Securities.io is committed to rigorous editorial standards. We may receive compensation when you click on links to products we review. Please view our affiliate disclosure. Trading involves risk which may result in the loss of capital.
Table Of Contents
Decentralized lending and borrowing have been among the biggest and most popular DeFi activities ever since the sector went big in 2020. DeFi offered people the chance to use their coins in a way that doesn’t include spending them or risking them in trading. Being able to take a loan with little to no questions asked, with the only real requirement being that you provide collateral, has been an attractive feature among crypto users.
However, there is still a matter of volatility, meaning that your coins can still lose their value if the market crashes, while you have them locked up. Also, if you happen to be a borrower who is raising coins, it will do you no good to have them devalued, as that would mean that you still don’t have the loan that you needed to begin with.
Liquity (LQTY) recognized this problem, which is why it launched its own service — a decentralized borrowing protocol built on Ethereum that utilizes a USD-pegged stablecoin, LUSD. Now, Ethereum holders can draw loans in the form of LUSD, and on top of that, their redemption and loan issuance fees are adjusted algorithmically.
What Problems Does Liquity (LQTY) Solve?
As mentioned before, Liquity emerged to solve problems that users were experiencing with DeFi lending and borrowing. The DeFi sector already reduced the risk factor significantly by allowing users to keep their coins and be able to withdraw them at any time, but that still doesn’t mean that their investment was perfectly safe. Liquity further improved the situation by solving one of the biggest problems, which is:
Volatility is a well-known issue in the crypto world. While it can be extremely rewarding, it can also financially ruin people who happen to make a wrong move, or those who are forced to withdraw funds after they have crashed, for whatever reason. Even within DeFi, your tokens can still see their prices crash after you bought them when their value was much higher, having you experience losses.
Of course, you won’t experience real losses until you sell. Then, and only then is the situation truly hopeless. But, if you can afford to wait for the prices to recover, you can still end up earning a profit. Liquity removed this step and risk by using a stablecoin pegged to the US dollar. As a stablecoin, LUSD has a fixed price of $1 per coin, so even during the worst bear market, the value of your investment will not drop.
Decentralized borrowing itself is a solution to a problem that many have been facing before DeFi went big. As you know, getting a loan from the bank is not only a lengthy procedure, but also a very tedious and complicated one. You have to provide all kinds of documentation regarding your earnings, proof that you are free of debt, and even disclose your most valuable ownership, so that the bank would know what it can take away from you if you can’t repay the loan and decide whether or not it is worth it.
Decentralized borrowing removed all of these issues. If you can provide collateral, you are eligible to take out a loan. All of it can be arranged through a smart contract, with no need for expensive intermediaries, complicated procedures, and extensive documentation collecting.
Another thing that should be mentioned is the fact that Liquity was designed to become fully autonomous after the deployment of its protocol. Its developer (Liquity AG) has given up on all influence on its technical functionalities. This means that any use of “we”, or “our” in the protocol’s documentation is referring to the Liquity Protocol itself, and not its developer.
Benefits of Liquity (LQTY)
Apart from simply solving the problems of decentralized borrowing, Liquity also made an effort to improve the experience for its users even further, through some very beneficial features. For example:
0% interest rate
Liquity features a 0% interest rate during the Recovery Mode, which is a mode meant to incentivize borrowers to behave in ways that promptly raise the TCR (Total Collateral Ratio) above 150% and to incentivize LUSD holders to replenish the Stability Pool. Essentially, it was designed to encourage collateral top-ups and repayment of debt, but also to act as a self-negating deterrent.
The collateral ratio of 110%
There are many beneficial rules regarding the loans issued by this protocol, such as the fact that they do not have a repayment schedule. You can leave your Trove open and repay the debt at any time, as long as you maintain a collateral ratio of 110%
Another benefit of the protocol is that it is governance-free, meaning that it does not rely on human governance and voting on monetary interventions. Instead. Its protocol parameters are either preset and immutable or controlled by the protocol itself through an algorithm, which means that any human intervention is redundant. There is no need to convince the token holders of reasons to implement various proposals or bring various changes. The protocol does everything on its own.
How Does Liquity (LQTY) Work
Liquity is a decentralized borrowing protocol that allows users to draw loans with zero interest against Ether used as collateral. Loans are paid out in a stablecoin LUSD, which is pegged to the USD, and the only requirement is to provide a minimum collateral ratio of 110%.
The project has no admin key, so nobody can alter the existing rules of the system. It is entirely governed by its smart contract code, which is immutable and self-sustainable. It features two cryptocurrencies — the stablecoin LUSD used to pay out loans on the protocol and a token LQTY, which is a secondary token that captures the fee revenue generated by the system and incentivizes early adopters and frontends.
The project charges a single one-off fee when LUSD is borrowed and redeemed.
Where to Buy Liquity (LQTY)
Liquity (LQTY) is currently available for purchase at the following exchanges.
Uphold – This is one of the top exchanges for United States & UK residents that offers a wide range of cryptocurrencies. Germany & Netherlands are prohibited.
KuCoin – This exchange currently offers cryptocurrency trading of over 300 other popular tokens. It is often the first to offer buying opportunities for new tokens. USA Residents are Prohibited.
Uphold Disclaimer: Assets available on Uphold are subject to region. All investments and trading are risky and may result in the loss of capital. Cryptoassets are largely unregulated and are therefore not subject to protection.
Liquity (LQTY) – The most efficient borrowing protocol
Thanks to the way it was developed, Liquity does not require human intervention or assistance in any way. Its developer launched the protocol, and the protocol will continue to serve the global community indefinitely. It is the most decentralized way to borrow funds that the DeFi sector can offer, and while this means that there will be no upgrades or changes to the protocol, it also means that there is no need for it to collect too many fees for rewards and for similar purposes.
It is efficient, immutable, transparent, and completely algorithmically managed, which also means that its system is as fair as it can be.
To learn more about this token visit our How to buy Liquity guide.
Ali is a freelance writer covering the cryptocurrency markets and the blockchain industry. He has 8 years of experience writing about cryptocurrencies, technology, and trading. His work can be found in various high-profile investment sites including CCN, Capital.com, Bitcoinist, and NewsBTC.
You may like
How to Buy Liquity | Buy LQTY in 4 Steps (September 2023)
Investing In Render Token (RNDR) – Everything You Need to Know
Investing in Hedera Hashgraph (HBAR) – Everything You Need to Know
Investing In Helium (HNT) – Everything You Need to Know
Investing In Solana (SOL) – Everything You Need to Know
Investing In Avalanche (AVAX) – Everything You Need to Know