What is Liquity?
Liquity is an open‑source, permission‑less protocol that enables users to draw a stablecoin (LUSD) against Ether (ETH) collateral without relying on price oracles or liquidations.
- Fully decentralized: governance is handled by the LQTY token holders.
- Collateral‑backed: ETH is locked in a smart contract as the sole collateral.
- Stability: LUSD maintains a soft peg to USD through a stability pool and redemption mechanisms.
How Liquity Works
The protocol follows a series of automated steps to manage borrowing, repayments, and system health.
- Opening a Trove: Users deposit ETH and borrow LUSD up to a minimum collateral ratio (typically 110%).
- Stability Pool: LUSD holders can deposit into the stability pool to earn LQTY rewards and absorb debt from liquidated Troves.
- Liquidations: Troves that fall below the minimum collateral ratio are automatically liquidated; the debt is covered by the stability pool.
- Redemptions: Any user can redeem LUSD for ETH at the peg, reducing circulating LUSD and improving system stability.
- Governance: LQTY token holders vote on protocol upgrades, fee structures, and parameter adjustments.
Why Use Liquity?
Liquity offers several advantages over traditional lending platforms and other stablecoin solutions.
- Permissionless Access: No KYC or approval processes; anyone can interact directly with the smart contracts.
- Zero Interest Rates: Borrowers pay a one‑time borrowing fee that is redistributed to stability pool participants, eliminating ongoing interest.
- Non‑Liquidation Design: The stability pool absorbs under‑collateralized positions, protecting borrowers from forced liquidations.
- Transparency & Security: All operations are on‑chain, auditable, and governed by token holders rather than a central entity.
- Incentive Alignment: LQTY rewards encourage participants to support system health, creating a self‑sustaining ecosystem.