Cover Image for Liquity Protocol

Liquity Protocol

Liquity is a decentralized stablecoin issuer that allows users to open collateralized debt positions (CDPs) by minting $LUSD stablecoins against their $ETH collateral. The loans taken by users ($LUSD debt) are highly capital efficient, interest-free, and, most importantly, free of any bank risk. Liquity's secondary token, $LQTY, is used to incentivize the adoption of some aspects of the protocol and as the value capture token in the ecosystem.









Token Strength.

Token Utility:

$LUSD's utility:
Deposited in the stability pool to earn yield
Deposited in Yearn vault for autocompounded yield
Used as collateral on Angle
Lent or borrowed on Aave and Silo
Used for amplifying yield on GearBox
$LQTY's utility:
Staked to earn yield and govern Liquity's grant program

Demand Driver:

$LUSD minting: demand to mint $LUSD creates demand for $LQTY as staking rewards are directly proportional to the amount of borrowing and redemption fees generated.

Governance participation: demand for $LQTY arises from those who wish to participate in Liquity's grant program.

Value Creation:

For DeFi as a whole, Liquity creates value through its decentralized, censorship-resistant, and resilient stablecoin, free of any bank risk, making it an appealing stablecoin for DeFi users and DAOs looking for trusted treasury assets. Furthermore, Liquity creates value through a completely decentralized protocol that allows DeFi users to open highly capital-efficient, interest-free loans. The protocol also creates value for anyone looking to earn a yield on their $LUSD through stability pools.

Value Capture:

Value accrual to token:
$LQTY token holders benefit from the Liquity protocol's revenue through staking rewards. The more the protocol generates revenue from borrowing and redemption fees, the higher the rewards for $LQTY stakers

Value accrual to protocol:
None. The Liquity protocol doesn't retain any revenue generated from borrowing and redemption fees, but distributes it all to $LQTY stakers

Business Model:

Revenue comes from: 
One-time borrowing and redemption fees

Revenue is denominated in: 
$ETH and $LUSD

Revenue goes to: 
100% of revenue goes to $LQTY stakers as staking rewards. The protocol and team stake some $LQTY tokens to earn yield in $LUSD, which is passed onto the grant program governed by $LQTY holders and stakers


Protocol Analysis.

Problems & Solutions
Problem: lack of a decentralized stablecoin free of any bank risk.

Solution: Liquity introduces a stablecoin backed completely by pristine $ETH collateral and many other design choices that decentralize the protocol.
MakerDAO and its $MKR token. The Liquity protocol, however, used a novel liquidation mechanism (stability pools instead of auctions that MakerDAO uses) and, hence, was able to become more capital efficient, offering CDPs with 110% collateralization ratio. Furthermore, $LQTY is not minted if bad debt is formed (like how $MKR is minted and sold to cover bad debt), and Liquity charges no interest rates like MakerDAO does. Lastly, Liquity is not a DAO like Maker, and it is governed instead by code.

Investment Take

... coming soon

Tokenomics Timeline.

  1. 2021-04-05


    Liquity protocol's launch date




Ecosystem Users.