What is Liquity (LQTY)?

Deep Dive

1. Purpose & Value Proposition

Liquity solves the problem of costly borrowing in decentralized finance by offering interest-free loans. Users lock ETH as collateral to mint LUSD, a stablecoin pegged to the US dollar. Unlike traditional lending protocols, Liquity replaces variable interest rates with a one-time borrowing fee (adjusted algorithmically based on demand). This model provides predictable costs for borrowers and minimizes reliance on governance.

The system’s Stability Pool acts as a decentralized insurance fund: users deposit LUSD to absorb losses from undercollateralized loans, earning ETH rewards from liquidated positions. This mechanism replaces auction-based liquidations, improving efficiency.

2. Technology & Architecture

Built on Ethereum, Liquity uses smart contracts to automate borrowing, collateral management, and liquidations. Key innovations include:
- Minimum Collateral Ratio (110%) – Lower than competitors like MakerDAO (150%), allowing higher capital efficiency.
- Redemptions – LUSD holders can redeem tokens for ETH at face value (plus a fee), enforcing the peg.
- Frontend Operators – Independent interfaces (not controlled by Liquity AG) let users interact with the protocol, fostering decentralization.

In its V2 upgrade, Liquity introduced BOLD, a multi-chain stablecoin, and the Protocol Incentive Layer (PIL), where LQTY stakers direct liquidity incentives to strategic DeFi pools (Liquity).

3. Tokenomics & Governance

LQTY has three primary roles:
1. Fee capture – Earns a share of borrowing and redemption fees.
2. Stability Pool rewards – Distributed to LUSD depositors and frontend operators.
3. Governance via PIL – Stakers vote on allocating 25% of protocol revenue to liquidity initiatives (e.g., incentivizing BOLD/ETH pools).

The total supply is capped at 100 million LQTY, with 35.3% allocated to community incentives, 33.9% to early investors, and 23.7% to the team—all subject to 1-year lockups (Liquity Launch Details).

Conclusion

Liquity reimagines decentralized borrowing by combining interest-free loans, algorithmic fee adjustments, and a self-sustaining liquidation mechanism. Its governance-minimized structure and focus on capital efficiency position it as a unique player in DeFi. As Liquity expands cross-chain with BOLD, how will its incentive-driven liquidity model compete with centralized stablecoin alternatives?