What Is Liquity (LQTY)?

Liquity (LQTY) is a decentralized borrowing protocol that allows users to draw loans with any interest against Ether token used as collateral. In simple words, the platform provides loans to individuals in exchange for Ether tokens present with them. On the platform, loans are paid out using LUSD tokens. LUSD is the USD-pegged stablecoin that can be redeemed at any time against the underlying collateral at face value. This means that the users can easily convert the LUSD tokens into traditional currency at any given time. 

Further, LUSD needs to maintain a minimum collateral ratio of 110%. Users can lock up Ether on the Liquity platform, then issue LUSD to their own Ethereum address, and subsequently transfer those tokens to any other Ethereum address as well. Next, a Trove is where the user can take out and maintain their loan. Each Trove is linked to an Ethereum address, and each address can have just one Trove. To put simply, Trove is an account that keeps the record of ETH as well as the debt given in the form of LUSD. 

Primarily, Liquity uses the LUSD tokens in the Stability Pool to absorb the undercollateralized debt, i.e., to repay the liquidated borrower's liability. The Stability Pool maintains the system's solvency as the first line of defense. The platform achieves solvency by acting as the liquidity source to repay debt from liquidated Troves and ensuring that the total LUSD supply remains backed up. Further, the Stability Pool is funded by users (stability providers) transferring LUSD. Over time, while gaining a pro-rata share of the liquidated collateral, stability providers lose a pro-rata share of their LUSD deposits as well.

According to the Liquity Docs, collateralized debt platforms do not rely on lenders to provide liquidity and generate free liquidity with no refinancing costs. Yet, most platforms charge recurring fees for borrowing. The variable fees (stability fees) correspond to an interest rate in traditional banking, have an indirect impact on monetary supply, and are rather ineffective in the short term. Short-term speculators and leverage seekers might not be greatly affected by interest rates, but existing borrowers may not have the means to repay their loans as an immediate reaction to rising interest.

In addition to charging stability fees, existing platforms require the individual borrower’s position to be overcollateralized. This is due to the liquidation mechanisms they apply to a borrower that become undercollateralized. Overcollaterization makes the borrower’s capital inefficient. Furthermore, both collateral auctions and fixed-price selloffs have turned out to be inefficient by design, leaving room for improvement.

Finally, crypto-backed stablecoins are not redeemable at face value, and due to the lack of direct arbitrage cycles, they cannot guarantee a hard price peg as well. Thus these coins are usually subject to higher price volatility than traditional currency-backed stablecoins. Instead, the systems rely on a soft peg mechanism that is less effective, stabilizing the exchange rate by making the loans more or less attractive through variable fees.

Liquity improves upon the above-mentioned issues by offering the following key benefits:

• Interest-free liquidity

• Low collateral ratio (110%)

• Hard price floor

• Governance-free algorithmic monetary policy

• Censorship resistance

• Growth incentives

Notably, LQTY is the secondary token issued by Liquity and incentivizes early adopters and frontends. Frontend Operator provides a web interface to the end user. This further enables them to interact with the Liquity protocol. LQTY rewards will only accrue to Stability Providers, users depositing LUSD to the Stability Pool, frontends facilitating those deposits, and liquidity providers of the LUSD:ETH Uniswap pool. 

History of Liquity (LQTY)

Robert Lauko and Rick Pardoe are the founders of Liquity. Lauko is the CEO and was previously a researcher at DFINITY. Pardoe is the lead engineer and is a Solidity. Michael Svoboda is the COO and was previously CEO and COO at several blockchain companies.

The whitepaper and the LQTY token of the platform were launched on April 5, 2021.

How Are New Liquity (LQTY) Tokens Staked?

LQTY holders can stake their tokens on the platform to earn the fees generated by LUSD redemptions and loan issuance. The process of redemption involves exchanging LUSD for ETH at face value. Anytime, users can redeem their LUSD for ETH without limitations. However, there may be a redemption fee on the redeemed amount. 

To start staking, the user needs to deposit the LQTY token to the Liquity staking contract. Once done, the user will start earning a pro-rata share of the borrowing and redemption fees in LUSD and ETH. The LQTY stake will earn a fee share equal to the share of the total LQTY staked at the instant the fee occurred. Only LQTY tokens can be staked on the platform, and LUSD can be deposited into the Stability Pool instead.

How Many Liquity (LQTY) Tokens Are There?

Liquity (LQTY) has a maximum supply of 100,000,000 LQTY tokens. 

How to Buy Liquity (LQTY) Tokens

LQTY tokens can be purchased and traded at an exchange like Coinbase. It's safe, secure, and easy.