out Liquity’s Cross-Chain Strategy blog article for a further exploration of the possibilities on Arbitrum.
Another highlight of the quarter came in February, when Binance announced its listing of LQTY in the Innovation Zone. LQTY pairs saw an immediate burst of volume upon listing, evidence of the widespread support for Liquity’s robust and decentralized architecture.
This further led to a flurry of other centralized exchanges adding LQTY trading pairs, including Kucoin and Crypto.com to name a few. As a result of these exchanges listing LQTY, the trading volume of the token increased drastically, as evidenced by the image below.
As LUSD, bLUSD, and LQTY have expanded to more and more DeFi platforms, it got harder to track every place you can find them. Thankfully, there’s an excellent Dune dashboard that lists them all in one place. The dashboard has been created by a Liquity community member @murathan and it is frequently updated as new opportunities appear across Arbitrum, Optimism, and Ethereum mainnet. It provides an overview of the different DEXs and AMMs having LUSD, bLUSD, and LQTY.
Community grants aren’t new to Liquity, but this quarter saw the program revamped and reimagined as LiquiFrens. This community program helped fund community members who contributed to Liquity’s ecosystem. Anyone can create a proposal to be voted on by LQTY holders, and several initiatives have already been approved during Q1. These include the yield dashboard mentioned above, and another proposal for enabling LUSD pairs on Mean Finance’s DCA platform.
In contrast to the protocol’s performance in other areas, Chicken Bond usage fell off sharply in Q1 after reaching a peak in early January.
This was a bit surprising, given the strong early adoption that CBs experienced during Q4 amidst the height of the bear market. One likely explanation is the rise of other yield sources within the Ethereum ecosystem, as the decline in CB usage coincides with massive growth of ETH liquid staking derivatives in Q1. While the boosted LUSD yield offered by CBs was quite attractive in Q4, it could be the case that upward price movement across DeFi pushed users back towards long ETH positions, ultimately settling on staking for yield in Q1. Even so, Chicken Bonds have been an overall benefit for the Liquity ecosystem, amassing nearly $1M LUSD in protocol owned liquidity since the October launch.
Along with permanent owned liquidity, it has also helped grow the LUSD / 3pool on Curve, with over $5m of liquidity being attributed to Chicken Bonds. This can be broken down to $1m coming through the permanent bucket, and $4m of being grown thanks to the bLUSD LP including LUSD / 3pool. All of this combined, means that around 25% of LUSD liquidity on Curve can be attributed to Chicken Bonds.
For those unfamiliar with Chicken Bonds, please see the Primer Report to learn how this unique DeFi primitive functions.
Starting with the two defining protocol usage charts, Open Trove Count and ETH Deposits, we can see that Liquity underwent significant growth in Q1.
The amount of ETH deposited in Liquity troves rose by 17% over the quarter, going from 343k at the end of Q4 to 401k by the end of Q1. Since opening a leveraged long position on ETH is a primary use case for Liquity, the improved market sentiment around ETH in Q1 led to a hefty increase in volume.
The open trove count told a similar story, growing from 919 to 1,096 over Q1, for an increase of 20%. One can assume that the expansion of LUSD to Arbitrum also had a positive effect on Liquity’s usage, as a result of new venues for deploying LUSD and greater exposure for the protocol.
In order to add some context around usage growth, let’s compare LUSD supply changes with DAI from Q4 → Q1.
DAI supply graph via daistats.com
As the most commonly used CDP platform, MakerDAO’s DAI is a solid benchmark for Liquity’s LUSD. Over the quarter, DAI supply declined by 8%, from 5.764B to 5.290B. DAI usage also hit an intra-quarter low during March, which coincided with the fallout from USDC reserve uncertainty. Drawing a stark contrast, LUSD supply moved in the opposite direction, with a 50% increase over Q1, from 178.5M to 267.8M.
Lastly a look at price stability, as viewed through exchange rates on LUSD’s primary liquidity venue, Curve.
Exchange rates were quite smooth over the quarter, with one notable exception. Early in Q1, LUSD trended steadily downwards towards $1, until mid March. The abrupt spike was caused by uncertainty around the reserves by which USDC was backed. Some portion of these were held with Silicon Valley Bank, which was ultimately closed by U.S. financial regulators on the 10th of that month. The situation affected DAI’s price as well, as USDC makes up a large portion of its reserves. DAI and USDC holders fled to alternative stablecoins that were unaffected by the SVB failure, causing the exchange rate with LUSD to spike. USDT was also seen as a safe option during this event, causing the exchange rate to fall due to increased USDT demand. This whole episode was yet another reminder of the risks carried by centralized stablecoins, and the “decentralization premium” that LUSD carries.
LUSD’s resilience in this uncertain time can also be seen in the chart below. While some other centralized stables like USDC, FRAX, and DAI took over 35 hours on average to regain its peg, LUSD was successful in getting back to peg in under 15 hours, helping users gain confidence at a time of upheaval. Another thing to note is that while LUSD did depeg for a short period of time, it only depegged to $0.985, compared to some of the stablecoins above, which depegged down to under $0.90.
During this banking scare, total LUSD supply grew by 30M from March 10-20, as the overall stablecoins market fled to safety. Once LUSD starts to trade at a premium, it creates an arbitrage opportunity where new borrowers can instantly profit by minting LUSD and market selling. This thread from DeFi Cheetah explains the process well. This system allowed LUSD to repeg faster than the majority of stablecoins during mid-March. With the increased volatility and LUSD activity, LQTY stakers earned some extra fees during this period.
There are plenty of ways to play instability in the stablecoins sector, and Liquity always provides some strong options.
Overall, Q1 was an eventful period for Liquity. The ecosystem saw plenty of expansion; LUSD made its debut on Arbitrum, LQTY was listed on Binance, and Liquifrens facilitated some excellent new resources for education and analysis. Usage metrics continued to trend upwards, with Trove account approaching all-time highs and over 58k ETH flowing into the protocol. It wouldn’t feel right to cover an entire quarter without being reminded about the value of decentralization, and Q1 delivered on that front as well, with LUSD once again being a preferred stablecoin option during times of uncertainty.
Liquity Yield Dashboard - https://dune.com/murathan/liquity-yields
Liquity Stats - https://dune.com/dani/Liquity
Chicken Bonds- https://dune.com/chickenbonds/lusd