Add Market: LUSD

What is Liquity?

Liquity is a decentralized borrowing protocol that allows users to draw interest-free loans against ETH as collateral (akin to MakerDAO). Loans are paid out in LUSD (USD-pegged stablecoin) and need to maintain a minimum collateral ratio of 110%. Loans are secured by the Stability Pool, where users can deposit LUSD that may be used to instantly repay uncollateralized debt. In return, they receive ETH collateral when liquidations occur and continuous LQTY rewards (Liquity’s secondary token capturing the protocol’s fee revenue).

Liquity recently launched on April 5th, 2021 and has attracted ~$2.5B TVL since then, ranking among the top 10 projects listed on DeFi Pulse. In addition, LUSD is also ranked among the top 10 stablecoins on DeFi Pulse and is the 2nd largest collateral-backed stablecoin behind DAI. Source.

Decentralization

  • The Liquity contracts have no admin keys and are accessible via multiple interfaces hosted by third-party frontend operators, making it censorship resistant.
  • The protocol is immutable and governance-free, as all operations are algorithmic and fully automated, and protocol parameters to maintain system health were set at time of contract deployment.
  • LUSD is only backed by ETH and no other collateral types may be added.

As concerns and regulations continue to arise around the stablecoin landscape, it’s clear that the DeFi ecosystem needs decentralized alternatives. With LUSD being fully decentralized, censorship-resistant, and already detached from governance by design, it seems like an obvious choice as a hedge against regulatory risk for Compound and its users.

LUSD Peg Maintenance

  • Redemptions: An arbitrage mechanism that allows users to redeem LUSD for ETH at face value (i.e. 1 LUSD for $1 of ETH minus fees) against the riskiest Troves (loans). In other words, when LUSD is below $1 on the open market, users can redeem (exchange) their LUSD for the underlying ETH collateral 1:1 within the protocol. The purpose of this mechanism is to pull excess LUSD out of circulation (i.e. deleveraging users), resulting in LUSD’s price going back up to $1.
  • Minimum Collateral Ratio (MCR): Thanks to Liquity’s instant liquidation mechanism, Troves are allowed to maintain a CR as low as 110%. This means that if LUSD ever exceeds $1.1, users can open Trove at the minimum CR and sell it for an instant arbitrage profit.

Besides these two hard-peg mechanisms, LUSD also maintains its peg through less direct mechanisms covered here.

LUSD Stability

While the protocol is still relatively young, LUSD has been trading within a narrow range of 0.991 - 1.002 against DAI on Curve (14d stats) — where LUSD is most liquid.


Source (Snapshot taken on 11/17)

Protocol Stability

As a borrowing protocol, minted debt (LUSD) and system health is heavily dependent on liquidation efficiency. In contrast to collateral auctions, Liquity liquidates under-collateralized Troves instantaneously — substantially reducing the possibility of protocol loss and the risk of LUSD becoming partially unbacked.

Around one month after launch, the protocol faced its first stress test (flash crash on 5/19) and liquidated $93.5M against the Stability Pool with 0 protocol loss. Liquity has completely innovated this necessary function of borrowing protocols by creating a liquidation mechanism that’s fast, effective, and works under extreme conditions. More info here.

It’s also worth highlighting that almost half of all positions got liquidated, going from ~1130 Troves to ~496 Troves within a 9 day span. Since then, Liquity has seen consistent growth and is now at a new all-time-high of >1200 Troves.


Source

LUSD Utilization

Although there is currently ~$550M LUSD sitting idly in the Stability Pool, it doesn’t need to be as large as it is considering it could have managed liquidations just fine if it were 5x smaller based on the liquidation volumes of 5/19. We also expect it to decrease in size as meaningful integrations appear such as an LUSD market on Compound. At time of writing, the Stability Pool dominance is hovering around the all-time-low of ~64% and is on a downtrend as new integrations are becoming available.

Source (Snapshot taken on 11/17)

Liquidity and Volume on DEXes

LUSD 3Pool Statistics

Source

LUSD-OHM Sushiswap

Source

D4Pool Statistics

Source

Motivation

Although Liquity has favorable borrowing parameters such as the MCR at 110% and being interest-free, some users would prefer borrowing LUSD on Compound for three main reasons:

  1. Borrowing LUSD against other collateral assets besides ETH
  2. Protection from redemptions
  3. Protection from Recovery Mode in Liquity, which allows any Trove below 150% collateral ratio to be liquidated.

