LUSD Analysis: Liquity Stable Opinion Article & Crypto Review

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1 year ago
Topics: Stables, Crypto, Cryptocurrency, BTC, ETH, ...

LUSD Analysis: Liquity Stable Opinion Article & Crypto Review

There are a lot of Stablecoins in Crypto, and today we’re reviewing LUSD, the Liquity Stable and Protocol

In our seeking to find a stable value where we can lock our profits in it and chill, we try not to forget the original principles and we work on not falling in ‘sheep’s clothing but inwardly are savage wolves, and by that I mean all the stablecoins that face a problem in:

  1. value accrual

  2. Centralization.

That’s why for today’s piece, I wanted to discuss one of the stables that I admired for a long time, and recently after the freezing event of USDC, it gained some momentum.


A Deeper Look at LUSD: Some Crypto Context


LUSD is the sable coin behind the system “liquity” which is a decentralized borrowing protocol where you are able to mint against your ETH at a ratio of 110%, interest-free

So for example, I can deposit 110$ worth of eth >> stake them in the platform, and voila, I can mint now 100 $LUSD, I can redeem my beloved ETH only when I redeposit the LUSD I borrowed, and by that the LUSD minted will be burned.

What is cool about liquidity, and more importantly decentralized-friendly, is that there is no direct place to mint it. Where the team had made sure of this, and it was left to the community to build. The contract’s parameter was set at the moment of creation and there are different frontends to interact with it. You can find all the frontends available here.

All frontends providers are compensated by $LQTY tokens, and they can choose a certain ratio where the hosts can devise these LQTY tokens with the community using their frontend, kickback rate.


Liquidation mechanism

The first important question we always need to ask in any lending and borrowing platform is “ how the liquidation happens “ in order to make sure the funds that we are lending are safu.

At Liquidity, they created what so-called “stability pools”

A stability pool is a place where people can deposit their LUSD to provide liquidation funds or “stability providing” for the smart contract to be able to liquidate those who will be under-collateralized and make sure that worth of ETH deposited >> worth of LUSD minted.

So for example, a miner can benefit from this mechanism in 2 places:

  1. Miner A wishes to buy ETH at a discounted value, he can deposit some LUSD in this pool, in case of a liquidation event, the funds are used to purchase ETH with a negative premium in exchange for his addition to get some sweet 7.5% APR in LQTY token

A good example is given by the Liquity team

2. Miner B is more degen, and he likes to build bots, he can create a bot that will trigger the liquidation contract, and by that will be compensated with 200 LUSD + 0.5% of the stability pool collateral as a reward for this service.


In the process of attempting to keep a hard peg mechanism where truly every 1LUSD = 1 USD in value, the team developed a redemption mechanism where people can use 1LUSD to redeem (1$ worth of ETH — a certain fee), a mechanism mostly used by arbitrageurs to gain in case of 1 LUSD < 1 USD (acquire USDC, swap USDC for LUSD from curve or Uniswap, exchange LUSD for ETH on liquity, sell ETH for USDC) the fee will be a base rate * 0.5%

To avoid being redeemed (Rukka coming and swapping your ETH), you can always keep your LTV above 150%, or else your ETH will decrease in value but your share of LUSD will increase. But I see that there is no actual loss for lenders unless LUSD failed to hold the peg. (no rest for the wicked)


Liquidity across defi

I made a tour to see how liquidity is spread across AMMs.

More than 50% of LUSD is provided in the stability pool, which is so healthy for the liquidation mechanism as we spoke before.

On curve finance, LUSD is paired with the 2 Basepools and both are incentivized with a good share of the curve emission gauge.

Currently, LUSD is around 1.03$ (kek), due to the buying shock that happened, it can be depegged if people tried to short it by depositing eth, minting LUSD, and swapping it to 3crv or crvFRAX, but people now feel safer with LUSD than ever.
(3crv all of them are able to be compromised by regulations, crvFRAX is USDC and wrapped USDC iykyk)


There are pools on uniV3 as well, but due to their small liquidity I won’t mention them (curve V2 fan)

Liquity team moved above mainnet and is experiencing at the moment L2 integrations, starting with velodrome.

So the 2 scenarios for deppeg I guess are for the moment protected :

1- LUSD << USD, Go and buy LUSD from an AMM and redeem it for a discounted ETH

2- LUSD >> USD, you can mint at a higher value and profit for some cents for the dollar, wait until it gets down to pay for your debt, and pray to pope andy that you are not liquidated until then.

Or just mint and enjoy farming :)

Extra thoughts

The pool I'm excited about is sUSD/LUSD and to see how it will succeed, I think it’s time when all the decentralized stable coins step ahead and create their own stable pool on Curve, similar to LUSD,sUSD, and others.

A new wave of stables is coming, so be safe and always DYOR.

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1 year ago
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nice one !

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