Liquity is a decentralized borrowing protocol offering interest-free liquidity against collateral in Ether. By utilizing a novel liquidation mechanism and leveraging an algorithmic monetary policy it can offer unprecedented benefits for borrowers.
Users can draw the stablecoin LUSD interest-free against their Ether used as collateral. They can thus obtain liquidity for free without any recurring costs.
Since the protocol can generate the LUSD tokens itself, it does not need to pass any capital costs onto the borrowers, nor does it rely on interest rates to regulate monetary supply.
There is a one-time borrowing fee as a percentage of the drawn amount. The fee rate depends on the current base rate, which is algorithmically governed by the protocol based on the redemption volumes.
Liquity AG does not run its own web interface. Instead, the protocol can be accessed via third party apps.
Anyone can easily run a frontend by using the launch kit or SDK and by doing so, earn a share of the Stability Pool rewards.
Liquity is a protocol rather than a platform. There is no administrator with special privileges that could interfere with, alter, or halt the operation of the protocol in any way.
Frontend operation is provided exclusively by third parties which make the system decentralized and resistant to censorship
Liquity protocol allows for an unprecedented minimum collateralization ratio of 110%, which corresponds to a loan-to-value ratio of 90.09%. This makes borrowing highly capital efficient and allows for up to 11x leverage on investments.
Borrowers need to ensure that their collateralization ratio does not fall below 110%, otherwise their positions (“Troves”) become vulnerable to liquidation. The protocol’s efficient, instantaneous liquidation mechanism allows for such a low collateralization ratio, while maintaining a high level of robustness.
Quick and efficient liquidations of Troves that fall under the minimum collateral ratio of 110% ensure the health and stability of the system.
Liquidation is performed in the following order of priority:
Liquidators are incentivized to execute prompt liquidations while stability providers benefit from contributing to the system’s Stability Pool.
LUSD is a fully redeemable stablecoin. At any time, the system allows holders to redeem their LUSD for the underlying Ether collateral at face value. For example: A holder redeeming 100 LUSD would receive $100 worth of Ether collateral from the riskiest Trove(s), minus the current redemption fee.
The redemption mechanism will create a price floor for LUSD, pushing its price back to parity whenever it drops below $1. Holders have an incentive to redeem LUSD if they can buy it for less than $1 and then convert it into Ether at a price of exactly $1. Every redemption leads to a contraction of the total LUSD supply and to an adjustment of the base rate. Learn more.
Unlike other platforms, Liquity protocol does not rely on human governance to vote on monetary interventions. All protocol parameters are either preset and immutable or algorithmically controlled by the protocol itself — making human interventions redundant.
By measuring the redemption volumes and applying a time decay mechanism it constantly adjusts the base rate, serving as a basis for both the issuance and the redemption fees.
Holders can deposit LUSD tokens to the Stability Pool and make the system more robust against Ether price drops.
Stability Providers are incentivized by the protocol in two ways:
Stability Providers can withdraw their Ether gains and their deposits at any time to the extent they have not been used to absorb debt
The system captures the revenue from the borrowing and redemption fees and pays it out on a pro rata basis to the stakers of the LQTY token. The tokens can be staked and unstaked any time with no minimum lockup period.