Liquity (LQTY) is a decentralized borrowing protocol that operates on the Ethereum network. It utilizes a USD-pegged stablecoin known as LQTY. This protocol allows Ether holders to draw loans in the form of LQTY, with fees for loan issuance and redemption being adjusted algorithmically. Liquity does not run its own frontend, which means to interact with the protocol, users may choose from a list of third-party frontend operators. This approach contributes to the system's decentralization and resistance to censorship.

Liquity operates by allowing Ether holders to draw loans in the form of its stablecoin, LQTY. The protocol uses an algorithm to adjust the fees associated with loan issuance and redemption. Users interact with the protocol through third-party frontend operators, which adds to the system's decentralization. The protocol also includes a Stability Pool, where users can deposit LUSD to receive LQTY compensation. The revenue generated by a frontend grows proportionally with the total amount of LUSD deposited by its users to the Stability Pool.

Liquity aims to provide a platform for Ether holders to draw loans in the form of its stablecoin, LQTY. This can be particularly useful for individuals who wish to leverage their Ether holdings without selling them. Additionally, Liquity's Stability Pool provides users the opportunity to receive LQTY compensation by depositing LUSD. This can serve as an incentive for users to participate in the Liquity ecosystem, potentially leading to increased adoption and use of the LQTY stablecoin.

Liquity was founded by Robert Lauko, who also serves as the Head of Research. The protocol was developed and launched on the Ethereum mainnet, marking its entry into the decentralized finance (DeFi) space. Since its inception, Liquity aims to provide a decentralized borrowing platform for Ether holders, while also offering a Stability Pool where users can receive LQTY compensation. The protocol has undergone various updates and improvements, with the team working to enhance its functionalities and user experience.

Liquity is a decentralized borrowing protocol that allows users to obtain non-monetary benefits against Ether used as collateral. The benefits are paid out in LUSD, a USD pegged stablecoin, and need to maintain a minimum collateral ratio of 110%. Liquity's ecosystem revolves around two native assets: the stablecoin $LUSD and the utility and governance token $LQTY. Users deposit $ETH as collateral to borrow $LUSD. An important feature of Liquity is its unique borrowing fee, which does not accumulate over time. This approach is designed with the intention of long-term cost efficiency, positioning it as an option in the DeFi lending space. On the other hand, $LQTY serves a dual purpose. Initially created without governance rights, it primarily served as a means for users to receive a portion of the protocol’s non-financial incentives, including borrowing and redemption fees. However, in January 2023, Liquity introduced a community governance program called LiquiFrens, granting $LQTY holders voting rights. This change is intended to reflect Liquity’s aspiration towards decentralization.

LQTY, the secondary token issued by the Liquity protocol, has features for users participating in the Liquity ecosystem. It aims to capture the fee revenue generated by the system and strives to encourage early adopters and frontend operators. Users may receive LQTY rewards by allocating LUSD into the Stability Pool, facilitating Stability Pool allocations through their frontend, or providing liquidity to the LUSD:ETH Uniswap pool. LQTY holders can stake their tokens to receive non-monetary incentives from loan issuance and LUSD redemptions. This mechanism aims to encourage users to hold LQTY, fostering user engagement with LQTY. Liquity has features that accept a range of cryptocurrencies as collateral, allowing users to borrow against popular assets such as Ethereum (ETH) and other ERC-20 tokens. This feature aims to provide users with the possibility of accessing liquidity, regardless of their chosen crypto assets.

Users can mint LUSD stablecoins on the Liquity platform by utilizing the platform's decentralized borrowing protocol. This protocol enables users to draw LUSD loans against Ether (ETH) collateral. The process involves providing ETH to a smart contract on the Liquity platform, which then mints LUSD stablecoins. The quantity of LUSD that can be minted is determined by the value of the provided ETH and the system's collateralization ratio. It's crucial to understand that the Liquity platform strives to maintain a minimum collateral ratio to ensure the stability of the LUSD stablecoin. This process is entirely decentralized and does not require any intermediaries, intending to facilitate the process for users to mint LUSD stablecoins.

LQTY, the native token of the Liquity protocol, plays a role in the system's operation. Unlike many other decentralized finance (DeFi) protocols, Liquity does not have a governance system, meaning that LQTY holders cannot influence decision-making within the protocol. This is a deliberate design choice aimed at maintaining the protocol's decentralization and resistance to censorship. LQTY is primarily a token of recognition, created by the protocol to encourage user participation, frontends, and stability providers, who are the first line of defense in maintaining system solvency. Despite its lack of governance capabilities, LQTY plays a role in the protocol's ecosystem, helping to encourage user participation and maintain the system's stability.

