Recently, the market has begun to have some panic (FUD) about stablecoins such as USDC, BUSD and even DAI. From Curve’s trading volume, we can clearly feel the changes in market sentiment. The trading volume of 3pool in 24 hours reached 613 million US dollars, even exceeding the total locked volume (TVL) of the pool, which is really amazing. As cryptocurrency players, what kind of stablecoin do we need to free us from fear? Today, I would like to introduce the Liquidity project.
Liquity project introduction
As a heavy user who has been using Liquidity since its launch, I have very deep feelings for this project, and of course I have been hurt a bit. But these injuries cannot be blamed on Liquidity, but more on myself. In the process, I also deepened my understanding of this project. I hope to share my experience and understanding with users who are currently using it or plan to use it in the future, and help them think more deeply about the pros and cons of this project.
If you want to own the most censorship-resistant, decentralized USD stablecoin, $LUSD is definitely the way to go. No matter it is $USDT, $USDC or $DAI’s FUD, $LUSD will always be the king who watches from the other side and watches with a cold eye.
Why is $LUSD the top stablecoin in DEFI?
1. The collateral is only ETH and is over-collateralized: In the Liquidity protocol, the collateral is only ETH and is over-collateralized, which means that its security is very high.
2. The protocol is not upgradeable: The Liquidity protocol is not upgradeable and no one can change its smart contract. This means that if the protocol has no vulnerabilities in the first place, then it will never introduce new vulnerabilities, making it very safe.
3. There is almost no downward decoupling: the protocol provides a mechanism to redeem ETH at USD 1, so the value of $LUSD is very guaranteed.
4. Censorship resistance: The Liquidity protocol is not responsible for running the front end. There are so many third-party front ends that they cannot be blocked at all.
Whenever the market fluctuates violently, $LUSD holders are definitely the happiest. In the past year, it has been decoupling upward for most of the year, reaching a maximum of $1.05, which once made me doubt that it would never come back again.
The surge of $LQTY token
With the recent FUD on $USDC and $BUSD, Liquity’s project token $LQTY suddenly experienced a violent rise. The project itself is definitely a good project, but it is not a very profitable project, at least for holders of $LQTY tokens. After mining $LQTY for more than a year, users feel miserable. This is a typical example of a good project not equaling a good token.
Why use Liquidity, isn’t MakerDAO great? Before May 2021, all my DEFI career cannot avoid MakerDAO. As an early player who participated in the founding crowdfunding of Ethereum in 2014, my belief in Ethereum can be said to be engraved in my genes. Continuously accumulating Ethereum and never selling one has been my consistent style for so many years.
But if you need some funds for turnover in life or investment, the DEFI lending platform is naturally an ideal way. Compared with MakerDAO, Liquity also uses ETH as collateral to borrow stablecoins and has the following advantages:
1. Lower liquidation line and higher capital utilization rate
Liquity’s coll. ratio is only 110%, compared to MakerDAO’s 150% at the same time. In other words, if you mortgage $1,500 of ETH on MakerDAO, you can only lend up to $1,000 of DAI, but if ETH drops a little, you will be liquidated. On Liquidity, by borrowing the same $LUSD of $1,000, you can withstand the value of the collateral ETH falling to $1,100.
2. Interest-free loans and interest-bearing loans: Borrowing stablecoins through Liquidity only requires a one-time borrowing fee of 0.5% (Borrowing Fee), while MakerDAO has annual fees that vary from year to year. There are currently two levels, one is a low-rate loan, the mortgage rate must remain greater than 170%, and the annual fee is 0.5% per year. The other is a medium-rate loan, where the mortgage rate must remain greater than 145% and the annual fee is 1.5% per year.
For a cryptocurrency user who is determined to never sell ETH while maintaining a certain cash flow, Liquidity is undoubtedly a more rational choice compared to MakerDAO.
The embarrassing situation faced by Liquity
You said $LUSD is so good, why doesn’t anyone use it? I think it’s because there are so few users of decentralized stablecoins who actually need censorship resistance. The main purpose of everyone coming to the currency circle is to make money. They are not like the so-called geeks, who are stupid and naive, but also have beliefs and ideas. Most people still prefer centralized stablecoins that are convenient, fast and hassle-free. There is nothing wrong with this, but don’t panic every time there is FUD.
In my opinion, if you want to use a cold wallet to seal a certain amount of cryptocurrency assets and even pass them on to future generations, then for the stablecoin part, you have to use $LUSD. After all, century-old stores are rare, let alone a centralized stablecoin backed by a company.
Most of the $LUSD borrowed through Liquidity is in the Liquidity project's own stability pool (always maintained between 60%-70%) and is not used in other scenarios.
Liquity’s expansion woes and the fall of Chicken Bonds
There is a lack of application scenarios for $LUSD, and the emergence of Chicken Bonds is an excellent opportunity to solve this problem. The mechanism of Chicken Bonds is quite complex and sophisticated. To put it simply, the $LUSD stored in Chicken Bonds is nominally divided into three pools (pending, reserve, permanent), but only $LUSD in one of the pools can enjoy all three pools. Revenue (reserve), $BLUSD is used to represent the user's share in this exclusive revenue pool.
At the beginning of the project, the nominal annualized rate of return (APR) of $BLUSD was very high, reaching 70%. This way Chicken Bonds' system can keep rolling. We can see in the picture below that the market price of $BLUSD was once much higher than the fair price when the project first started.
The idea of this mechanism design is really good, but all the calculations of the mechanism designer did not become a reality in actual applications. From a macro perspective, Chicken Bonds has brought almost no positive external effects to Liquidity. The TVL of the protocol has not changed much since the launch of Chicken Bonds. In my opinion, it can only be said that $LUSD, which was originally placed in the stable pool, entered Chicken Bonds. It is still a mutual competition of funds on the market, which makes the initial high APR just an illusion. The wheels of Chicken Bonds traveling at high speed gradually stopped due to various friction and losses in reality.
From my personal experience, because I was curious about this novel mechanism, I also created three bonds at different times to participate in this experiment, but in the end I canceled two of them, and one of them still hasn’t received a reply after more than 100 days. Book. Fortunately, the mechanism of Chicken Bonds will not make you lose money, but only a large amount of opportunity cost.
At present, the price of $BLUSD has been infinitely close to its floor price and is getting further and further away from the lower limit of fair price. Chicken Bonds has already entered a certain degree of death spiral.
The price of $BLUSD is falling, and no one is creating bonds anymore. This has caused a cliff-like plunge in the pending pool. The ratio of pending/reserve has continued to decline. The $BLUSD revenue multiplier has also continued to fall. The $BLUSD APR has plummeted, and the market premium has continued to decline. is negative, the price of $BLUSD falls, thus forming a Chicken Bonds death spiral.
Judging from the above logical reasoning, if Chicken Bonds does not trigger system externality input, that is, bring a large number of new users to Liquidity, increase TVL, and increase $LUSD application scenarios, then this mechanism will be unsustainable.
In summary: Liquidity is a very promising project. $LUSD has many advantages as a decentralized stable currency, but the value and application scenarios of the $LQTY token need to be further explored and expanded. I hope to see more innovations and applications in the future to take this project to the next level.