Key Insights

• Work on Liquity v2 has been announced. An alternative product that aims to overcome the  stablecoin trilemma.
• LUSD usage among DeFi treasuries further expands with GearBox, Silo Finance, and Bao Finance swapping centralized stablecoins to LUSD. This significant move symbolizes a monumental shift, fostering enhanced utility and confidence in the usage of LUSD.
• Usage metrics showed strong growth in the beginning of Q3 reaching an all-time high in open troves. The ever-evolving market dynamics across DeFi then changed the setting, and led to a period of a small underpeg for LUSD and a series of redemptions for Liquity Protocol. 
  

Introduction 

Liquity had an overall positive quarter by hitting milestones like an all-time high in open troves, top 3 in most forked protocols in terms of forks TVL, and gathering a community of 50,000 followers on X. 

Even though various market forces have interacted in complex ways, leading to interesting changes and challenges to Liquity Protocol and LUSD, this once again highlighted Liquity's ability to be resilient during all market conditions and continuously stand the test of time.

Ecosystem

LUSD on L2

While Liquity’s immutable smart contracts are designed to function perpetually on Ethereum mainnet only, delivering access to LUSD on rollups has been a major part of the past several quarters. This enables users on different L2s to use LUSD for various use cases without having to pay significant gas fees. In addition to Ethereum, LUSD has continued to grow on the likes of  Optimism, Arbitrum, and zkSync in Q2. 

In addition to that, Q3 saw LUSD’s first foray into Mantle where Stratum Exchange and Crust Finance integrated the most decentralized stablecoin. Furthermore, PolygonZk became the second zk rollup that welcomed LUSD with Zero (a Univ(3,3) Protocol) giving the stablecoin a grand debut on zkEVM. 

DeFi Treasury Holdings

During Q3,  we saw a further increase in DAO and protocol treasuries adding LUSD, the shift coming at the expense of centralized stablecoins indicating a growing preference and trust in LUSD's decentralized approach within DeFi. Here are some notable examples:

Gearbox

In an effort to reduce centralization risk, and as per DAO’s approval, GearBox voted to swap 50% of the treasury’s USDC to LUSD. You can read more here.

Silo Finance 

Silo Finance also voted on swapping USDC to LUSD for $1m. The stated goal was for Silo to diversify its treasury holdings away from centralized stablecoins. Get more details here. 

BAO Finance

Bao Finance got through votes with BAO DAO with which they successfully switched their main baoUSD liquidity pool to baoUSD/LUSD on Balancer.

The following proposal on the BAO DAO governance forum stated: "The next logical steps are to reduce reliance on DAI and other centralized stables further by using the most decentralized stablecoin in our Protocol Stability Module (ballast)". And proposed swapping part of their treasury DAI for LUSD followed by a proposal for swapping their USDC for LUSD. All proposals passed successfully. 

As DAOs continue diversifying their treasury,  $LUSD is emerging as the stablecoin of choice across DeFi being immutable, backed by only trustless collateral (ETH), and being fully decentralized. 

Integrations: 

LUSD continues being integrated by a variety of DeFi projects that feel the hunger and strong demand for the robust stablecoin. Here are some notable highlights from recent integrations:

• Aave - LUSD is now available both on Aave v2 and v3 on Ethereum, Optimism, and Arbitrum. Aave’s community has also welcomed LUSD with open arms to be added as a collateral asset. This decision was met with unanimous approval on the vote, receiving a resounding 'YAE' vote. 

In a further show of support, Aave's governance voted to increase the LUSD supply from 12M to 18M, amplifying its presence and utility.

• Preon Finance has seamlessly integrated LUSD, employing it as a peg stability mechanism within their protocol. This strategic move is detailed further here.

• LUSD has also been added to the DeFi powerhouse Polynomial Finance on Optimism. This integration allows traders to conveniently execute trades with LUSD at the click of a button.

• Additionally, LUSD also debuted on Antfarm (Arbitrum), a pioneering band rebalancing AMM, underscoring its evolving prominence in the DeFi landscape.

Key Metrics

LUSD Peg Stability Overview

Throughout July and early August, LUSD’s peg remained admirably stable, hovering constantly close to an ideal $1.00. In July, the peg deviation was a minimal 0.0108, and in August, it even decreased further to 0.0084. However, brief fluctuations were noted in August, becoming more pronounced in September, with the peg occasionally dropping to around $0.995 and even reaching $0.99 at certain moments. This was primarily influenced by shifts in DeFi market dynamics. Here’s a more intricate look at the situation.

In June, MakerDAO voted to increase their ETH loans' Stability Fees (interest rates). The increments were as follows:

• ETH-A: by 1.99% from 1.75% to 3.74%. (7.5K min debt, 145% collateral ratio)
• ETH-B: by 0.99% from 3.25% to 4.24%. (25k min debt, 130% collateral ratio)
• ETH-C: by 2.49% from 1% to 3.49% (3.5k minimum debt, 170% collateral ratio)

To illustrate the impact, consider utilizing Maker's most capital-efficient vault (ETH B) for a 25k debt; the resultant interest owed would be $1,060 by the end of the first year.

With Liquity, there is no annual interest = only a one-time borrowing fee starting from 0.5%, which means your total 'cost' would only be $125. So this change made borrowing with Liquity even more compelling compared to Maker’s offerings. 

