Some thoughts on Liquity

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.

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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.

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Appreciate the deep-dive analysis and explanation.

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This means that if the incentives run out or drop considerably, as happened with Iron Finance and your Titan, then the liquidity they have generated could be greatly depleted.

They have it setup for the long haul:

LQTY’s community issuance (outside of LP incentives and the Community Reserve) follows a yearly halving schedule, described by the following function: 32,000,000 * (1–0.5^year). The purpose of this issuance curve is to favorably incentivize early adopters while also maintaining incentives for the long term.
LQTY Rewards and Distribution - Liquity Docs

I am not sure about credit / leverage, what can happen is someone mint/sell Lusd to buy something else and another user buys Lusd to get reward. Therefore, it can be used for leverage. It works a bit like our SRD, they pay to get the demand.

But I agree with the others point.

Agreed – thanks for doing this, Long.

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For anyone watching LUSD, it’s had a 12-cent move today

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Wow, that’s steep. Downward?

94c to $1.06

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Main issue with it, it is actually very good for borrower.

If you have the liquidity you can repay your interest free loan with benefit.

wow super peg xd

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the price graph looks like the rhythm of a heart, omg xd

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Liquity is a very cool protocol, but as a functioning stablecoin it currently lacks liquidity on the majority of DEXES and seems primarily to be focused as a cheaper alternative to Maker’s ETH-B Vault allowing people to make riskier leverage on ETH with less cost. Nice Write Up :slight_smile:

I feel it is a coin designed for farming, but in itself without the use of DAI.

Coinbase’s price feed. It also shows LUSD going between 97 cents and $1.08 in the last 24 hours. So… not a very stable stablecoin if there’s that much volatility in secondary markets :man_shrugging:

I wish them luck, but they’re not a competitor to us.

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Clearly, it is as if you pay and return the change, you issue LUSD you can stake it and receive “rewards” those rewards go down in value, there are no incentives and all for sale, it makes no sense. more than speculative not long term.

There is incentive, you can get 25% off during the Liquidation as LUSD provider.

To be fair check the price history of dai was quite volatile before the PSM was implemented. I acknowledge they are certainly significantly behind MKR in terms of development cycle however it would serve us well to not totally ignore them either.

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What about sUSD or sEUR? Do they not have enough liquidity?

These are Synthetix assets? If so, I would say they are not structurally sound as they have no enforcement mechanism for their pegs nor do they have an emergency settlement mechanism to enforce the peg in extreme circumstances. We could easily find ourselves holding assets that are completely detached from their intended price.