Liquity Protocol: The DeFi protocol that focuses on Stablecoin + lending

Leo

23-03-14 15:41

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With the end of the USDC anchor crisis and the recovery of its liquidity, USDC also rose to $1 yesterday, which seems to restore the status of the former Stablecoin giant. However, after this event, its strong resilience did not reduce the industry's concerns about stablecoin, but more intensified concerns about the dollar peg stablecoin. If USdcs are not stable asset classes, where should we store our $1? Today we'll look at a decentralized lending Protocol that is also a stablecoin-focused revenue protocol: Liquity Protocol (LUSD & LQTY), and LUSD is also the most talked about stablecoin in the market recently.

An introduction to Liquity Protocol

The Liquity Protocol is a decentralized lending Protocol, also known as Collateralized Debt Protocol (CDP). Interest-free lending can be applied for through collateralized ETH (ETH is the only type of collateral Liquity accepts). LUSD Stablecoin loan. As a DeFi Protocol, Liquity Protocol is a completely decentralized DeFi protocol with immutable, unmanaged and free governance features.

LUSD is different from USDC and USDT stablecoins in that the latter is 1:1 pegged to the dollar. If assets and liabilities are out of 1:1, such stablecoins will collapse and become unstable. The difference with LUSD is that instead of being linked to fiat money (physical cash stored in banks), LUSD is linked to ETH. In addition, the protocol is anti-censorship, no regulator can prohibit LUSD's issuance, and the protocol is completely operated by code, which is immutable.

The Liquity Protocol is an interest-free lending mechanism that charges a one-time borrowing and redemption fee. This fee is adjusted algorithmically based on the most recent redemption time. For example: if there are more redemptions in the near future (which means LUSD may be trading at less than $1), the interest rate on borrowing (the fee) will increase, thus discouraging borrowing.

To borrow money in this project, the borrower needs to open a trove through the Ethereum address, and each address can only have one trove. If a certain amount of ETH is deposited in the trove, the corresponding amount of LUSD can be extracted, provided that the mortgage rate cannot be higher than 110%, and the minimum amount of loan is 2000 LUSD. Of course, the user can always pay off the debt and close the vault. Although ETH is also subject to the risk of price declines, the agreement will liquidate LUSD's position to ETH immediately to ensure the agreement's full 1:1 mortgage lending ratio.

Liquity Protocol use case

Its use cases include:

- To borrow LUSD by mortgaging ETH;

- Deposit LUSD into the stablecoin pool to ensure liquidity;

- Pledge LQTY to earn the fees paid for borrowing and redeemingLusd;

- When LUSD is less than $1, exchange $1 LUSD for $1 ETH.

Liquity's revenue sources are:

-LUSD Bonds

- Pledge LQTY

-LUSD stabilization pool

LUSD Bonds yield

Bonds have an enhanced auto-compounded yield and can be held or traded. Earnings growth was also achieved by converting its earnings into bLUSD from three different sources. Bond itself technically acts as an NFT and is traded on OpenSea.

The advantages of bLUSD are:

It offers a higher return than putting LUSD in a stable pool;

The revenue generated is automatic and compound;

Also an ERC-20 token that can be used as collateral against a rise in the floor price.

Pledge LQTY

Part of the agreement fee (ETH and LUSD) can be earned by pledging LQTY. After starting the pledge, users can earn borrowing and redemption fees proportionally. LiquityProtocol ranked 11th in terms of cost over the last 24 hours, DefiLlama data showed.

The redemption mechanism of Liquity Protocol is that users can redeem $1 LUSD to $1 ETH without limit according to the price, and LUSD will be destroyed. However, certain fees will be paid during the redemption process. As mentioned above, As redemptions increase (meaning LUSDs are likely to fall below $1), the borrowing fees charged increase, making borrowing less attractive, a mechanism that prevents new LusDs from entering the market and pushing prices below $1.

LUSD stabilization pool

Deposit LUSD in the stable pool to earn LQTY income and ETH income in liquidation, the current APR is about 8.42%. As mentioned above, the liquidation income comes from trove. When users deposit ETH to lend LUSD, as ETH price drops, If the user does not add positions or repay part of the debt, the mortgage rate will fall below 110%, and then the liquidation of trove will occur.

LUSD's special mechanism

So how does LUSD maintain a stable link with ETH and maintain its own supply cycle? LUSD has several special mechanisms.

The hard hook mechanism means that LUSD can be converted into ETH at 1:1, and the system charges a one-time redemption fee, which increases with each redemption, and gradually decreases to zero if no redemption occurs over time. LUSD is destroyed upon redemption.

For example, Peg = 0.98 USD, arbitrageurs buy LUSD at 0.98 USD, redeem at 1 USD, gain 0.02 USD profit, LUSD's buying pressure will make its price rise; Peg = $1.15, the arbitrageurs take out their maximum loan at 110% collateral and sell LUSD for a profit of $0.05. LUSD selling pressure drives prices down.

The soft peg mechanism refers to that LUSD also benefits from the indirect dollar parity mechanism, including taking LUSD dollar parity as Schelling point. Since the Liquity Protocol regards LUSD as equivalent to the dollar, the parity between the two is the implied equilibrium state of the protocol.

In addition, the mechanism of the same borrowing and redemption costs for LusDs also prevents the supply of LUSDs from getting out of control. The borrowing costs and redemption costs for depositing Lusds in ETH operate in the same way (as more people issue LusDs, the costs will rise).

The Liquity Protocol's stabilization pool as a liquidity reserve is also a source of liquidity to repay debts in the liquidation position. If the stabilization pool is depleted due to liquidation, debts and collateral will be equally distributed. This mechanism is also a buffer for Liquity Protocol to face risks.

The Liquity Protocol also has a special recovery mode, designed to handle mass liquidation, which is activated when the system's total collateral rate (TCR) is below 150% and positions below 150% can be liquidated. The recovery mode is designed to encourage deposits into ETH and repayment of debt.

LUSD obtaining mode

In addition to mortgaging ETH to obtain LUSD, users can also obtain LUSD on other Cex or Dex

Dex: Uniswap, Curve

CEX: Gemini

Liquity Protocol partners with token economy

Liquity Protocol also has a strong roster of collaborators, Pantera Capital, Polychain, Nexus Mutual, Synthetix, Coinbase, Velodrome, OlympusDAO, Gemini, Huobi, and LUSD are among the top 10 stablecoins by market capitalization.

LQTY, which has a maximum supply of 100 million and a revolving supply of 91 million, currently has a marketcap of about $285 million, according to Coinmarketcap