Introduction

Liquity is a decentralized borrowing protocol that allows users to draw loans with 0% interest against Ether (ETH) used as collateral. Loans are paid out using LUSD tokens, a USD-pegged stablecoin that can be redeemed at any time against the underlying collateral at face value.

The Liquity protocol is non-custodial, meaning that users retain full control of their assets at all times. It is also immutable, meaning that the protocol code cannot be changed without the consent of the majority of LQTY holders.

LQTY is the governance token of the Liquity protocol. LQTY holders can stake their tokens to earn a portion of fees generated by opening and closing loans. They can also use their tokens to vote on protocol proposals and participate in governance.

Benefits of Liquity and LQTY

There are several benefits to using Liquity and LQTY, including:

• 0% interest loans: Liquity offers 0% interest loans, which means that users can borrow ETH without having to pay any interest. This can be a great way to finance projects or investments without having to worry about accruing debt.
• USD-pegged stablecoin: LUSD is a USD-pegged stablecoin, which means that it is always worth $1. This makes it a safe and reliable asset to hold, especially during times of market volatility.
• Staking rewards: LQTY holders can stake their tokens to earn rewards. This is a great way to earn passive income and support the Liquity protocol.
• Governance: LQTY holders can vote on protocol proposals and participate in governance. This gives them a say in how the protocol is run and ensures that it is aligned with their interests.

Risks of Liquity and LQTY

There are also some risks associated with using Liquity and LQTY, including:

• Liquidation risk: If the value of ETH falls below the collateral ratio, users' positions may be liquidated. This means that their ETH will be sold to repay their loans.
• Protocol risk: The Liquity protocol is still under development, and there is a risk that it could be hacked or exploited.
• Market risk: The price of LQTY is volatile, and it is possible to lose money by investing in it.

Total Value Locked (TVL) tracks the total value of assets that are locked up in the network. An increase in TVL can indicate that users are confident in the network and are willing to commit their assets. For Liquity, TVL = ETH (deposits) + LUSD (minted) + LQTY (staked).

Distribution Details

35.3% to Liquity Community

• 32,000,000 to rewards pool
• 1,333,333 to LPs
• 2,000,000 to Governance Reserve

23.7% to Team & Advisors

• 23,664,633 to Liquidity AG employers

33.9% to Investors

• 33,902,679 to early-stage investors

6.1% to Liquidity AG Endowment

• 6,063,988 to Liquidity AG for use by the company

1.0% to Service Providers

• 1,035,367 to service providers who helped Liquity before launch.

$LUSD tokens do not have a maximum supply as they are generated by using $ETH as collateral, and the protocol does not impose any restrictions on accepting $ETH collateral to create $LUSD. On the other hand, the secondary token, $LQTY, has a capped maximum supply of 100,000,000 (100MM) tokens. This ensures that $LQTY token holders will not face dilution once the token emissions are completed. The emissions of the $LQTY token began on April 5, 2021, which is the same day the protocol was launched.

Given the substantial float of approximately 92% for $LQTY, the specific details regarding vests and lockups for its allocations hold minimal significance at present. The market is primarily awaiting the release of a small number of team unlocks and stability pool emissions, which are expected to gradually decrease until approximately March 2024.

The Liquity protocol charges one-time borrowing and redemption fees that range from 0.5% to 5% (they’re usually on the lower side of this range) in $LUSD and $ETH respectively. Of these fees, Liquity takes 100%, distributing all of it to $LQTY stakers, making the secondary $LQTY token the value capture token of the protocol.

Stability Mechanism

Token Utility

Collateral Options

• Liquity: Liquity accepts ETH as collateral for generating LUSD stablecoins.
• MakerDAO: MakerDAO supports multiple collateral options, with ETH being the primary one. Other assets, such as BAT and USDC, have also been added as collateral options.
• Synthetix: Synthetix focuses on synthetic assets rather than collateralized debt. SNX holders stake their tokens to mint and trade synthetic assets.

