Hey folks, if you’ve been following crypto twitter like I have, you’ve probably heard from a countless number of people that there’s a lot of expectations for an upcoming market crash. Whether it’s next week or early next year, many people are calling for alts to drop another 30–40% and for Bitcoin to possibly dip down at least into the 14k range. For those that have become increasingly risk adverse, Liquity has been optimizing ways in order for people to continue to profit off of both liquidations and also through their native stablecoin, $LUSD.
I’ve written about Liquity several times in the past, and with the introductions of their dynamic Chicken Bond NFTs a couple of months ago, they’re essentially a DeFi market-efficiency building tool that allows Liquity to stabilize its liquidity at the same time benefiting NFT holders through auto-compounding their returns off of $LUSD. I’ll get into more detail on this later, but first let’s do a quick recap of Liquity’s troves and how it started to generate revenue in the first place…
Profiting off of Liquidations:
Liquity allows at very cheap rates for people to make collateralized loans. Once they have selected a Liquity frontend, a prospective borrower can create a “liquity trove” and then deposit their $ETH and borrow $LUSD against it. Liquity’s docs recommend that you keep your ratio at least above 150%, but the protocol has a minimum of 110%. In other words, if there’s a significant $ETH price drop and the collateral ratio falls below 110%, then you are at risk for liquidation. The cool part is that you can see all the troves (at time of posting there are 841) in real-time and how close they are to liquidation:
#Realyield — Once a liquidation occurs, rewards from the liquidation are given to stakers in Liquity’s Stability Pool. Every time there has been a significant $ETH crash, you’ll see that that the stability pool gets well rewarded, sometimes earning close to 700% APR:
Currently sitting at a rolling 7 day moving average of greater than 10%, disregarding all other factors, if your only strategy was to stake $LUSD in the stability pool, you could still make a pretty decent return with relatively very low risk.
Why Liquity is attractive to borrowers: Even in the face of adverse market conditions, the main reason why Liquity is able to attract so many borrowers is because of its loan structure:
Aside from the one-time borrowing fee of 0.5% and a refundable $200 deposit into the liquidation reserve, borrowers can borrow $LUSD very cheaply and in turn use that liquidity to do a variety of things, including staking it into the $LUSD stability pool, or using it to buy Chicken Bonds.
Profiting off of Stablecoins:
I’ve already mentioned that you can earn pretty great returns off of the $LUSD stability pool, but in the last couple of months, the Liquity team has also launched their dynamic Chicken Bonds NFTs which offer principle protected opportunities to earn auto-compounding returns off of stablecoins. By contrast if you were to directly stake $LUSD into the $LUSD Stability Pool, instead of earning $LUSD, you woulud earn $LQTY and $ETH as interest — giving you exposure to altcoins instead of stables.
How do the Chicken Bonds work?: In a nutshell (pun intended) the Chicken Bond NFTs are representative of the owner’s claim to the amount of their bonded $LUSD. When you first deposit, you receive a NFT in the form of an egg:
Once one creates a Chicken Bond, the owner starts accruing $bLUSD (Boosted $LUSD) with proof of ownership represented by the egg NFT. From there they have 3 options:
Keep re-bonding — you can continually sell your accrued $bLUSD (or just hold) forever and ever.
Chicken In — at a point where you should be in profit, you can claim your bond, essentially getting the $bLUSD you accrued during your bonding time. In this case, your NFT becomes a full grown chicken:
Chicken Out — If you don’t/can’t wait until the chicken egg reaches maturity, you can “Chicken Out,” essentially forfeiting $bLUSD you earned-to-date, and retain all of the initial capital that you put in (hence why it’s principal protected). In this case, your NFT turns into a little chick running away:
What kind of returns can you make?: The interest you can earn is a bit hard to calculate, as the earning rates for $bLUSD will differ greatly depending on how long you wait.
As you can tell from the graphic above, the yield is relatively much higher at first but will decrease significantly as it reaches the $bLUSD cap. Other reports on Twitter show a more realistic example of how the yield pays out:
In a general sense, as your bonded $LUSD is auto-compounded and “yield amplified,” with Chicken Bonds you can rest assured that you will make more interest than you would with directly staking in the $LUSD stability pool. In addition if you’re more interested in gaming $bLUSD itself, I would recommend keeping an eye on the Chicken Bond statistics which can be found on Liquity.app’s Bonds page:
Being relatively new I can’t imagine that these APR’s will last forever, but at least for the past month the $bLUSD APR’s have been attractively high.
Conclusion
Whether you’re worried the market is nearing its final plunge or else if you simply want to stack your stablecoins until this bull market is over, Liquity offers a plethora of strategies — all potentially very profitable and with very minimal risk. As there’s a lot of uncertainty with centralized exchanges right now, in my opinion it makes sense to start utilizing some of the DeFi strategies while I’m waiting a lot of the fear to abate.
If you’re wanting to read further about Liquity, I highly recommend that you check out my previous articles on Liquity borrowing/liquidation mechanisms (1, 2, 3) or if you’re interested in learning more about the Chicken Bonds, I highly recommend you checkout their website https://www.chickenbonds.org, especially their deep-dive article about the NFTs themselves and all their different attributes.
Thanks for taking the time to read this and be sure to follow me on twitter (https://twitter.com/CryptosWith) to get all of those latest updates.
Disclaimer: And as a final reminder, this is not financial advice and this is for educational and entertainment purposes only. Please as always, do your own research and find what investments are best for you. Cheers everyone!
