Provided by Frogs Anon
July 31, 2023
To start off this report, let’s look back one year ago at Q2 ‘22, a time when the entire crypto market was experiencing a steep decline. The cumulative crypto market cap was basically slashed in half, ETH dropped down under $1,000, and general interest in DeFi all but stalled out after UST’s implosion. Many protocols never recovered from this nightmare of a quarter, but those that did proved the resiliency of both their teams and their products. Nobody asks for a bear market, but it does have a way of clearing out the unnecessary and making space for truly valuable and innovative projects to shine.
Liquity was no exception when it came to the effects of the bear market, as Q2 ‘22 saw all-time lows in TVL, LUSD supply, and Trove count. What never changed, however, was the core value of LUSD, always redeemable for $1 worth of ETH. LUSD has held its peg in all market conditions. Events of the past year like the Terra collapse and U.S. bank failures that put USDC reserves in jeopardy have put the industry’s need for robust decentralized stablecoins on full display. Liquity’s recovery over the past year has been strong, and today we find the protocol approaching pre-bear market numbers across several key metrics.
Here’s a look at the events and metrics that defined Liquity’s Q2 ‘23 operations.
While Liquity’s immutable smart contracts will always operate on the mainnet, delivering access to LUSD on rollups has been a focal point of the past several quarters. LUSD debuted on Optimism back in Q4 ‘21, and supply on the network grew by 2M this quarter to 7.9M total. Top venues for LUSD on Optimism include a handful of Velodrome pools, Sonne Finance, and Stargate Bridge.
As of 2023, Arbitrum users also gained access to LUSD, thanks to the knights of Camelot Dex. After debuting on Camelot, LUSD usage has spread to venues such as Ramses, Uniswap, SolidLizard, and more. LUSD supply on Arbitrum experienced a net increase over Q2 from 2.1M to 2.8M, but that’s not quite the whole story. During May the supply shot up to over 8M, largely due to a single-day inflow of 4M on May 3rd. This influx of LUSD mainly went to stableswap pools on Chronos, a ve(3,3) DEX fork of Solidly. While not the most “sticky” liquidity, which is to say boosted LP rewards and arbitrage may have played a large part, it does go to show the high levels of activity on Arbitrum.
Lastly, Q2 also saw LUSD venture into its first zero knowledge rollup; enter zkSync. In just over two months, there's over $700k in liquidity available for the stablecoin across various DEXes on the chain, with the most popular venue for liquidity providers being Maverick Protocol.
Three key factors contributed to a progressively tighter peg over the course of Q2:
- Users bridging on to L2 and selling LUSD to other stables
- Concentrated liquidity
- Chicken Bonds
Data indicates that on Arbitrum/Optimism, the cost of using LUSD is somewhat lower compared to Mainnet, with over $12m in liquidity now. This trend could be attributed to users exchanging LUSD for USDC/USDT and quickly bridging back to Mainnet.
Concentrated liquidity type venues like Univ3, Maverick, and Balancer, are another reason behind peg tightening. This approach avoids relying solely on the 'at peg' assumption typical in traditional stableswaps (e.g., LUSD/3CRV). Given that LUSD naturally maintains a slight premium, traditional stableswap venues may not be as efficiently incentivized. It appears that transitioning to concentrated AMMs helps address this situation.
Lastly, the design of Chicken Bonds allows Liquity to accrue protocol-owned liquidity. The resurgence in CB popularity during Q2 looks to be a contributing factor in peg tightening as PoL is strategically deployed to liquidity venues.
As DeFi treasuries grow and look to diversify their holdings, LUSD is often selected for its decentralization, robustness, and the immutable yield opportunity of Liquity’s Stability pool. Olympus DAO has long been partially backed by LUSD, currently with over 10M which is deposited in the Stability Pool and saw yield ranging from 2.5-7.5% over Q2. Olympus also launched a boosted liquidity vault for LUSD this quarter, a single-sided LP vault that pairs LUSD with OHM to earn yield on Balancer with minimal IL risk. This vault has seen instant popularity, reaching $1.5M TVL in the first week.
