Liquity: An Overview

Liquity is a decentralized borrowing system deployed on multiple chains, including Ethereum, that issues interest-free loans collateralized by Ether and denominated in LUSD. The protocol is designed to be non-custodial, immutable, and free of on-chain governance, with the goal of providing a transparent and secure borrowing experience.

Overview

Liquity was launched in December 2019 by Robert Lauko and Rick Pardoe and operates as a platform that issues loans in LUSD, a stablecoin pegged to the US dollar, with a required minimum collateral ratio of 110%. The system forgoes a proprietary frontend, allowing users to interact via various third-party interfaces, which promotes decentralization. Within Ethereum’s ecosystem, assets that maintain a stable value are critical, and most of the market is dominated by fiat-backed stablecoins such as Tether and USDC; Liquity seeks to offer an efficient means to borrow a stablecoin.

Stability Pool

The Stability Pool is a central mechanism in Liquity’s approach to preserving solvency, intended to supply liquidity to repay debts arising from liquidated Troves and to help ensure that the total LUSD supply remains properly collateralized.

When a Trove is liquidated, the Stability Pool uses its LUSD balance to pay off the outstanding debt and, in doing so, burns an amount of LUSD equal to the remaining liability while receiving the full collateral of the liquidated Trove.

Funding for the Stability Pool comes from individuals called Stability Providers who deposit LUSD into the pool. As liquidations occur, a Stability Provider’s LUSD balance diminishes proportionally, and in exchange they receive a proportional portion of the collateral recovered from liquidated Troves.

Contributors are incentivized to deposit LUSD into the Stability Pool because Stability Providers generally expect to obtain collateral with a dollar value exceeding the LUSD they help extinguish, given liquidations typically happen just below the 110% collateral threshold. Additional motivation includes the prospect of liquidation gains and early adopter rewards paid out in LQTY tokens.

Liquity v2

Liquity v2 plans to add principal protection, a feature intended to reduce losses during market downturns and make hedging positions more attractive, while also introducing an internal secondary market intended to lower the liabilities linked to providing principal protection.

Hedging positions in Liquity v2 are structured as perpetual instruments that are exempt from liquidation; holders can exit these positions and claim their portion of any surplus held in the reserve. The exit payout depends on the price movements of the reserve asset, which in turn affects the effective leverage of the position.

Principal Protection

Principal Protection in Liquity V2 is designed to improve the appeal of hedging offerings by ensuring users are protected from downside losses: when a hedging position is opened, the user is guaranteed the ability to sell the position for at least its fixed principal amount, providing asymmetric downside protection while still allowing for amplified upside exposure.

To support this guarantee, Liquity V2 collects premiums from users when new positions are initiated via an auction-style process. These paid premiums bring fresh capital into the system and help maintain adequate overcollateralization for covered positions.

Tokenomics

Liquity USD (LUSD) is an ERC-20 stablecoin that underpins the Liquity borrowing protocol, enabling loans that are denominated in a USD-pegged token. Borrowers must open a Trove backed by a minimum deposit of ETH and maintain at least a 110% collateral ratio. Following the Ethereum Merge, the network operates under Proof-of-Stake (PoS); holders can place LUSD into the Stability Pool to earn rewards paid in ETH and LQTY.

As a US dollar–pegged token, LUSD can be exchanged directly for fiat or swapped for other tokens such as USDT.

LQTY is the secondary token in the Liquity system that accrues fee revenue and incentivizes participants such as those depositing LUSD, frontends that route deposits, and liquidity providers for the LUSD:ETH Uniswap pool. LQTY has a fixed supply cap of 100,000,000 tokens and does not function as a governance token. Rewards are distributed for depositing LUSD, facilitating Stability Pool participation, and providing liquidity, and LQTY holders may stake their tokens to receive a share of fees generated by loan issuance and LUSD redemptions.

• Liquity Community: 35.3% (32,000,000 LQTY allocated to the rewards pool, earned through Stability Pool deposits, and rewarded to frontends and Stability Providers by the protocol; 1,333,333 LQTY allocated to LPs of the LUSD:ETH Uniswap pool, earned by staking LUSD:ETH Uniswap LP tokens and distributed over 6 weeks by the protocol; 2,000,000 LQTY allocated to the Community Reserve, sourced from the Liquity AG endowment, intended for grants, hackathons, events, and community initiatives)
• Team and Advisors: 23.7% (23,664,633 LQTY allocated to current and future Liquity AG employees and advisors; Tokens under a 1-year lockup, with 1/4 vesting after 1 year and 1/36 vesting every subsequent month)
• Investors: 33.9% (33,902,679 LQTY allocated to Liquity's early investors, subject to a 1-year lockup)
• Liquity AG Endowment: 6.1% (6,063,988 LQTY allocated to Liquity AG for company use, with a 1-year lockup)
• Service Providers: 1% (1,035,367 LQTY allocated to service providers assisting Liquity before launch, subject to a 1-year lockup)

BOLD

$BOLD is the native stablecoin proposed for Liquity V2, operating as a US dollar–pegged token collateralized exclusively by Ethereum-based assets such as WETH, wstETH, and rETH. Its issuance contracts are immutable to reduce dependence on governance and to shrink potential attack surfaces. $BOLD may be redeemed at any time for $1 worth of collateral, and its peg is preserved via a market-driven mechanism that incorporates user-set interest rates and redemptions. The protocol channels all revenue to $BOLD holders through Stability Pool deposits instead of creating token emissions, thereby forming a yield model tied to protocol activity. Liquity plans to bolster liquidity via a Protocol Incentivized Liquidity program. A companion asset, sBOLD, created by K3 Capital, allows users to earn automated, compounded returns by allocating deposits across multiple Stability Pools.

Investors

• Polychain Capital
• Tomahawk.vc
• Lemniscap
• 1kx
• A Capital
• Alex Pack
• Robot Ventures
• DFINITY Ecosystem Fund
• Pantera Capital
• Nima Capital