Governance

• Liquity: Liquity has no decentralized governance model where LQTY token holders can participate in decision-making, however, the protocol is fully governed by algorithms - unmanipulatable, battle-tested algorithms harnessing transparent blockchain data to make the most appropriate changes to the protocol.
• MakerDAO: MakerDAO's governance is controlled by MKR token holders, who have the power to vote on various proposals and changes to the system.
• Synthetix: Synthetix's governance is determined by SNX token holders, who participate in voting on protocol changes and fee distributions.

• Liquity: Liquity utilizes a stability mechanism called the Stability Pool, where users deposit collateral (ETH) to mint LUSD stablecoins. The protocol aims to maintain the stability of LUSD by incentivizing users to keep the system collateralized.
• MakerDAO: MakerDAO operates with a similar concept but uses collateralized debt positions (CDPs) to generate DAI stablecoins. MKR token holders govern the system and participate in its risk management.
• Synthetix: Synthetix focuses on synthetic assets, allowing users to mint and trade various synthetic tokens representing real-world assets. SNX token holders participate in the protocol's governance and receive rewards for providing collateral.

• Liquity: LUSD is the stablecoin generated on the Liquity Protocol. It serves as a medium of exchange and can be used for various DeFi applications.
• MakerDAO: DAI is the stablecoin generated by MakerDAO. It has gained widespread adoption and is used in various DeFi platforms and applications.
• Synthetix: SNX is the native token of the Synthetix protocol. Holders can stake SNX as collateral to mint synthetic assets and participate in the platform's governance.

• Liquity is a unique and innovative DeFi protocol. It is a non-custodial, overcollateralized stablecoin protocol that allows users to borrow USDC against ETH without any liquidation risk. This makes Liquity a very attractive option for users who want to access liquidity without giving up control of their assets.
• Limited Supply and Tokenomics: The $LQTY token has a capped supply, which means there is a finite number of tokens available. This limited supply, combined with the growing demand for Liquity's services, creates a potentially favorable supply-demand dynamics.
• The Liquity team is experienced and has a proven track record. The team has worked on a number of successful DeFi projects, including MakerDAO and Compound. This gives investors confidence that the team is capable of executing on their vision for Liquity.
• The Liquity protocol is battle-tested. It has been live since 2021 and has weathered a number of market downturns without any major issues. This shows that the protocol is robust and can withstand volatility.
• The Liquity market is still relatively small. The total value locked (TVL) in Liquity is currently around $500 million. This is a small fraction of the TVL in other DeFi protocols, such as MakerDAO and Uniswap. As the Liquity protocol gains more users, the demand for LQTY is likely to increase, which will drive up the price.

Overall, I believe that Liquity Protocol's $LQTY token is undervalued and has potential for growth in the next cycle. The protocol is unique, innovative, and has a strong team behind it. The market for Liquity is still relatively small, which means that there is a lot of room for growth. As the protocol gains more users, the demand for LQTY is likely to increase, which will drive up the price.

Liquity has seen significant usage decline in recent months. The number of unique addresses interacting with the protocol has decreased from around 1,000 in March 2023 to less than 300 in June 2023. This decline is likely due to a number of factors, including the protocol's high barrier to entry, and increasing network gas costs.

Liquity holders are also declining, including a decline in distinct traders on DEXs. User growth and activity are in this trend likely due to the fact that Liquity has minimal use cases in DeFi applications as major and established players receive more attention and integration from developers.

The top 10 holders of $LQTY hold a combined 41.19% of the total supply. This is a relatively high concentration of ownership, which could pose a risk to the security of the network. However, it is important to note that the top 10 holders are all exchanges and liquidity providers, which suggests that the majority of the $LQTY tokens are held by entities that are unlikely to sell.

The remaining 58.81% of the $LQTY tokens are held by a large number of smaller holders. This distribution suggests that the $LQTY token is widely distributed and that no single entity or group has a significant amount of control over the network.

Overall, the distribution of $LQTY tokens is relatively concentrated, but it is important to note that the majority of the tokens are held by exchanges and liquidity providers. This suggests that the $LQTY token is widely distributed and that no single entity or group has a significant amount of control over the network.