About Liquity USD (LUSD)

Liquity USD (LUSD) is a decentralized, dollar-pegged stablecoin issued by Liquity Protocol, a decentralized borrowing protocol. It enables users to receive interest free loans paid out in LUSD.

Per documentation, all loans issued by Liquity are backed by ETH, which must be posted as collateral before receiving LUSD-based funds. Like other decentralized lending protocols, Liquidity requires borrowers to adhere to a minimum collateralization ratio (MCR) of 110%. For example, a user wishing to borrow $1,000 LUSD must have at least $1100 of ETH at their disposal. Should the value of a borrower’s collateral drop below this minimum rate the position is subject to liquidation.

Liquity is best known for its interest-free lending environment. While this is true in the sense that the platform does not charge monthly interest, all borrowers are subject an initial “borrowing fee” of at least 0.5%.

Liquity’s stability pool is the platform’s first line of defense against system insolvency. Funded by individual LUSD token holders, the pool acts as a tokenized reserve used to liquidate positions that fall under the platform’s minimum collateral ratio (110%).

During such events, the stability pool taps into its LUSD resources to pay off the remaining balance of the loan while simultaneously seizing the collateral locked in by the borrower, resulting in a net gain. These profits are ultimately distributed to individual LUSD providers at a rate proportional to their stake in the pool. Rewards are given out in the form of LQTY, a secondary asset within the Liquity ecosystem.

While pegged to the USD, LUSD is ultimately collateralized by ETH. At any given time 1 LUSD is always redeemable for exactly $1 worth of ETH, creating an arbitrage opportunity that should (in theory) prevent LUSD from dropping below its $1 peg. The ETH needed to execute these redemptions is ultimately taken from rouge borrowers whose minimum collateral ratios are teetering near 110%. In such the borrower’s debt balance is reduced accordingly.

In this same vein, LUSD’s minimum collateralization ratio is said to work as a price ceiling preventing the token from deviating above $1, documentation said.

When was LUSD created and how much was it worth?

Liquity and its flagship stablecoin LUSD are the brainchild of Swiss developer Robert Lauko who launched the platform in 2019. Per Crunchbase, Lauko maintains an active role in the project serving as its CEO.

In September of 2020, Liquity managed to raise roughly $2.4 million in seed funding. This was followed by a $6 million Series A funding round roughly six months later in March of 2021. Investors included a series of large industry players including Pantera Capital and Alameda Research.

Liquity’s mainnet went live shortly thereafter in April of 2021 at which time LUSD was made available to the public.

Data from CoinGecko shows that LUSD has been largely successful in maintaining its $1 price target apart from brief de-pegs in June of 2021 and January and August of 2022.

How is the price of LUSD determined?

LUSD is a stablecoin pegged to the USD. In times of diminishing market demand, LUSD may drop below its $1 benchmark. In these cases, users are incentivized to swap 1 LUSD for exactly $1 worth of ETH, pocketing the difference. This dynamic works to decrease LUSD’s circulating supply, which should in theory boost LUSD’ price. In times of elevated demand, Liquity’s minimum collateral ratio works as a price ceiling, preventing the token from breaking above $1. As of September 2022, there were 166 million LUSD tokens in circulation.

Why does LUSD have value?

Like other fiat-pegged assets, LUSD allows users to take risk off the table while also keeping their funds on-chain. Moreover, users will likely be intrigued by Liquity’s interest-free lending environment which allows them to borrow at rates far lower than those offered by commercial banks.

Is LUSD secure?

LUSD is a standard ERC-20 token that’s supported by a number of leading Ethereum wallets and exchange-based storage solution.

In terms of platform security, it has received a 97% safety rating from blockchain auditors DeFiSafety.

What are the main benefits of LUSD?

• LUSD allows users to gain exposure to the US dollar while keeping their funds on-chain.
• 1 LUSD is always redeemable for $1 worth of ETH, no matter the price.
• Liquity offers an interest-free lending environment for digital asset borrowers.

What do critics say about LUSD?

That LUSD is not backed by USD reserves.