Liquity seeks to address the challenges related to collateralization and liquidation in the cryptocurrency lending space by implementing a specific system design. It uses a timely price feed from decentralized exchanges and liquidity pools, allowing for timely identification of undercollateralized loans. Liquity also introduces a Stability Pool, where users can allocate tokens needed for debt repayments in advance. This pool is instantly available for writing off undercollateralized debts, eliminating the need for collateral auctions or fixed price sell-offs. In the event that the Stability Pool is insufficient to offset the entire undercollateralized debt, Liquity has a fallback loan redistribution mechanism. This redistributes the liquidated positions, including the debt and collateral, to active positions, ensuring that all loans are intended to be covered by the total available collateral in aggregate. This system design seeks to improve capital efficiency and mitigate systemic risks.

Liquity aims to manage risk through a liquidity risk management framework. This includes scenarios involving the loss or impairment of both unsecured and secured funding sources. Liquity also aims to establish a funding strategy that provides diversification in the sources and tenor of funding. It seeks to maintain an ongoing presence in its chosen funding markets and relationships with providers to promote diversification of sources. In addition to these measures, Liquity aims to manage its collateral positions, differentiating between encumbered and unencumbered assets. It monitors the legal entity and physical location where collateral is held and how it may be mobilized in a timely manner. Liquity conducts stress tests on a regular basis for a variety of short-term and protracted institution-specific and market-wide stress scenarios to identify sources of potential liquidity strain.

In the Liquity system, liquidity providers, also known as Stability Providers, may benefit in two primary ways. Firstly, they may benefit from liquidations of ETH loans, also known as Troves. When these Troves are liquidated, it generally results in a net benefit for the Stability Pool, which is the difference between the absorbed debt (in LUSD) and the received collateral (in ETH). Stability Providers, participating pro rata with their pool contributions, thus acquire collateral from liquidated positions under certain conditions. Moreover, Stability Providers continuously receive LQTY allocations based on the contributed LUSD and the kick back rate of the frontend through which their contributions are made. These LQTY allocations capture the fee allocations managed by the system and encourage early adopters and Frontend Operators. Stability Providers can retrieve their ETH benefits and LQTY allocations at any time, while LUSD contributions can be retrieved as long as the system contains no liquidatable debt.

In the DeFi ecosystem, liquidity is crucial as it enables seamless transactions and ensures that there is sufficient liquidity available at all times. Liquity contributes to this by incentivizing users to add tokens to liquidity pools, thereby increasing the overall liquidity of the DeFi space. This process is facilitated by automated market maker algorithms and smart contracts, which help maintain the proper price of the assets in the pool. And, Liquity also strives to reduce price volatility, a common issue in DeFi, by ensuring higher liquidity. This aims to increase the stability and efficiency of the DeFi ecosystem, thereby aiming to increase user accessibility.

Liquity's versatility is indicated through its various integrations and partnerships. One of the key collaborations is with Tenet, a layer-1 DeFi blockchain solution. Tenet has integrated Liquity's USD-pegged stablecoin, LSDC, into its protocol. LSDC operates on the Tenet Stablecoin Protocol, which is decentralized and uses the Liquity model to allow users to access non-monetary benefits against yield-bearing collateral assets. This integration demonstrates Liquity's function to provide stablecoin solutions for other blockchain platforms. Another notable collaboration is with Maverick Protocol, which has decided to move the liquidity of its native token, TENET, to Maverick Protocol. This collaboration demonstrates Liquity's function to facilitate liquidity migration and aims to encourage collaborative opportunities. Liquity's integrations and partnerships indicate its adaptability and potential to offer improvements within the cryptocurrency space.

Developers have several ways to engage with and contribute to the Liquity protocol. They can utilize the Liquity software development kit (SDK) to integrate the Liquity protocol into their own environments. This enables developers to create their own frontends, which are crucial for connecting users to the Liquity protocol. By running a frontend, developers may receive non-monetary incentives in the form of Liquity token (LQTY) rewards. Developers can also contribute to the Liquity code base, which is open-source, fostering continuous improvement and innovation. Liquity provides a bug bounty program, encouraging developers to identify and report potential vulnerabilities in the system. This collaborative approach strives to improve the robustness and security of the Liquity protocol.

Liquity employs a distinct approach to decentralized governance by reducing the need for human intervention in decision-making processes. Instead, it uses built-in algorithms to manage and dynamically update its adjustable parameters. This means there's no need for token voting or governance calls, which are common in other decentralized finance (DeFi) protocols. The protocol's rules are immutable, meaning they cannot be altered by anyone, aiming to maintain security and trust for users. This governance-free nature, combined with a one-time borrowing fee, strives to provide a predictable experience for users. By measuring redemption volumes and applying a time decay mechanism, Liquity constantly adjusts the base rate, which serves as a basis for both borrowing and redemption fees. This approach to decentralized governance is designed to make human interventions less necessary, further contributing to the protocol's decentralization.