Liquidity USD Review: The Decentralized Borrowing System Explained
The Defi ecosystem has adopted a new decentralized borrowing protocol to solve the Liquidity issues in the crypto world. They promised to reshape the debt system in a similar way web and email transformed our use of the media.
The new DEX Liquidity protocol uses smart contracts to eliminate the Liquidity issues that the earliest exchanges faced. In addition, it’s designed to create unprecedented Liquidity with collateral that competes with Ether.
The protocol seeks to offer a network where anyone can be a lender and a borrower without paying any interest. This review is designed to give detailed information on this new Defi borrowing protocol-Liquidity USD.
It explains the protocol’s technology, working mechanism, unique features, the utility token, the protocol’s aims, and key benefits, etc. The review is compiled to guide beginners and anyone that wish to become a fan of the protocol.
- 0.1 What is Liquidity USD?
- 0.2 The working mechanism
- 0.3 Main Features of the Liquidity USD
- 0.4 Key Benefits of Liquidity USD?
- 0.5 How to Use Liquidity USD?
- 1 Highly capital-efficient Through Instant Liquidation
What is Liquidity USD?
Liquidity is a decentralized, non-custodial, governance, and immutable borrowing protocol. It allows users to lend and borrow in LUSD at zero interest rate against Ether as collateral. LUSD is a stable coin pegged in USD that needs to maintain a 110% minimum collateral ratio.
The loans in the Liquidity protocol are secured by fellow borrowers who act as guarantors of last resort. The loans are also secured via a stability pool that contains LUSD.
The Liquidity protocol has a native stable coin that is pegged to USD known as the LUSD. It can be fully redeemed at face value for primary collateral, which is distinct from other decentralized stable coins.
The protocol is designed to allow users to mint tokens using a self-service mechanism similar to other stable coin systems. But the other stable coin systems adopted advanced governance mechanisms to maintain the dollar-peg through interest rates or updating fees.
Liquidity algorithmically adjusts loan issuance and Redemption fees to support LUSD and eliminate the need for human intervention and interests. These loan issuance and Redemption fees are originally set at 0% and then increase gradually with the amounts redeemed.
They tend towards zero if the Redemption activity reduces. The usage trend of Liquidity as a protocol that is leveraged against Ether will always tool the price part of Ether.
It’s founded by Robert Lauko and has a total locked value of $ 2,441,876,946 as of August 9th, 2021.
The working mechanism
The working mechanism of the Liquidity protocol is simple and easy to go by. The borrower holding Ether will first lock it up in a smart contract to create personal Liquidity positions – ‘Trove. Each of the Troves created should have at least a 110% collateralization ratio which is exceptional in the Defi ecosystem. The borrower can then mint the desired LUSD tokens, which are recorded as debts to collateral.
You can get almost 90.09 LUSD as a borrower if you use $100 worth of Ether. When you want to retrieve your collateral, you are expected to return the LUSD to the smart contract to redeem their loan.
Then they will release or free your collateral; however, the lower the collateral requirements, the better the capital efficiency. For instance, if the liquidation ratio is set at 150%, the low-risk tolerance borrowers may be uncomfortable.
They may keep their ‘Trove’s collateral ratio’ at over 300% to survive any sudden drop in collateral price by 50%. But if liquidation happens at a ratio below 110%, the borrower will maintain a Trove’s collateral ratio of 220%.
A good capital efficiency enhances integration with other Defi protocols and increases Ether Market via a higher ROI. In addition, the system stability is strengthened by an increased number of borrowers and stability pool depositors.
The stability pool depositors are rewarded with the surplus gains from the collateral from the liquidated Toves by borrowers. They also earn LUSD tokens as rewards from their initial deposits. LUSD is a utility token that tracks the amount of revenue generated by the Liquidity Protocol through staking. You can stake the LUSD to earn a percentage of the Liquidity protocol’s revenue streams via Redemption and issuance of fees.
Main Features of the Liquidity USD
The core features of the Liquidity protocol that distinguishes it from other similar Defi projects are explained below.
Borrowing at Zero Interest
The Liquidity protocol allows you to borrow the stable coin LUSD at zero interest rate using Ether as collateral. Hence, Liquidity here is free. The protocol generates the LUSD tokens on its own. It doesn’t share the capital cost on its borrowers nor regulates monetary supply based on the interest rates.
It charges a one-time fee on its borrowers as a proportion of the withdrawal amount. The fee rate depends on the present base rate governed algorithmically by the protocol based on the volume of Redemption.
