Once Liquity goes live, it’s important that our existing community and newcomers alike understand how they can interact with the protocol. In this blog post I’ll describe Liquity’s three primary types of users: Borrowers, Stability Providers, and Stakers.
We recently shared a video of our CEO and Founder, Robert Lauko, discussing Liquity Use Cases that you can watch here.
Borrowers
Borrowing LUSD is Liquity’s primary use case. Borrowers are users who deposit their ETH as collateral and borrow LUSD against it for use elsewhere. They could deposit their newly minted LUSD into the Stability Pool, provide liquidity on Uniswap, buy more ETH to leverage up their position, etc.
The advantages of using Liquity for borrowing are twofold:
- No variable interest rates. Borrowers pay a one time fee to borrow their LUSD. That means users will know their borrowing costs up front, and won’t be subject to fluctuating interest rates for the duration of their outstanding debt.
- Lower collateral requirements. Compared to other protocols, Liquity’s minimum collateralization ratio of 110% is quite low. In other words, you’ll be able to get access to more debt (LUSD) per $ of ETH — significantly improving your capital efficiency.
Stability Providers
Liquity’s second use case involves the Stability Pool. The Stability Pool is the first line of defense in maintaining system solvency. It achieves that by acting as the source of liquidity to repay debt from liquidated Troves — ensuring the total LUSD supply always remains backed. I’ll spare the technical details for now, you can find more info here and here.
Users can become Stability Providers (i.e. Stability Pool depositors) by depositing some of their LUSD to the pool. In return, they’ll receive ETH rewards from liquidated Troves and additional LQTY rewards from the protocol.
For every liquidated Trove, Stability Providers lose some of their deposited LUSD and gain ETH. Because the system is over collateralized, the ETH gained should almost always be higher in dollar terms than the LUSD lost — leading to a net gain over time. Add pro rata LQTY rewards on top of your ETH earnings, and the outlook is even better.
Stakers
Speaking of LQTY, that brings us to our third use case. As mentioned above: LQTY rewards accrue to Stability Providers over time, but it doesn’t stop there. Users can stake their LQTY rewards in Liquity’s staking contract to receive more rewards.
Liquity’s staking rewards come from issuance fees and redemption fees. Issuance fees are paid in LUSD and occur when a user borrows LUSD. Redemption fees are paid in ETH when an arbitrageur redeems LUSD for ETH held within Liquity. So, LQTY stakers will earn rewards in the form of ETH and LUSD.
Note: You can learn more about the borrowing fee here and the redemption fee here.
What next?
Liquity is not currently live on Ethereum main net. However, Liquity is available on all Ethereum test networks (Kovan, Ropsten, etc.) — try out our dev UI here. The dev UI is the best way to get hands on experience with Liquity before launch.
If you’d like to learn more about Liquity, check out our documentation and join our community Discord. We’re around to hear out feedback and answer any questions!