In August, MakerDAO voted to increase the system’s DSR (Dai Savings Rate) to 8%. Some users saw an opportunity to borrow cheaply from Liquity for a 0% interest rate loan, then swap LUSD into DAI for 8% APR. 

The 8% DSR stood briefly before being lowered to 5%, but it still contributed to a growing trend of users preferring Liquity for borrowing then selling LUSD for DAI thus creating a downward pressure leading to LUSD becoming underpegged for some period.  

Trove Count Trends

The number of troves continued the trend seen in the previous months of 2023 for an increase resulting in an all-time high. Despite a persistent sideways market, new loans kept flowing in, surpassing the old ATH from the peak of the bull market. Ultimately reaching 1325 open loans. 

The momentum in the number of troves maintained its upward trajectory as seen in the preceding months of 2023, culminating in an all-time high. Despite a persistent sideways market, new loans kept flowing in, surpassing the old ATH from the peak of the bull market, ultimately reaching 1325 open loans in the last quarter. 

However, a significant number of redemptions happening through the second part of the quarter resulted in 1206 troves during the last day of Q3. This marked a subtle decrease of 1.16% over the quarter, compared with 1220 open troves at the close of the second quarter.

What are redemptions in the Liquity Protocol? 

Redemptions are pivotal processes within the Liquity Protocol, allowing for the exchange of LUSD for ETH at face value, operating under the presumption that 1 LUSD maintains a valuation of exactly $1. Essentially, it ensures that for x LUSD, one gets an equivalent amount of x Dollars in ETH. 

Users can redeem their LUSD for ETH at any time without limitations. However, a redemption fee might be charged on the redeemed amount.

During redemptions, the riskiest troves (lowest collateralized troves) are first in line no matter whether the collateral ratio is 140, 160, or even 180%. If a trove with a 180% CR is the lowest collateralized it could be redeemed. 

Contrary to liquidations, redemptions do not cause any loss for the user. Over time, depending on ETH price movement, they can result in a loss or gain, depending on buy-back time. You can read more about redemptions in this article. 

LUSD Supply

During Q3, LUSD supply decreased from 283m to 258m (-8.8%). The reason behind the decrease has been the mentioned market dynamics across DeFi which led to redemptions. 

TVL

The Total Value Locked for Liquity protocol decreased from 395 993 ETH to 385 094 ETH, resulting in a -2.75% change. 

Risk Reports 

For over two years, Liquity’s robust smart contracts have steadfastly weathered the waves of significant market fluctuations. The protocol’s smart contracts are immutable, reinforcing a strong foundation of stability and security within the system, even during significant drops in Ethereum's price.

Here are some risk reports from the last quarter: 

LUSD got the highest possible “A” rating on Bluechip

LUSD is the only decentralized stablecoin to get such a grade. 

Bluechip is the first stablecoin rating agency that uses an open and transparent rating system to assign grades to all major stablecoins with the goal of helping investors navigate risks. Read more here. 

‍A must-read risk assessment on $LUSD from Revelo Intel

It covers everything involving LUSD - accessibility, economic & technical risks, etc. With a risk matrix that compares some of the top 10 stablecoins, it's sure to be your go-to guide for all risks related to stables.

Exponential.fi: LUSD is best in class!

LUSD tops the Exponential.Fi report as the premier stablecoin. This analysis provides essential guidance on stablecoins, seeking the ideal mix of decentralization, stability, and efficiency.

Exponential.Fi have created Exponential Risk Ratings, an institutional-grade risk assessment system for DeFi investments.

Oracles and Liquity v2 

In the vast DeFi universe, smart contracts make the rules, executing transactions based on data. But a key question comes up. Where does this data come from? How do smart contracts gather real-world, off-chain information?

This is where oracles come into place, creating a bridge between the on-chain, and off-chain worlds. That’s why one of the many key components of the research behind Liquity v2 is making the right decision on which oracle would complement the future protocol in an optimal way. Building in an open and transparent way, Liquity contributors shared their thoughts and research on the oracle topic openly. The collective wisdom has echoed within the broader community, catalyzing a wave of substantial interest and engaging discussions on the oracle topic. 

If you have missed the conversation or want to recall what happened check out these links: 

• Rick Pardoe’s talk on “Research Findings Evaluating DeFi Oracles”
• The oracle criteria for Liquity v2 + the updated version after community feedback. 
• “The Oracle Conundrum” article on Liquity’s blog.
• “Oracles in DeFi” X Spaces. Discussion with RedStone and Pyth.

Liquity contributors meeting plus a new addition to the team

Contributors to Liquity met in Paris around the StableSummit and EthCC. Liquity’s founder Robert Lauko had the chance to announce on stage Liquity v2 -  an alternative product that aims to crack the stablecoin trilemma. For more details, you can watch Robert’s talk during EthCC, or read the introduction article on Liquity v2 in our blog.

Supporting the v2 launch will be Colin Platt who joins as the Head of Product. Colin has a strong financial background and has been active in the DeFi space since its inception. 

His interesting blend of traditional finance background, DeFi expertise, and tech knowledge makes him the ideal person to help shape and launch the v2 product. 

Conclusion

In conclusion, Liquity continues going strong in the fast-changing world of DeFi. The protocol’s design keeps handling various market changes, proving its strength and reliability time and again. 

Liquity’s journey continue to lead to a lasting, positive mark in the world of decentralized finance.

‍