Stablecoins have been among the biggest stories in the Ethereum ecosystem in 2020. And one of the newest stories in that sector is Liquity, a novel “decentralized borrowing protocol” that will rely on a USD-pegged stablecoin called LQTY.
Introduced on Monday, May 4th, Liquity is being created by a startup of the same name as a DeFi protocol for powering zero-interest loans that don’t require high collateral ratio.
The protocol is still in-progress, but these planned elements will make the project stand out from reigning DeFi lending dApps like Maker and Compound.
For one, the role of interest rates are significant in these projects, and Maker and Compound both require borrowers maintain a minimum collateralization ratio of 150%.
Liquity will be unique, then, in having much less collateral demands for its version of Maker vaults, dubbed “troves.” The Liquity team said:
“Each trove is required to have a minimum collateralization ratio of only 110%, which is unparalleled in DeFi space. The borrower can then mint LQTY tokens, which are calculated as a debt against collateral. For Ether that is worth $100, the borrower can obtain up to 90.09 LQTY. When the borrower is ready to retrieve their collateral, they simply return the LQTY to the contract to repay their loan and free up their collateral.”
For now, the protocol isn’t ready just yet for the limelight as the Liquity team still has an “internal version running on … testnets,” but its launch is now on the horizon and its possibilities are interesting.
LQTY Is Light on Governance
Maker and Compound respectively rely on MKR and COMP, governance tokens that the dApps’ communities use to maintain and steer the projects. Yet governance is difficult in traditional settings just as it is on-chain, so these token voting systems face their share of expected and novel challenges.
Not everything in life needs to be structurally conservative, but minimizing governance where possible can offer unique advantages. In this vein, Liquity is taking the “governance-free” approach when it comes to managing the protocol and LQTY.
“Price stability does not rely on human governance, but is achieved through protocol incentives and algorithmically adjusted redemption and loan issuance fees (0% by default),” the project’s landing page explains.
While the system’s precise model is still yet to be seen in the wild, it will surely be attractive to Ethereum stakeholders who have expressed dissatisfaction with recent Maker and Compound governance decisions, e.g. MakerDAO approving centralized coins like USDC and WBTC as collateral and Compound voters embracing Tether (USDT).
To this end, Liquity’s development is also notably coinciding with the development of MetaCoin, a “governance-minimized” MakerDAO alternative that was first proposed back in February. Minimum viable stablecoin efforts are seemingly becoming more popular, it would seem, so Liquity is likely just the latest of more to come.
Understanding the Stability Pool
At times, Liquity loans will need to be liquidated to ensure their don’t collateralization ratios don’t plunge below the key 100% mark. To facilitate this process, the protocol will rely on a so-called Stability Pool:
“It is maintained by users who deposit LQTY in exchange for the future collateral of liquidated troves. When a trove falls below the minimum collateral ratio of 110%, the system liquidates its debt by burning an identical amount of LQTY tokens held in a Stability Pool … In return for the LQTY that is burned from the Stability Pool, all the collateral of each liquidated trove is sent to the Stability Pool and distributed proportionally among all depositors.”
Accordingly, if all goes to plan the project’s Stability Pool will provide yield seekers in the DeFi ecosystem with yet another new on-chain avenue to potentially accrue passive income.