Project Description

Liquity is a decentralized currency protocol that allows the use of ETH as collateral to lend LUSD, which is a stable currency linked to USD. Liquity was launched in 2019. The white paper will be released in May 2020 and will be launched on the Ethereum mainnet on April 15 this year. After the project was launched, due to the sophisticated design of the system, it quickly attracted more than 1 million Ethereum, and the deposit amount exceeded US$4 billion at the highest point. So far, no major security or mechanism issues have been exposed.

Stabilization mechanism

a. Stability mechanism of LUSD

The core of LUSD's stability mechanism is that the system allows users to mortgage ETH to mint\lend LUSD at the price of 1USD at any time, or repay or redeem LUSD at the price of 1USD to recover ETH.

Repayment refers to users who have LUSD arrears and can return LUSD to the system in exchange for the collateral ETH; redemption means that any user can exchange LUSD from the user with the lowest mortgage rate at any time at the price of 1USD. ETH. Under this mechanism:

When the price of LUSD on the market is higher than 1USD:

Users can mint new LUSD and sell them to the market for profit (the LUSD minting cost is only 1USD). Of course, the above is not mandatory, there are also many limiting factors, such as the clearing fee of 200LUSD reserved for newly opened positions, as well as the casting fee and redemption fee (between 0.5% and 5%, controlled by the algorithm, which will be detailed below). However, since the minimum mortgage rate is limited to 110% during minting, and LUSD is always priced at 1 LUSD = 1 USD (in ETH) when minting, when the LUSD price is higher than 1.1, any user can obtain it through the newly opened position LUSD immediately sells LUSD to the market for profit. This can be said to be the upper limit of the price control reserved by the system.

When the price of LUSD on the market is lower than 1USD:

Users who already owe LUSD will have an incentive to buy LUSD from the market to repay the system (because their LUSD minting cost is 1USD). Of course, there are also extreme cases. For example, in extreme cases, the market is extremely liquid and the borrower may be unable to operate, so the system reserves a lower price limit through “redemption”. Any user can buy LUSD from the market at a price of less than 1USD at any time, and redeem 1USD worth of ETH to the system at the same time.

The above mechanism is what Liquity founder Robert Lauko called "hard anchoring": by giving the entire market open arbitrage opportunities, the price of LUSD is controlled between [1-redemption rate, 1.1] USD.