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Liquity Protocol Explained
Description of the Liquity Protocol
Unlike other stablecoins, For the underlying collateral, LUSD is fully redeemable at face value. Liquity allows users to mint tokens in a self-service manner, whereas other stablecoin systems have complex governance mechanisms which are required to maintain the USD peg by updating fees or interest rates. Liquity has devised algorithmically adjusted redemption and loan issuance fees to support its currency in place of the need for interests and human intervention.
This creates Better Capital Efficiency due to Lower collateral requirements and contributes to a more liquid ETH market and facilitates Liquity’s integration with other DeFi projects through higher ROI.
ETH is locked up by a borrower in a smart contract and a “Trove” (an individual liquidity position) is created. Each Trove is required to have a minimum collateralization ratio of only 110%, which is unique to other protocols in the DeFi space. The borrower can then mint LUSD tokens, which are calculated as a debt against collateral. This increased collateral factor enables users to borrow more value against their ETH asset. Eg. For Ether that is worth $100, the borrower can obtain up to 90 LUSD. When the borrower is ready to retrieve their collateral, LUSD can be simply returned by them to the contract to repay their loan and free up their collateral.
High-collateral borrowers and Stability Pool depositors provide stability to the system. They are rewarded for their roles by receiving collateral surplus gains from Troves that are liquidated. In addition, the depositors receive LQTY tokens as a kickback from front ends. LQTY can be staked in order to earn a proportion of the protocol revenue generated from issuance and redemption fees.
Liquity is a protocol rather than a platform and is controlled by nobody. As such, it outsources the operation of front ends to third parties that are willing to run a web interface to the protocol, which helps to maximize the censorship resistance and also help bootstrap the network.
Instadapp is one of the frontends for the Liquity protocol but Liquity gains the powerful features of Instadapp making it the premier choice for Liquity users! Instadapp makes it easier for borrowers to leverage their ETH multiple times with a single click. Protecting loans from liquidation is simpler, and cheaper, as borrowers can swap some of their ETH collateral to LUSD to increase their collateral ratio, in a single click!