Interest-free loans using ETH as collateral.
Yes, you read that right: 0% interest.
TOTAL VALUE LOCKED: $1.68B REWARD KICKBACK RATE: 90% MINIMUM COLLATERAL RATIO: 110% MAXIMUM LOAN-TO-VALUE RATIO: 90.09% BORROWING FEE: 0.5% REDEMPTION FEE: 0.5% BORROWER INTEREST RATE: 0% AVERAGE LENDER ROI: 17.14% APR
Users can draw the stablecoin LUSD interest-free against their Ether used as collateral. They can thus obtain liquidity for free without any recurring costs.
Since the protocol can generate the LUSD tokens itself, it does not need to pass any capital costs onto the borrowers, nor does it rely on interest rates to regulate monetary supply.
There is a one-time borrowing fee as a percentage of the drawn amount. The fee rate depends on the current base rate, which is algorithmically governed by the protocol based on the redemption volumes.
LUSD is a fully redeemable stablecoin. At any time, the system allows holders to redeem their LUSD for the underlying Ether collateral at face value or trade LUSD against other assets. For example: A holder redeeming 100 LUSD would receive $100 worth of Ether collateral from the riskiest positions held, minus the current redemption fee.
The redemption mechanism will create a price floor for LUSD, pushing its price back to parity whenever it drops below $1. Holders have an incentive to redeem LUSD if they can buy it for less than $1 and then convert it into Ether at a price of exactly $1. Every redemption leads to a contraction of the total LUSD supply and to an adjustment of the base rate.
Liquity protocol allows for an unprecedented minimum collateral ratio of 110%, which corresponds to a loan-to-value ratio of 90.09%. This makes borrowing highly capital efficient and allows for up to 11x leverage on investments.
Borrowers need to ensure that their collateral ratio does not fall below 110%, otherwise their positions (“Troves”) become vulnerable to liquidation. The protocol’s efficient, instantaneous liquidation mechanism allows for such a low collateralization ratio, while maintaining a high level of robustness.
Quick and efficient liquidations of Troves that fall under the minimum collateral ratio of 110% ensure the health and stability of the system.
Liquidation is performed in the following order of priority:
Offsetting: The LUSD tokens in the Stability Pool are used to repay the undercollateralized debt and are subsequently burned. The collateral from the liquidated Trove is sent to the Stability Pool.
Redistribution: If the Stability Pool does not contain sufficient LUSD to cover the debt, the (remaining) debt and collateral from the liquidated Trove is redistributed to all active borrowers in proportion to their own collateral amounts.
Liquidators are incentivized to execute prompt liquidations while stability providers benefit from contributing to the system’s Stability Pool.
Holders can deposit LUSD tokens to the Stability Pool and make the system more robust against Ether price drops.
Stability Providers are incentivized by the protocol in two ways:
Liquidation gains: Liquidations will generally lead to a net gain for the Stability Pool, consisting of the difference between the absorbed debt (in LUSD) and the received collateral (in ETH). Stability Providers participating pro rata with their pool deposits thus acquire collateral from liquidated positions at a significant discount.
Rewards: Stability Providers will continuously receive LQTY tokens based on the deposited LUSD and the kick back rate of the frontend through which their deposits are made. To encourage early adoption, the rewards start high and decay over time.
Stability Providers can withdraw their Ether gains and their deposits at any time to the extent they have not been used to absorb debt
The system captures the revenue from the borrowing and redemption fees and pays it out on a pro rata basis to the stakers of the LQTY token. The tokens can be staked and unstaked any time with no minimum lockup period.