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Will Liquity's New Model Change the Stablecoin Game?

By Michael @ CryptoEQ | CryptoEQ | 23 Feb 2024


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Intro

Liquity is a decentralized borrowing protocol that offers interest-free loans against Ether used as collateral. Designed to tackle the centralization issue in the stablecoin market, Liquity aims to make borrowing more capital-efficient and user-friendly, while maintaining a fully decentralized and governance-free system.

Stable-value assets are vital for Ethereum applications and have grown to represent tens of billions of dollars in value. However, most of this value is centralized in fiat-collateralized stablecoins like Tether and USDC. Decentralized stablecoins, such as DAI and sUSD, make up a smaller portion of the total supply. Liquity addresses this imbalance by creating a more efficient and decentralized way to borrow stablecoins without governance interference.

Liquity offers several benefits that make it stand out from traditional borrowing platforms:

  1. 0% interest rate: Borrowers don't need to worry about accruing debt.
  2. Minimum collateral ratio of 110%: Efficient usage of deposited ETH as collateral.
  3. Governance-free: Fully automated operations and algorithmic protocol parameters set at contract deployment.
  4. Directly redeemable: LUSD can be redeemed for the underlying collateral at face value.
  5. Fully decentralized: No admin keys and accessible via multiple front-end operators, ensuring censorship resistance.

Using Liquity

To access Liquity, users need to choose a web interface (front end) operated by third-party applications or integration services. The core team behind the protocol does not operate a front end, promoting decentralization and avoiding central points of control.

Liquity offers various use cases, including:

  1. Borrowing LUSD against ETH by opening a Trove.
  2. Securing Liquity by providing LUSD to the Stability Pool in exchange for rewards.
  3. Staking LQTY to earn fee revenue paid for borrowing or redeeming LUSD.
  4. Redeeming 1 LUSD for 1 USD worth of ETH when the LUSD peg falls below $1.

Roadmap

Liquity is set to revolutionize the Collateralized Debt Position (CDP) market in 2024 with the introduction of a user-determined interest rate mechanism, marking a pivotal advancement in decentralized finance (DeFi). This innovation provides users with unprecedented autonomy over their borrowing costs, representing a significant evolution in the approach to stablecoin lending and borrowing dynamics.

User-determined interest rates diverge from traditional CDPs and money markets, where rates are typically algorithmically determined or set through governance. By allowing users to select their interest rates, we empower them to manage their borrowing experience in alignment with their risk tolerance, offering full control over their financial positions.

This model significantly mitigates redemption concerns, as borrowing rates now determine the order of redemptions, enabling users to influence their likelihood of being redeemed by opting for higher interest rates. This shift towards a borrower-rate determined model also aims to enhance the stability of the stablecoin's peg to the dollar by introducing dynamic borrowing rates and a responsive monetary policy.

Moreover, the protocol's adaptability to economic conditions is further augmented through the possibility for users to adjust their interest rates at any stage of their loan's lifecycle, or to delegate this capability to third-party managers or smart contracts. This flexibility ensures that the system remains responsive and dynamic, catering to the evolving needs of the DeFi ecosystem.

The new stablecoin will support borrowing against various LSTs and ETH, enhancing the Ethereum-native characteristic of the offering without reliance on fiat or traditional financial assets. Inclusion of built-in liquidity incentives and the provision of sustainable real yield from borrowing fees and liquidation gains address the challenges of maintaining liquidity and ensuring the sustainability of stablecoin demand.

The introduction of this innovative DeFi primitive is not merely an evolution of the CDP model but a significant leap forward. By solving the critical balance between borrowing and stablecoin demand through user-set interest rates, the protocol empowers borrowers to adapt to market changes proactively. This autonomy enhances the system's overall stability and efficiency, benefiting both borrowers and the broader DeFi ecosystem.

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Michael @ CryptoEQ
Michael @ CryptoEQ

I am a Co-Founder and Lead Analyst at CryptoEQ. Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.


CryptoEQ
CryptoEQ

Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.

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