Liquity Protocol
Liquity v1 is a decentralized borrowing protocol that allows users to mint LUSD stablecoins using ETH as collateral.
Basic Information
Fundamentals
TVL
APR
Statistics
| Weekly | Monthly | Quarterly | Yearly | |
|---|---|---|---|---|
| Period Start | N/A | N/A | N/A | N/A |
| Period End (inclusive) | N/A | N/A | N/A | N/A |
| APR | N/A | N/A | N/A | N/A |
| CAGR (APY) | N/A | N/A | N/A | N/A |
| TVL High | N/A | N/A | N/A | N/A |
| TVL Low | N/A | N/A | N/A | N/A |
Liquidity
Not calculated yet
Liquidity analysis will be available soon
Strategy
There is a way to earn rewards with LUSD stablecoins:
- Earn LQTY Yield
- Deposit LUSD into the Stability Pool (SP)
- Earn LQTY tokens (inflation) as rewards
- Sell LQTY tokens to get additional LUSD
- To maximize profits, you can collect LQTY rewards during the down market and hold onto them, waiting for the market to recover. Selling the accumulated LQTY only when its price is high allows for larger gains, but this approach has a drawback - you cannot reinvest the rewards immediately, as you must wait for favorable market conditions. This delays compounding and could reduce the overall efficiency of your investment.
- Receive Additional ETH (bonus, not included in the APR)
- When liquidations occur, you receive a portion of the liquidated ETH. But your LUSD is sold so your LUSD position is reduced.
- Liquidations are rare but provide significant upside (+10% in ETH)
Yield Source
LQTY Token Incentives
LQTY token entitles the holder to a share of the system revenue generated by Liquity's redemption fees and issuance fees. To earn a share of system fees, the LQTY holder must stake their LQTY in a staking contract. This generates demand for LQTY tokens, so they have value.
On the other hand, LQTY tokens are issued to Stability Pool participants as rewards (inflation).
This means that a Stablility Pool depositor earns LQTY for providing his LUSD as a backstop against liquidations.
Liquidation Gains (ETH)
When liquidations occur in the Liquity protocol, Stability Pool participants receive a portion of the liquidated ETH as rewards. This happens when Trove positions fall below the minimum collateralization ratio and are liquidated.
While liquidations are rare, they provide significant upside potential (+10% in ETH) when they do occur.
Liquidation Statistics
- 31 liquidations in 2023
- 16 liquidations in 2024
Strategy Limits
Deterministic Constraints
- Finite Emissions: Only ~1.85 million LQTY currently left
- Halving Curve: LQTY issuance rate is reduced with time, every year
Probabilistic Constraints
- LQTY Price Volatility: Market price of LQTY can not be predicted and can go down which will require you to wait and not to sell (no compounding in this case)
- Liquidation Frequency: Depends on ETH price movements
- Redemption Risk: If ETH drops and you hold liquidated ETH, your portfolio becomes volatile
Underlying Assets/Allocations
Risk Analysis
Potential Risks
- LUSD depeg: Deviation from $1 reduces your returns
- LUSD liquidity risks: If LUSD becomes less liquid, it may be difficult to sell LUSD, potentially leading to losses if you need to sell quickly
- Smart contract risks: Smart contract vulnerabilities or hacks could lead to losses
- Liquidations Below 100% Collateralization: If Troves fall below 100% collateralization (a rare scenario, often indicating a severe market crash and LUSD depeg), you may receive less ETH than the value of your LUSD, leading to a net loss
Risk Analysis (3rd Parties)
Summary
Liquity demonstrates exceptional protocol design and is governance-free. It has strong third-party ratings from multiple agencies. The protocol has excellent historical performance, operates on Ethereum (the most secure chain), and maintains very low dependencies on external systems.