$LUCY $LUSD Pool (ETH1)-Launching

$LUCY $LUSD Pool (ETH1)-Launching

ETHL1 $LUCY $LUSD Launch Planning
ETHL1 $LUCY $LUSD Launch Planning

About $LUCY- ‘Defensive’ stablecoin yield including liquidations

$LUCY is a new stablecoin yield optimisation vault that automatically harvests yield from multiple sources, including liquidations, which tend to go up in down markets when ETH prices fall. The new $LUCY vault fully utilises the Balancer v2 architecture and the new Power Agent v2 decentralised automation network to offer a variable yield with multiple sources, including ‘defensive’ yield from sharing in proceeds from liquidations of ETH held on Liquity. Liquidations yield rises when ETH proces fall, usually in down markets, meaning that $LUCY yields can rise in down markets.

$LUCY Launch Planning

More About Liquity’s $LUSD

USD Pegged / Crypto Collateral / Over Collateralized / Reserve Redemption

Liquity’s $LUSD is a fully-decentralised over-collateralised stablecoin based on ETH collateral only. Liquity is a CDP-based borrowing protocol that shares some similarities with Maker (DAI). Recent US government actions against fiat-backed stablecoin USDC, and governance problems stemming from Maker’s dependence on USDC have focussed global attension on the advantages of the Liquity approach. Liquity differentiates itself from Maker through the following:

  • one-time borrowing fee of 0.5-5% and 0% interest rate
  • lower collateralization ratio (CR) requirement of 110% on individual vaults (troves) and protocol level CR of 150%
  • direct redeemability of 1 LUSD for $1 of collateral at any time a more efficient liquidation mechanism
  • immutability of contracts and governance-free

Liquidation

The liquidation system relies on the following:

  • Stability Pool
  • Oracles
  • Redistribution

Stability Mechanisms

  • Reserve Redemptions and Arbitrage
  • When LUSD trades at between $1 and $1.1, arbitrageurs must deposit $1.1 of ETH and expose themselves to the collateral’s directional risk while they wait for DAI to return to peg.

    However, when LUSD is >$1.1, the arbitrageur can deposit $1.1 of ETH and instantly mint and sell LUSD for >$1.1, repeating the process till LUSD drops to $1.1. Thus, LUSD has a hard ceiling price of $1.1 and not $1.

  • Borrower Actions
  • Issuance Fees
  • Redemption Fees
  • $1 as it disincentivizes unnecessary redemption. However, when LUSD is below $1, redemption fees need to be carefully managed to avoid a situation where high redemption fees make arbitrage unprofitable.

  • Issuance Fee % and Redemption Fee % are based on the same function (base rate

+ 0.5%). The base rate is dynamic and based on the rate at which minting/redemption occurs.

Source of Price Information

  • Oracles - Covered under ‘Liquidation’

Noteworthy Elements

  • In Maker, the liquidation engine acts as a single barrier when price of collateral starts to crash, taking on the obligations of ensuring healthy liquidations without expected losses. Liquity uses game theory to shift partial responsibility to trove owners.
  • LUSD redemptions are settled against troves with the lowest CR. This poses a risk of liquidation to any trove that is close to 110% CR.
  • These 2 mechanics force trove users to ensure that they are not the least collateralized participants and that the protocol CR is at least 150%

Risks/Limitations

  • During a rapid crash in collateral value, trove owners will look to buy LUSD to repay their loans and avoid liquidation. This can drive price of LUSD above $1 (as with Maker’s Black Friday 2020 crisis). Since LUSD is endogenously generated within the system, additional stablecoins cannot be procured easily to repay loans.
  • If the CR drops below 100% in a flash crash and liquidation is facilitated through the Stability Pool, collateral gained by Stability Providers is less than LUSD spent, resulting in a net loss.
  • In a flash crash, demand for LUSD could push the price up beyond $1. As the price of LUSD approaches $1.1, it becomes less profitable for Stability Providers since the maximum potential gain is 10%, causing LUSD to be withdrawn.
  • Although the protocol uses 2 of the most trustworthy oracle providers - Chainlink/Tellor - they have been known to fail.
  • Liquity’s governance-free design makes it impossible to rectify contract errors. This means thinking about edge case fragility scenarios are critical since there is no ‘failsafe’.
  • Due complexity of trove management, growth of LUSD supply will come from leverage demand rather than stablecoin demand.

Rating

  • Stability - 3 - Unlike Maker, Liquity doesn’t have a PSM to ensure 2 way 1:1 swaps. Instead it has a hard peg on the downside (through arbitrage incentives) but a soft peg on the upside - a range of $1 to $1.1 (explained above)
  • Trustlessness - 4 - ETH is the only accepted collateral and there are no custodians involved.
  • Scalability - 2 - Due to a better liquidation system, it is more capital efficient than Maker but less than fully-collateralized stablecoins.
  • Simplicity - 3 - Simple to use for the average user but management of vaults requires constant monitoring.