The Liquidity AG has no web interface of its own. You can access the protocol through a third-party application. Anyone is free to become a frontend operator using the SDK or Launch Kit and, in turn, earn a portion of the stability pool rewards.
Liquidity is known as a protocol instead of a network. Hence, no special privileged administrator can alter, interfere with or halt the protocol’s operation. The protocol’s third parties exclusively provide frontend operation that decentralizes the system and makes it censorship-resistant.
The collateral ratio of 110%
The minimum collateral ratio of the Liquidity protocol is 110%, which is equivalent to a 90.09% loan-to-value ratio. This increases the capital efficiency of borrowing and allows for a leverage of investment up to 11 times.
Borrowers always uphold their collateral ratio above 110% to prevent their Troves (positions) from becoming vulnerable to liquidation. The protocol’s instantaneous and efficient liquidation mechanism maintains a high degree of robustness and supports a low collateralization ratio.
Efficient and instantaneous liquidation of troves with a minimum collateralization ratio of 110% ensures that the system is stable. The liquidation process follows the order of priority below;
- Offsetting: The LUSD token is kept in the stability pool. They are used in repaying the undercollateralized debt and then burned afterward. The borrower’s collateral from the liquidated Trove is transferred to the stability pools.
- Redistribution: If the LUSD in the stability pool is insufficient to cover the debt, the remaining collateral and debt are redistributed. They are transferred from the liquidated Trove to active borrowers according to their collateral amounts.
The stability providers earn from donating to the system’s stability pools while liquidators are rewarded for carrying out prompt liquidation.
LUSD is a stable coin that is fully redeemable. The system allows the LUSD token holders to pay back their LUSD at face value for the original Ether collateral.
For instance, if you are redeeming 1000 LUSD, you will get Ether collateral worth $1000 from the riskiest Trove minus the Redemption fee. In addition, the Redemption process creates a background price for LUSD, returning it to parity anytime it goes below $1.
The LUSD token holders are rewarded for redeeming the token if they can buy at a price lower than $1 and convert to Ether at the same $1 price. All Redemption will lead to a reduction in the LUSD total token supply and a rescaling of the flat rate.
Liquidity protocol, unlike other platforms, doesn’t depend on physical governance to vote for monetary interventions. The protocol algorithmically controls all parameters on its own except for the ones that are preset and immutable. This eliminates human intervention in the protocol’s governance. The protocol also and adjusts the base rate of the Redemption volumes using a time decay mechanism.
This base rate serves as the basis for both Redemption and issuance fees.
Rewards for Stability Providers
The LUSD holders strengthen the Liquidity protocol system against the Ether price variations by depositing to the stability pool. The protocol pays the stability providers incentives in the following ways;
- Liquidation gains: The liquidation process generally leads to increased revenue for the stability pool. It’s the difference between the debt absorbed in LUSD and the collateral received in Ether. The stability providers that participate proportionally with their deposits or contributions receive collateral from the liquidated Trove at a reasonable discount.
- Rewards: The stability providers are rewarded with LUSD tokens in proportion to their ‘kick-back rate of the Frontend .’ This reward is distributed based on the number of contributions or deposits that they made. These rewards start at a high rate and fade away with time. This is done to encourage early participants.
The stability providers are allowed to withdraw their gains in Ether or their deposits at any time.
Incentives for Stakers
The Liquidity system tracks the revenue generated from both the Redemption and borrowing fees and captures them. It then pays them out to all stakes of the LUSD token on a pro-rata basis. You can stake or un-stake the LUSD token at any time without a lock-up time frame.
Key Benefits of Liquidity USD?
Liquidity is designed to offer the best borrowing conditions on the Defi market. It has the following main benefits:
- Liquidity has a collateral ratio of 110% only.
- The system has free governance. Human beings do not govern it. Hence, all operations are fully automated and are algorithmic.
- The interest rate on borrowing is zero.
- The protocol is not control by any independent body. It’s censorship-resistant.
- The LUSD token can be redeemed directly at face value for the main(underlying) collateral at any given time.
How to Use Liquidity USD?
To will need to use a web interface known as ‘frontend’ before you can access the Liquidity system. The protocol’s team of developers doesn’t operate a frontend, and Liquidity is only accessed via these third-party applications-front end.
They are web interfaces that connect end-users to the Liquidity protocol receiving the LUSD token as a reward in return. Anybody can become a Frontend operator once they have a technical understanding and a webspace.
