What is Liquity?
Liquity is a decentralized borrowing protocol on Ethereum that allows users to take out interest-free loans using Ether (ETH) as collateral. Loans are issued in LUSD, a stablecoin pegged to the US dollar, and require a minimum collateral ratio of 110%. The protocol is fully automated and operates without governance, ensuring decentralization and censorship resistance.
Liquity features a one-time borrowing fee and a refundable liquidation reserve, making it cost-effective for borrowers. The stability pool, funded by LUSD holders, is crucial for maintaining system stability during liquidations. Stability providers deposit LUSD into the pool, earning liquidation gains and rewards in LQTY, the protocol's native token.
One of Liquity's key mechanisms is its handling of liquidations. When the collateral ratio of a loan falls below the required threshold, the collateral is liquidated to maintain the protocol’s stability. This ensures that the system remains solvent and that LUSD retains its peg to the US dollar.