Couple of people on this thread: [Signal Request] Shorten the PPG process - #9 by Tosh9.0 were commenting on the competitiveness of Liquity in relation to Maker.
I’ve looked pretty deeply into Liquity at this point (it’s an interesting protocol!) but I am not convinced that it represents an improvement for Vault users in Maker, regardless of the attractiveness. I believe that any vault holders that migrate to it are eventually going to realize that it’s much worse for them than Maker is, regardless of the relative fee.
Almost 90% of all LUSD in existence is in their Stability Pool and receiving LQTY incentives. This means either (or some mix of the following) are true:
- Close to 677M worth of usage doesn’t reflect any desire for credit / leverage using Liquity - meaning it’s not stealing users from us.
- Everyone using Liquity for leverage is not going to be able to pay back their Troves if (when) the ETH price drops - leading the price of LUSD to spike the same way it did to DAI on Black Thursday and Trove users taking up to a 10% haircut as they need to buy back LUSD close to $1.1.
To be clear, LUSD is probably a superior asset to DAI provided you purchase it at close to $1. It’s that superiority that makes Liquity as a platform a terrible deal for Trove/Vault users. The trade-offs that the protocol makes to ensure LUSD is a great asset directly and negatively impact Trove users. This is most apparent in these mechanics:
- Redemptions to maintain lower bound of the LUSD peg are directly negative for Trove users, and introduce a zero-sum game mechanic when trying to maintain a safe collateralization ratio.
- Stability pool incentives that lock-up such a huge proportion of the existing LUSD - preventing Trove users from accessing it when they want to de-lever.
- ‘Liquidations’ that socialize bad debt to all Trove users in the absence of LUSD in the stability pool (admittedly unlikely in the near future due to the incentives above.)
- The upper bound of $1.1 on the LUSD peg risking haircuts when wanting to close up a Trove.
Edit: Some counterpoints to the above have been provided by Liquity in a recent medium post. Feel free to give it a read.