There’s a new decentralized stability protocol stepping up to the plate to compete with Maker.
Liquity is an algorithmic governance, low collateralization, and interest-free lending protocol with many similarities to the Maker system. The system allows users to deposit ETH as collateral into a CDP/Vault equivalent (known as “Troves”) and in return receive LQTY – the protocol’s USD-pegged stablecoin.
We are proud to announce Liquity (https://t.co/0Fc8kqVPLQ), a decentralized borrowing protocol for Ethereum! Liquity will issue its own #stablecoin LQTY at 0% interest and a collateral ratio of 110%. LQTY is pegged 1:1 to the USD, fully redeemable and algorithmically controlled.
— Liquity (@LiquityProtocol) May 4, 2020
However, there are a few major differences with Liquity. For one, there’s no stability fee or interest rate that accrues over time. Instead, depositors incur a one-time issuance fee when LQTY is minted and a one-time redemption fee when LQTY is redeemed for the underlying collateral – in this case Ether. In addition, Liquity features a significantly lower collateralization ratio of 110% compared to Maker’s 150%, effectively allowing depositors to draw more liquidity from the protocol with the same amount of ETH.
Second, one of the biggest drawbacks with the Maker system is the reliance on Keeper’s to liquidate under-collateralized vaults. Running a Maker Keeper bot requires some in-depth technical knowledge, creating some barriers to entry for participating in a critical piece of the system. This is ultimately what led to a significant amount of Vault owners being liquidated for 100% of their collateral during Black Thursday as millions in ETH was liquidated for 0 DAI.
To combat this, Liquity instead relies on stability pools to liquidate undercollateralized CDPs. These stability pools comprise of LQTY tokens that any user can deposit. If a CDP falls below 110% collateralization ratio, the position is liquidated and a corresponding amount of LQTY is burned. In return for depositing LQTY into the stability pool, users are given the ETH collateral distributed pro-rata to depositors at a discount (generally between 100 – 110% of the position’s value).
The whitepaper goes into significantly more detail surrounding the stability mechanisms, liquidation process as well as recovery mode and emergency shutdowns. If you’re interested in taking a deep dive, feel free to reference the whitepaper here.
Growth Tokens (GT) – Liquity’s Native Token
Liquity features Growth Tokens (GT) which are distributed to users that contribute to the system stability via participation. The whitepaper only briefly highlights these tokens, however, it does note that GT can be staked in order to earn a proportion of the protocol revenues from issuance and redemption fees. The protocol intends to distribute GT to two user groups: front-ends and stability pool depositors.
Front-ends are applications/products that interact with the protocol. Front-end applications retain the ability to determine the kickback rate to its users. Therefore, products that interact with the Liquity are ultimately competing with the kickback rates of other applications.
ok. @LiquityProtocol is an interesting stablecoin idea.
1) Algorithmic governance
2) low collateralization (110%)
3) Interest-free loans
seems a bit too good to be true, tbh. but what the hell.
let's read this whitepaper! LIVE! /
— scott lewis🌾 (@scott_lew_is) May 5, 2020
With Maker now beginning to support centralized/permissioned assets like WBTC and USDC as well as relying on human governance for protocol upgrades and changes (via MKR holders), we may see some competition heat up for governance-minimized, trustless stablecoins in the coming year.
There’s seems to be a growing appetite in the DeFi community for stablecoins that are more in line with the broader ethos of open finance and crypto at large. With that, Liquity is right on the mark for targeting this niche.
I'm still waiting for the Uniswap of stablecoins to emerge…
— Ryan Sean Adams – rsa.eth (@RyanSAdams) May 11, 2020
We are proud to announce that we are backing @MetaCoinProject (Reflexer Labs) as our first investment.
We believe that DeFi needs a resilient, safe and governance minimised stablecoin. We see Reflex Bonds as a first step towards this vision.https://t.co/W6d8YroOWa
— METACARTEL VENTURES (@VENTURE_DAO) May 11, 2020
Across the board, we’re expecting new alternatives to attempt to fill the void left by Maker and their governance-heavy approach to building out a crypto-native stability protocol. And we’ll be here to report it.
For all things DeFi, sign up to our newsletter!
Analyst at Bankless – one of the leading resources for open finance. Lucas is an active contributor to the DeFi ecosystem with appearances in other notable DeFi outlets including The Defiant and Our Network. He has years of experience working with dozens blockchain and token startups where he focused on token economics, marketing, and growth.