Liquity Protocol Review

What is Liquity Protocol?

Liquity is a decentralized and non-custodial borrowing protocol that revolutionizes the DeFi space by offering interest-free loans. It does so by issuing a USD-pegged stablecoin LUSD for users to borrow against collateral in Ether. 

The work on the project began in early 2020 and the protocol was launched on the Ethereum mainnet in April 2021.

Liquity stands out among other stablecoin projects as it requires less collateral thanks to its automated nature and instantaneous and efficient liquidation mechanics. Still, it maintains the same security level as competitor projects that rely on auctions to sell collateral.

Liquity protocol is not controlled by any centralized authority, it is governance-free and censorship-resistant. Basically, Liquity operates as a fully automated algorithm controlled by a smart contract with a completely immutable code. According to the developers, there’s no admin key, and nobody can alter the rules of the system in any way.

How does Liquity Protocol work?

Various factors including features, tools, and the operator's kickback rate (0-100%) should be taken into consideration when using the protocol. For example, a kickback rate of 60% means a web interface user would receive 60% of their earned LQTY rewards while the operator receives the remaining 40%. 

Additionally, all loans on Liquity are secured by a Stability Pool ensuring that the total LUSD supply always remains backed. Stability Pool is funded by Liquity users called Stability Providers. They transfer their LUSD into Stability Pool allowing this liquidity to be used to repay debt from liquidated Troves. A Trove is a loan-control interface connected to an Ethereum address. Each Trove can interact with one address. In cases when collateral value lowers just below 110% the Trove is immediately liquidated and the entire amount of that collateral is transferred to Stability Pool. Aside from liquidation gains, Stability Providers receive gas compensations from the protocol and LQTY rewards.

How to use Liquity Protocol?

Liquity is so decentralized that it doesn’t provide any native interface encouraging users to choose among a wide range of third-party frontend operators to interact with the Liquity Protocol app. There’s a list of available operators on the project’s website. 

Liquity’s main product is a collateralized stablecoin LUSD, users first need to deposit funds to mint it. There’s a minimum collateral ratio of 110%, so at least 110 USD needs to be deposited to get 100 LUSD. The minimum borrowing amount is 2,000 LUSD.

To borrow LUSD a user must open a Trove and deposit a collateral. To close a Trove user needs to repay the full amount of their debt. There is no payment schedule, a debt is active as long as a user maintains a minimal collateral ratio of 110%.

Liquity protocol charges one-time fees for borrowing and redemption. The Liquity Protocol fees may vary from 0.5% to 5% as they are algorithmically adjusted based on demand and the last redemption time. Upon opening a loan, each user has to pay a Liquidation Reserve of 200 LUSD. After a loan is repaid, a user receives these funds back, but in case of liquidation this reserve is used to cover gas costs for the transaction sender.  

Liquity also offers staking opportunities for LQTY holders allowing them to earn a share of the fees equal to their share of the total LQTY staked at the moment the fee is imposed.

The LUSD and LQTY tokens

There are two native ERC-20 tokens on Liquity protocol: LUSD and LQTY.

LUSD is a USD-pegged stablecoin users can borrow against the underlying collateral and can be redeemed on any time at face value. 

LQTY is the utility token of the protocol. It is used to provide incentives for frontend operators and stability providers on the protocol. LQTY acquires its value from Liquity’s fee revenue that is generated by the system on each borrowing and redemption occasion. The total supply of the coin is 100,000,000 LQTY.

Is Liquity Protocol safe?

Liquity AG is the legal entity behind the Liquity protocol. The company is headquartered in Switzerland with a team of people from Switzerland, UK, Spain, Vietnam, USA, and Macedonia. All the nine Liquty Protocol team members have open profiles available on the Liquity website. 

Robert Lauko is the co-founder and CEO of Liquity. Holding a Ph.D. in Law from the University of Zurich, he was involved with DFINITY Foundation and the Internet Computer before setting up his own project.

Rick Pardoe is the co-founder and the core developer at Liquity. He holds degrees in Physics and Economics and works as a Solidity developer.

Luquity’s Chief of Operations, Michael Svoboda, has been previously engaged as CEO and COO at several blockchain companies. He holds a degree in computer science and economics.

Liquity Protocol audits can be found in the protocol dashboard on this webpage.

Partners

In March, 2021, Liquity secured $6 million in Series A funding from Pantera Capital with additional contributions from Nima Capital, Alameda Research, Greenfield.one, and IOSG. The protocol also lists Meltem Demirors, David Hoffman, and Calvin Liu as angel Investors.

Although the protocol clearly is not aiming to develop a wide ecosystem for itself, any third-party developers are free to join its frontend operators pool. Liquity already lists Zerion, DeFiSaver, and B.Protocol among its frontend operators. The protocol also uses oracles such as Chainlink and Tellor to provide price feeds.

What's next?

There’s no roadmap for Liquity, as according to the developers, the protocol has no admin keys and its smart contract cannot be altered in any way. But this completely algorithmic nature, however, allows Liquity to expand on other markets in the DeFi space. The company is working on expanding the presence of its stablecoin on more platforms around the DeFi space.

Links

https://docs.liquity.org/