Liquity USD (LUSD)

Liquity USD (LUSD) is the USD-pegged used to pay out loans on the . At any time it can be redeemed against the underlying at face value.[1]


Rick Pardoe, core developer of the project and Robert Lauko, the CEO, co-founded Liquity USD in April 2021. It is an token designed to power the underlying Liquity decentralized borrowing protocol.

Liquity USD is designed to provide loans in liquidity agreements through its stablecoin backing. To access the loans offered by the platform, users need to have a collection with a minimum deposit of before accessing the LUSD network, thus opening up a '110% collateral' rate to users.

According to Liquity, the protocol is a decentralized lending system allowing users to obtain loans at 0% interest rates while collateralizing ETH. As a result of its deployment on the Ethereum , Liquity USD is validated using a consensus mechanism, due to the Ethereum Merge.

Users can deposit LUSD tokens into a stable pool to receive rewards from ETH and LQTY, the protocol's secondary token. Over time, the balance of LUSD in the stabilization pool decreases as settlement transactions are executed on the network. In exchange, the protocol rewards users with a percentage of settled ETH and LQTY. While it provides several key use cases for its users, LQTY token holders can also pledge their for a portion of the loan and redemption fees charged by the platform. These fees are primarily allocated to the pledge contract and accrue to ETH and LUSD.

As LUSD is pegged to the US dollar, which means that its value is very close to the normal value of the dollar. Because of this value, token holders can exchange their LUSD tokens directly into or other token pairs, such as . In contrast to few 's like , Liquity loans carry a 0% interest rate but charge a fee for loan creation. The minimum loan size on Liquity is 2,000 LUSD.[5]

Liquity USD has a total supply of 261 million LUSD, and an equal amount of LUSD in circulation with a market capitalization of $264 million.

Redemption Mechanism

LUSD is a fully redeemable stablecoin. At any time, the system allows holders to redeem their LUSD for the underlying Ether collateral at face value. For example, A holder redeeming 100 LUSD would receive $100 worth of collateral from the riskiest Trove(s), minus the current redemption fee. The redemption mechanism will create a price floor for LUSD, pushing its price back to parity whenever it drops below $1. Holders have an incentive to redeem LUSD if they can buy it for less than $1 and then convert it into Ether at a price of exactly $1. Every redemption leads to a contraction of the total LUSD supply and to an adjustment of the base rate. [6]

LUSD Supply Shrinkage

Liquity troves are collateralized debt positions (CDPs) that enable users to borrow LUSD against their ETH deposits. Redemptions occur when the price of LUSD drops below $1. Liquity's stability mechanism allows users to redeem 1 LUSD for $1 worth of ETH to maintain price stability. However, this ETH comes from troves with the lowest .

On October 24th, 2023, over 4.13M LUSD tokens were redeemed for ETH. In September, 2023 alone, the total supply of LUSD has dropped by almost 40 million tokens. The rise in trove redemptions has prompted users to close their troves and seek alternative lending protocols. Some users have expressed deep concerns with Liquity's redemption mechanism, saying that it is not capital-efficient for borrowers and causing the biggest users to leave. The recommended safe collateral level for troves is changed to 240%, which means that one can safely borrow only around $42 in LUSD against $100 worth of ETH.

In September 2023, the average of redeemed troves stood at 181%. bots have been taking advantage of the ongoing arbitrage opportunity arising from MakerDAO’s DAI Savings Rate, exerting downward pressure on the price of LUSD and shrinking its supply. As users pay off their debt and close their troves, the supply of LUSD decreases. However, this reduction in supply boosts the yield for LUSD stakers in the stability pool. Currently, the LUSD stability pool offers stakers an annual yield of 4.53% .[7]

LUSD & LQTY Bridging

To cater to smaller holders LUSD has also arrived on . The process works as: an LUSD-IOU on the target chain can be to recover the base LUSD on , although the process takes a week, a delay is required for the Challenge Period serving to help secure the assets stored on an Optimistic network. Due to the bridges, LUSD can exist on , enabling smaller holders to easily acquire it on their local venue too. The process is exactly the same for LQTY. Bridging LUSD to layer 2 is to democratize access to it.