Asset Parameters

We’d like the Compound community to decide on what the following parameters should be for LUSD:

  1. Collateral Factor:
  2. Reserve Factor:
  3. Borrow Cap:
  4. Interest Rate Curve:

Audits

Trail of Bits Security Assessment - January 2021

Coinspect - March 2021

Trail of Bits Liquity Protocol and Stability Pool Final Report - March 2021

Trail of Bits Liquity Proxy Contracts Report - March 2021

Contracts:

LUSD Token Address: 0x5f98805a4e8be255a32880fdec7f6728c6568ba0

Chainlink LUSD Price Feed: 0x3D7aE7E594f2f2091Ad8798313450130d0Aba3a0

Resources

Website

Documentation

Dune Analytics

Twitter

Discord

Blog

8 Likes

By far one of the best stablecoins out there as it is one of the few that make borrowing against eth a one time fee.

I support listing LUSD on compound 100% asap. These are the kind of stablecoins you can use as collateral in compound.

Pls include LUSD

5 Likes

Sound proposal, hence it‘s a yes - please add LUSD!

3 Likes

Thank you for setting it up @Derrick , @rleshner could you give us your opinion, probably LUSD is one of the very few coins in the entire defi space that has absolutely no parameters to tweak and provides stability-as-service model. Few notable mentions:

4 Likes

Support the LUSD addition to the platform. This is that algorithmic decentralized stablecoin that can become standard in DEFI. Strong technical team, several contracts audits, strong backers, significant TVL.

3 Likes

Still, for support, you need to be known about you. The best marketing is to list LQTY on one of the well-known exchanges. Otherwise, one and a half diggers will monitor your progress.

I’d like to further vouch for the addition of LUSD. DeFi needs a trust-minimized dollar-pegged coin with trustless collateral (ETH only), and we haven’t had that since sai (single-collateral dai) was wound down. The Liquity team took trustlessness a mile further by excluding all forms of governance from the design and deploying all contracts as non-upgradable. This feat is basically singular across the whole stablecoin space.

Anyone on Compound who values trust minimization must currently settle for dai, which, although less centralized than other supported stablecoins, is still a weak substitute for this role. This is due to dai’s reliance on fiat-backed stablecoins for stability (USDC, USDP), the inclusion of other custodied assets in its collateral portfolio (WBTC, home improvement loans, etc.), a monumental governance overhead, the governance capture implicit in that, increasing intertwining with the legal system, and a degrading level of trust in the decentralized nature of its governance (predicted 5 years ago by its co-founder).

I’ll also add a longer-term view of the stability chart Derrick posted. This one shows LUSD’s price in dai, USDC and USDT on Curve since the genesis of Liquity. (Up-to-date chart here.)

Apart from the early fluctuations and the lasting distortion of the reward program in the first few months, you can see a few off-peg spikes. The “largest” ones (in quotes, since both were under 4%) happened at the end of May and the end of October. In both cases, the peg successfully returned to normal values in a few days, which was a battle-test validation that Liquity’s fully automated peg mechanisms work.

5 Likes

cToken for LUSD: CErc20Delegator | 0xc0da79a6a0f255ed6d31a8ffd719c19a52aa5a36

2 Likes

A proposal for this is going to be submitted very soon, first with a 0% collateral factor.

Then a subsequent proposal will significantly increase the collateral factor (I think we’ve been forgetting this second part for some of the new assets added)

6 Likes

Thanks @JacobPPhillips . With regards to increasing the collateral factor, Gauntlet can set CFs (as well as the other risk parameters) for all assets, so we are happy to coordinate together on that. Our platform ingests on-chain data in order to determine risk parameter settings that best optimize capital efficiency and manage risk according to market conditions. A summary of our December parameter updates can be found in this risk review here and we look forward to setting parameters for new assets like USDP and LUSD.

2 Likes

Excited to see this moving forward!

@JacobPPhillips @Derrick would either of you like to speak about the upcoming proposal on next week’s developer community call?

The call will take place at 9:30am PT on Wednesday (1/12) in the community-dev-calls channel of the Compound Discord. Please let me know if so and I’ll be happy to add you to the agenda.

3 Likes

Happy to join the call :slightly_smiling_face:

2 Likes

Fantastic – looking forward to having you on the call tomorrow at 9:30am PT!

3 Likes