Welcome to this post, where we are going to see how liquity, a lending platform based on its own stablecoin LUSD, works.
LUSD has become one of the leading stablecoins in use, and one of the leading stablecoins that rely on over collateral to keep its value pegged to $1. Let’s see how you can use the leading platform to get liquity by depositing funds as collateral with everything you need to know.
What is Liquity
Liquity is a decentralized lending protocol that allows interest-free loans against Ether used as collateral. Loans are paid in LUSD (a USD-linked stablecoin) and need to maintain a minimum collateral ratio of 110%.
In addition to collateral, loans are guaranteed by a stability fund containing LUSD and by other borrowers acting collectively as guarantors of last resort.
LUSD is a stablecoin with over collateral to maintain its dollar equivalent value. In addition to using third party platforms to be able to mine LUSD, making it not a centralized stablecoin on a single platform. By having this more open format, we could see platforms like Olympus where you could use your LUSD.
Currently LUSD is only on the Ethereum network, and you will have to use etheruem as collateral to borrow LUSD.
The main advantage posed by liquity is that you don’t pay interest when you borrow, although you’re not going to get rewards for depositing your Ethereum either. But usually, when you borrow, you have to pay an annual %. In this case, you’ll only be paying a 0.50% mining fee the first time and that’s it. The platform does not charge any interest for borrowing, because the Ethereum placed is used as collateral for the stablecoin to have guarantees and reserves on the LUSD price.
Let’s see how you can borrow LUSD and take advantage of these benefits on one of the platforms, which is the main one, liquity.app, but keep in mind that there are others you can use like lusd.eth.link and they have a very similar operation to the one we will now see.
Trove is where you can place your Ethereum to get LUSD as a loan, paying 0% interest. At the moment, you can only place Ethereum, and you will have to borrow a minimum of 2,000 LUSD to use it. So you won’t be able to borrow smaller amounts. Although with the high fees that the Ethereum network has, it wouldn’t make much sense to do so either.
The first thing we find is collateral, which is the amount of Ethereum we want to place. Indicate the amount, you can click on max to indicate everything, although keep in mind to leave to pay for transactions.
Once you have indicated the amount, in borrow you must indicate the amount of LUSD you want to borrow, with a minimum of 1,800 LUSD. Enter an amount greater than 1,800 LUSD and you are done.
Now, you will be able to see all the information about the loan. How is the liquidity reserve, the 0.50% commission that we have discussed that is charged only once, the total debt, the settlement price, where if Ethereum reaches that price your position will be liquidated. And the collateral ratio you have. This ratio has to be always above 150% or else your position can be liquidated.
Check that all the information is correct, and click on confirm, confirm in your wallet and you are done. You should be able to see your LUSD in your wallet.
Now, always keep in mind the risk of being liquidated if the price of Ethereum drops, and you can add more Ethereum to avoid being liquidated or return the LUSD at any time.
A big advantage of using liquity over other lending platforms on DEFI, is not paying interest on your LUSD. So once you have deposited your Ethereum and withdrawn your LUSD, the only thing you have to worry about is not being liquidated if the price of Ethereum drops. But you won’t have to pay any interest and you can withdraw your Ethereum for your LUSD at any time.
It is a widely used strategy if you think Ethereum will continue to rise, place Ethereum as collateral and borrow stablecoins, in this case LUSD that you can use to buy more Ethereum or for any other use. As Ethereum appreciates, your collateral increases in value and you will be able to return the LUSD and receive more Ethereum, as the cryptocurrency becomes more valuable.
Here, you will be able to contribute LP tokens as ETH-LUSD to help the protocol maintain its value and have liquidity inside. For depositing the LP you will receive the native token of the LQTY platform, and with a good annual % for providing liquidity, either in LP’s or only placing LUSD.
In staking, you will be able to place your LQTY tokens and get an extra annual % for placing them. The annual % is not shown, but in staking you get a percentage of the commissions that the platform gets every time LUSD is mined.
I hope it has helped you to know more in detail how Liquity works and all the advantages it brings. Remember that if you don’t have an account with binance, you can create one below.