Joining the ranks of Olympus, Synthetix, and other mature DAO treasuries, Dopex added LUSD to its holdings in Q2 to the tune of $1M. When discussing the decision, Dopex cited the lower risk profile compared to other stablecoin options, as well as the native yield opportunity that exists in the Stability Pool. With Dopex operating on Arbitrum this was made possible by the introduction of LUSD to the rollup earlier this year and is certainly a move that will catch the attention of fellow DAOs on the network. Decentralized treasuries holding decentralized stablecoins - truly a beautiful sight.
Chicken Bonds, Liquity’s novel sister protocol, saw muted volume in Q1, especially compared to how well the bonds caught on in the second half of ‘22. However, the tides turned in Q2 as yield-bearing collateral took center stage in DeFi, in large part due to protocols building on top of staked ETH.
Gravita is one of the new protocols in that category, a Liquity fork for interest-free LSD-backed borrowing that also incorporates bLUSD as collateral. Thus far $4.2M worth of bLUSD has been deposited on Gravita to borrow 3.5M GRAI, the protocol’s native stablecoin, for an impressive 84% LTV. For comparison, other collateral assets on the platform include different flavors of LSDs, which typically secure 45-55% LTV.
To top it off, mint caps on Gravita bLUSD vaults have gotten full within hours, showing the increasing demand for yield-bearing stablecoin collateral.
Aave and MakerDAO are popular borrowing platforms in DeFi, trailing only Lido in the TVL ranks across all protocols. In Q2 however, we saw some changes (especially on Maker's side) when it comes to adjustments on their interest rates.
For all the borrowers out there it seems useful to have some information on loan cost across top options, in terms of both LTV and interest rates. As of Q2, here’s a look at how loan costs stack up when borrowing $10,000 in stablecoins for 1 year with ETH collateral (Note: borrowing fees on Liquity are variable between .5% and 5% depending on borrowing conditions, typically it stays close to .5% and over the past week has ranged from .5-.6, so an average of .55 is used here.)
Maker DAO and Aave are both excellent protocols in their own right, and offer flexibility in terms of collateral options. However, for borrowing against ETH, Liquity is the clear winner.
Checking in on how different crypto asset-backed stablecoins have fared throughout 2023, it’s apparent that while DAI remains the most prominent option, its usage has been sliding lower. As the year began, circulating supply for DAI was a touch above 5B, but as of Q2 close it’s sitting at 4.25B (-15%). Frax, another top contender in the sector, has seen circulating supply remain mostly neutral so far this year, with a slight decline from 1.018B to 1.004B (-1.4%).
While LUSD’s circulating supply is lower than either of those two stables, its growth trajectory is much more favorable. Over the first half of 2023, LUSD supply rose from 179M to 282M (+57.5%).
Trove count increased by a healthy 170 over the course of Q2 (+16.5) continuing a steady upwards trend that began in Q2 ‘22. The 1220 active Troves are the most seen since early 2022, sitting only 6% off the all time high mark. Bear market or not, Liquity usage is on the rise.
While YTD figures were covered in the previous section, the solo LUSD chart is worth examining as well. In Q2, LUSD supply increased from 267M to 282.5M (+5.5%).
Quarterly TVL was a mixed bag, actually down ever so slightly in ETH terms (-1.5%), but up in dollar value (+2.4%) due to ETH price rising over the quarter.
When considering the tumultuous path that the entire crypto industry has been on over the past year, it’s refreshing to see protocols provide value that outlasts market shifts. Liquity continues to do what it does best, providing a decentralized, robust stablecoin and a venue for ETH holders to borrow off their assets at a low cost.
L2 expansion has seen a solid rise as the expansion of LUSD into newer chains (like zkSync) and sustained usage on various chains have allowed for LUSD liquidity on rollups to stick. Chicken Bonds also found a new home with Gravita, as more and more DeFi users are being introduced to the benefits of yield bearing collateral assets. With LUSD supply and trove count rising, Liquity is approaching pre-bear market numbers in several respects.
To top things off, the Liquity team is not stopping there. A new project from the Liquity team in the works; a long anticipated foray into the staked ETH market.
Liquity Yield Dashboard - https://dune.com/murathan/liquity-yields
Liquity Stats - https://dune.com/liquity/liquity
Chicken Bonds- https://dune.com/chickenbonds/lusd