Liquity: Interest-free Algorithmic Borrowing on Ethereum

Launched on Mainnet in April 2021, Liquity is a newcomer to the DeFi borrowing space featuring a novel decentralized borrowing offering. The MakerDAO-like protocol offers interest-free loans against ETH, which is the only asset accepted as collateral. Loans are paid out in LUSD, a USD pegged stablecoin Liquity issues, and borrowers need to maintain a minimum collateral ratio of 110% to avoid liquidation.

Although Liquity closely resembles MakerDAO, it differentiates on a few dimensions. 0% interest rate loans, immutable and decentralized protocol management, higher capital efficiency, redemptions, and a robust peg mechanism for a more fair and simple user experience.

Strong kick-off

Liquity saw strong user interest at launch, going from $0 to $1B TVL in 10 days. This demand, coupled with strong LUSD issuance, was due to the rewards that were distributed to the participants of the Uniswap LP farming for LUSD:ETH pool, which took place during the 6 weeks following the mainnet launch. Following this period, we observe a downward trend in the total LUSD supply, which has yet to make a clear turnaround.

Meanwhile, the Total Collateral Ratio (TCR) made a sudden dip during the market crash of May 19th, but the situation immediately reversed with the liquidation of under collateralized debt positions. During this event, TCR nearly spiked up to 500% before finding a new normal around the levels of 300%. The data is limited to a single market incident, yet in itself, it displays an outlook for the risk-averse design of Liquity.