What is Liquity USD (LUSD)?

What Is Liquity USD (LUSD)?

The Liquity protocol utilizes a stablecoin called Liquity USD (LUSD), which is pegged to the USD and is used to repay loans. The stablecoin can be exchanged for the underlying collateral at face value anytime. To avail loans, users need to establish a Trove and deposit a certain amount of Ethereum (ETH) as collateral. LUSD can be borrowed up to a collateral ratio of 110%. The Liquity protocol offers interest-free loans, which are secured by Ether collateral and backed by a Stability Pool with LUSD. As of now, the total value locked on the protocol is over $642 million.

Who Are the Founders of Liquity USD (LUSD)?

Robert Lauko has an impressive background in traditional finance, as well as experience researching algorithms, network monitoring, and scalability issues. He is the founder and Head of Research at Liquity. Rick Pardoe, the co-founder and Lead Engineer, holds degrees in Physics and Economics. Michael Svoboda, the current CEO, brings with him a wealth of experience having held the same role at several blockchain companies. He holds a degree in computer science and economics.

How Does Liquity USD (LUSD) Work?

Liquity is a decentralized protocol that aims to provide a capital-efficient way to borrow stablecoins. It is 'non-custodial, immutable, and governance-free’ in nature, as explained in its official documentation. With this protocol, users can obtain interest-free loans that require less collateral compared to other borrowing systems. Instead of selling Ether for cash, users can lock up their Ether and borrow against it to withdraw LUSD. The loan can be repaid at a later date. It is also possible to use LUSD as collateral when borrowing Ether and then sell it on the open market to purchase more Ether, creating a cycle that can be repeated multiple times. Users can earn LQTY by depositing LUSD in the stability pool, providing liquidity to the LUSD:ETH Uniswap pool, and facilitating the Stability pool through their frontend. It's worth noting that Liquity Protocol does not have a frontend, and external frontend operators provide access to end-users.

What Makes Liquity USD (LUSD) Unique?

With Liquity protocol, users can borrow stablecoins interest-free. To ensure stability, there are one-time borrowing and withdrawal fees that adjust automatically based on the frequency of withdrawals. If there are more withdrawals, the borrowing fee will increase to discourage people from taking out loans.

Unlike other systems like MakerDAO, Liquity does not implement variable interest rates to control borrowing dynamics. Instead, it uses a decentralized and direct feedback mechanism through one-off fees. This approach allows borrowers to understand the changes in cost upfront and avoids complicated governance procedures.

How Is the Liquity USD (LUSD) Network Secured?

LUSD is an Ethereum-based ERC-20 token that utilizes the Proof-of-Stake (PoS) consensus mechanism for security. Validators must stake a certain amount to take part in consensus and validate transactions.