Since the collapse of the $UST, many CeFi projects have been unable to operate continuously due to centralization, and eventually withdrew from the market. The idea that "decentralization is the end" has gradually penetrated into the hearts of investors, and Liquity has attracted much attention as one of the most decentralized stablecoins.
What is Liquity?
Liquity is a lending platform as well as a stablecoin issuance platform. The protocol went live on Ethereum on April 5, 2021, and currently only supports Ethereum. Liquity has two native assets, one is the USD-pegged stablecoin $LUSD, and the other is the utility governance token $LQTY.
On Liquity, users can deposit $ETH, lend $LUSD, and have a minimum collateral rate of 110% (i.e., lending a $100 worth of $LUSD requires a mortgage of at least $110 worth of $ETH). Compared to other overcollateralized stablecoins, Liquity has several notable features:
- Liquity only supports $ETH as collateral and currently only supports the Ethereum network.
- Although Liquity's borrowing rate is floating, its borrowing fees (interest) are settled in one lump sum when the user borrows. Changes in interest rates during the borrowing period do not affect the interest on the borrowing, nor does the length of the borrowing period affect the interest on the borrowing. It is more conducive to the control of borrowing costs by long-term borrowers.
- Liquity is fully supported by algorithms and contracts and runs independently. The protocol cannot be modified after deployment, and the development team does not have the relevant permissions.
Token economy
Liquity has issued native governance token $LQTY and stablecoin $LUSD.
$LUSD is a stablecoin backed by $ETH overcollateralization. $LUSD can be deposited into a stablecoin pool and earn the protocol's liquidation proceeds as well as $LQTY rewards.
In addition to overcollateralization, $LUSD has a stabilization mechanism called redemption. Redemption means that any holder of $LUSD, whether obtained through collateral borrowing or not, can exchange 1 $LUSD for $1 of $ETH at any time. This redemption will start with the riskiest position. If you open a position on Liquity, redemption means that someone else exchanged $LUSD for your collateral.
Since the value of the $LUSD will eventually approach one dollar, the borrower will not incur an actual loss. And every time the user redeems the basic interest rate of the agreement, the base interest rate will rise, that is, the borrowing fee and the redemption fee will rise, on the one hand, large-scale redemption can be avoided, on the other hand, the borrowing can be reduced, further promote the reduction of $LUSD circulation, and help the currency price to stabilize. However, the price of $LUSD fluctuates more than other stablecoins.
$LQTY was released in April 2021 when the platform went live. Liquity's original vision was a platform without governance, completely governed by contracts. Therefore, $LQTY can only be used for staking at first, earning the platform's revenue share (including borrowing fees and redemption fees). However, Liquity opened LiquiFrens, a community governance, in January 2023, giving $LQTY voting rights (currently on probation, three months).
$LQTY's initial allocation plan is shown in the figure, with a total supply of 100 million, of which 56.6% is allocated to investors, teams and advisors. The share of teams and advisors is unlocked in 3.25 years. Early investors' shares will be unlocked for a year of lock-up, and the exact unlocking plan is not disclosed.
Roadmap and progress
Liquity does not disclose a specific roadmap, but it reports quarterly on the overall disclosure of project progress. According to the Q4 2022 report, the project intends to further enhance the liquidity of $LUSD in Arbitrum. In addition, the project team will vote on community proposals every month, and you can also learn some project dynamics, which can be found in its Snapshot.
Currently, Liquity's total $LUSD issuance is about 230m, the total TVL of the agreement is about $600m, and the total collateralization ratio of the platform is 259.9%. Since the bear market, $LUSD supply has generally shown a downward trend, falling over the past year, but Trove has continued to rise since June 2022 and has basically returned to the level of the beginning of last year. However, most Trove are small positions within 100 $ETH, and only 7 are 10k-100k $ETH.
$LQTY current circulation is 91m, 53.43m $LQTY is staked, accounting for about 58.72%. $LQTY's pledge has continued to rise since April 2022, but recently due to higher prices, today's pledge has decreased by 99,011.84 $LQTY compared to the 27th. The yield (APR) for $LUSD stable pool and $LQTY staking is 5.74% and 0.76%, respectively.
Ecological development
As of March 2023, Liquity lists 20 frontends on its official website, of which the highest number of active users is Liquity.App.
According to Liquity's report, the three main deployment directions of the $LUSD ecosystem are: Chicken Bond, Layer 2 and Lending.
- Chicken Bond is a new product developed by the Liquity team on the basis of Liquity, and users can earn higher earnings than stablecoins by depositing $LUSD. The income mainly comes from the compounding income from the stable pool and a small amount of the LP income from the Curve $LUSD pool. Currently, Chicken Bond's TVL is $20.64m, of which $6.38m comes from $LUSD deposited by users.
- Layer 2: Liquity is committed to deploying liquidity to the Layer 2 network, including Optimism and Abitrum, becoming the primary stablecoin on the Layer 2 network.
- Lending: Liquity integrates with other lending platforms (e.g. Aave, Euler, etc.) where users can deposit/borrow $LUSD.
Looking at the distribution of $LUSD, apart from the stable pool, most of $LUSD are not distributed much on Curve and Uniswap, Layer 2 and other lending protocols. According to DefiLlama's statistics, the total market capitalization of stablecoins on OP is currently $656.9m, with USDC accounting for 54.97% and $LUSD accounting for only 0.89%.
Token secondary market performance
The chart below shows the price action of $LQTY over the last 90 days. It can be seen that $LQTY benefited from the public opinion storm at $BUSD in February this year, from February 1 to 27, $LQTY prices ranged from $0.711 to $1.278. On February 28, $LQTY launched Binance, which further doubled its price. The current price remains around $2.2.
Liquity itself is highly decentralized, the protocol is fully supported by contracts, and the community and development team have a low degree of intervention in the protocol itself. However, it also has some shortcomings in the user experience, because Liquity does not have its own front-end, and the front-end developed by third parties has different forms and functions, which may cause some inconvenience in use.
Mechanically, Liquity only supports $ETH collateral and only charges a one-time lending fee. Compared to Maker's multi-collateral, multi-interest rate model. But $LUSD is not as stable as other stablecoins in price, with higher volatility, but also greater relative arbitrage space.
At present, $LUSD has a weak ecosystem compared to other stablecoins, and its usage scenarios are not rich enough. Since $LQTY governance has just been launched, its functionality needs to be improved compared to the governance tokens of other protocols. However, overall, the pledge ratio of both $LUSD and $LQTY is relatively high.
Although it is managed and operated by the contract, Liquity's contract has not experienced any security problems and continues to operate stably. However, at present, its ecology is weak, and the use scenarios of tokens are not rich enough. In the future, as the industry attaches more importance to decentralization, the recognition of the protocol may gradually increase, which will also have a positive effect on ecological development.
Based on the above information, TokenInsight gives Liquity a rating of BB with a positive outlook.