Launch kit: You can get the Frontend launch kit app from GitHub, then download it by using Docker or cloning the repository. Power users or individuals seeking the best starting point for their front end will spin it up.
SDK +: You can use the SDK technical documentation with the provided middleware library to create a Frontend app. The wallet and integrator services will then integrate the protocol into their existing platform using the SDK.
Choose a Liquidity Frontend: The Frontend operators list was compiled only for informational purposes as Liquidity AG is yet to cooperate with Frontend Operators. Again, the list is not conclusive because Liquidity AG has not conducted any review on the Front-end operators. The AG has not made any statement as regards the technical functionality or authenticity of the frontend operators.
Typical examples of front end operators include the following;
Zerion, Liquidity.App, DeFi Saver, Multiplier, LiquityFi, B.Protocol, Liquidity.Fun, Liquidity.gg and waterslide, etc.
The technological principles of the Liquidity protocol can be explained in the three headings below;
Highly capital-efficient Through Instant Liquidation
The Liquidity protocol allows a novel or boundless liquidation to increase the capital efficiency of the system. This makes it remain more robust to price volatility than its competitors.
The system needs more liquidation to cover for outstanding debt prior to Trove’s collateral ratio goes below 100%. The Liquidity protocol uses the stability pool to primarily absorb Troves that are under collateralized.
This technology is maintained by members that deposit LUSD in exchange for collaterals of Trove yet to be liquidated. The system automatically liquidates its debts anytime Troves goes below the minimum collateral ratio of 110%.
It achieves this via the burning of the equivalent amount of the LUSD tokens in the stability pool. This differs from other platforms that sell off their collateral following a long process faced with further price slash.
The Liquidity protocol in compensation for the burnt LUSD sends the collaterals of all liquidated Trove to the Stability Pool. They are then shared among the depositors according to their contributions.
This technique is aimed at rewarding the depositors and the collateral worth more in USD most times than the burnt LUSD token. This assertion stands because liquidation is more below a 110% collateral ratio, though with over a 100%probality.
The system is also designed to provide a mode for recovery. This recovery mode is induced when the system collateralization ratio falls below 150%, the critical collateral ratio (CCR). The riskiest Troves are immediately liquidated whenever this happens, whether they are 110% or not until the CCR is met. The recovery mode is a technology that guides the system away not to ever reach the CCR. It serves as a deterrent.
Price stability through Redemption
The LUSD token, similar to stable coins backed with fiat currency, is redeemable for its underlying collateral at face value.
The token value is at a fixed rate of $1 in the system. This implies that a user is free to redeem 1 LUSD for is Ether equivalent at any time. Anytime 1 LUSD goes below $1, arbitrageurs are encouraged to pay back 1 LUSD for Ether worth $1.
This ensures stability in token price via direct arbitrage instead of relying on monetary interventions like variable interest rates. Redemption has a positive influence on the entire system collateralization and eliminates net loss by affected borrowers. This effect also ensures that Troves are duly collaterized like the rest by creating incentives, improving the system security.
One protocol, many front ends
The Liquidity protocol is not a platform, as stated earlier. Its technology and mechanism of operation are not controlled by anybody. It seeks the assistance of the front end and other third-party operations that accepts to run the protocol’s web interface.
They are specific with third parties that can run a censorship resistance and decentralized Frontend web interfaces. The front ends will maintain a continuous reception of the LUSD tokens is proportional to the amount of deposited LUSD.
They will also try to gain users through the rate of Kick-back that they can set freely, ranging from 0-100%.
Conclusion of Liquidity USD Review
This Liquidity review is an informative tool that explains in detail the general overview of the protocol. It explains the Liquidity as a decentralized protocol and not a platform, non-custodial and not custodial and immutable borrowing protocol.
The protocol was founded by Robert Lauko and has a total locked value of $ 2,441,876,946. It allows members to lend and borrow funds in LUSD without any interest rate using Ether as collateral.
The protocol has a stable coin known as the LUSD, which is pegged to USD. It was created to maintain a minimum collateral ratio of 110%. Liquidity loans are secured by fellow borrowers acting as guarantors of last resort and via a stability pool that containing LUSD. You will need to use a frontend web interface like Zerion, Multiplier, and Liquidity. App to access the Liquidity system.
The protocol’s team of developers doesn’t operate a frontend, and Liquidity is only accessed via these third-party applications- the front end.
The Frontend operators list in the review was compiled for informational purposes only. The Liquidity AG is yet to cooperate with Frontend Operators. They are yet to conduct due diligence on them. We hope you find this Liquidity review informative.