LUSD x Maverick

The first three liquidity pools involving LUSD that were launched on :

  • LUSD / wstETH pool
  • LUSD / ETH pool
  • LUSD/ USDC pool

Maverick’s highly customizable liquidity structure for LUSD/ETH pools, enables much higher liquidity efficiency than UniswapV2-type distributions, with a similar availability, depending on the chosen range. The LUSD/ pool, a LUSD/ is also available, as part of a joint effort with the team.

LUSD x GearBox

GearBox, the composable leverage protocol, was live on October 31, 2022. GearBox V2 is used to leverage LUSD/ / yields. The user can be a supplier of tokens used by leveragers, to earn a native yield and GEAR tokens. Users can earn and provide liquidity to facilitate LUSD/3CRV leveraging, and supply or on GearBox. [10]

LUSD x Synthetix

In November 2021, integrated LUSD into their ecosystem. It was to help aid peg on . [11]


The co-incentivized LUSD / pool was live on October 6, 2021 and was eligible for rewards. There is $400,000 in combined rewards allocated to the pool. [12]



Liquity operates in a decentralized manner, eliminating the need for central authorities and intermediaries. This makes it censorship-resistant and trustless.


All transactions on the Liquity platform are recorded on the blockchain, ensuring transparency and auditability.


The Stability Pool mechanism allows LUSD to maintain its to $1, even in times of market volatility.

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 that the total LUSD supply always remains backed.[4]


Liquity USD is tradeable and can be used in various applications, giving users flexibility in how they manage their assets.


Users can earn rewards by participating in the Liquity ecosystem, either by depositing collateral, LUSD, or contributing to the Stability Pool.

Challenges and Risks

Price volatility

Price volatility in the collateral asset (ETH) can pose a risk to users if the value of their collateral falls significantly. Users should always be aware of the potential risks associated with participating in DeFi platforms. Monitoring and adjusting this ratio can help ensure the stability of the stablecoin.

Smart Contract Security

Verify the security of the smart contracts governing the Liquity protocol. Security vulnerabilities can pose risks to the liquidity and stability of the protocol. Stay informed about any security audits and updates.

Governance and Upgrades

Keep an eye on the governance mechanisms and community involvement in the Liquity protocol. Transparent governance and a responsive development team are crucial for addressing concerns and implementing necessary upgrades to enhance liquidity.

Integration with DeFi Ecosystem

Assess how integrated Liquity is within the broader ecosystem. Strong integration with other protocols and platforms can contribute to liquidity and stability.

Community Communication

Regular and transparent communication with the community is essential. Updates on protocol changes, security measures, and any potential risks should be communicated effectively to maintain trust and confidence.

Monitoring Oracle Systems

Verify the reliability and security of the oracle systems providing price feeds to the Liquity protocol. Accurate price feeds are crucial for maintaining the stability of the stablecoin.

Liquidity Pools

Assess the liquidity available in or where LUSD is traded. Adequate liquidity on these platforms is essential for users looking to buy or sell LUSD without significant .

Regulatory Compliance

Stay informed about regulatory developments that may impact the operation of Liquity. Ensuring compliance with relevant regulations is crucial for the long-term viability of any stablecoin project.

See something wrong? Report to us.

Liquity USD (LUSD)


Did you find this article interesting?



Join the IQ Brainlist

Sign up for the IQ Brainlist to get early access to editing on the beta site!

Join Now

Subscribe to our newsletter

Never miss any of the most popular and trending articles on when you sign up to our email newsletter.

Subscribe's vision is to bring blockchain knowledge to the world and knowledge onto the blockchain. A part of Brainfund Group.


What's IQ?StakingBonds


About usCareersBrandingIQ GPTIQ Dashboard

© 2023 Powered By BrainDAO& IQ