This is the seventh article in the "Kay's DeFi Notes" series. This series is dedicated to providing some common sense about DeFi in the most easy-to-understand language, including not limited to general concepts such as impermanent loss/AMM, or about the principles of new projects , Design analysis, and strive to make melon-eating people who don't understand DeFi at all understandable. I hope I can write at least 30 articles.
The author does not have a traditional financial background. This is a non-serious series, focusing on sorting out personal thoughts and self-expression. People who read it can just read it casually, and those who write it can write whatever they want.
Maker: "There are always people who want to harm me"
Since the birth of MakerDAO, there have been a variety of projects that believe that Maker is not doing well enough, and have explored decentralized stablecoins in various directions, from over-collateralization to semi-collateralization of the "New Calculator" and even the "Wild Federal Reserve". What's more, Ross Ulbricht, the founder of the darknet "Silk Road", has conducted research on the Maker protocol in prison, and pointed out that the current role of the "borrower" (borrower) in the Maker system needs to pay stability fees There is a problem with the design of , which proposes to abolish the combination of savings contract and stability fee, and transform the Maker agreement through a decentralized market mechanism.
Liquity, the protagonist of this article, chose a moderate over-collateralization scheme, but canceled the interest of LUSD in the system's DAI role (because Maker's interest rate is not a fixed rate, and even derived some fixed-rate projects using zero-coupon bonds such as yield.is), replaced by a one-time Borrowing Fee (borrowing fee) and Redemption Fee (redemption fee).
Is Liquity really interest-free?
This is somewhat like a bank credit card, which has a fixed interest-free period (normally about 56 days). For customers who repay on time, the bank is equivalent to subsidizing interest-free loans (actually there is a handling fee of about 0.6%, but generally borne by merchants), the bank’s profits come from:
Normal customers: credit card handling fee (paid by the merchant), the actual annualized rate is less than 5%
Installment customers: the actual annualized rate is generally around 18%
Customers with the lowest repayment: the actual annualized rate exceeds 36%
Compared with traditional credit loans, bank credit cards subsidize the interest-free use of normal customers with the high interest rates of installment customers and customers with the lowest repayment.
Similarly, the Liquity system is motivated by:
Low-frequency borrowing and repaying users: borrow enough at one time, never use it again, and the capital cost is 1% (0.5% + 0.5%)
High-frequency borrowing and repaying users: Borrowing and repaying every three to five times, the average annualized rate of Maker is exceeded after 3 to 4 full warehouse operations
Liquidated users: 10% ETH penalty (this Maker also has it)
Compared with MakerDAO's floating interest, Liquity subsidizes low-frequency borrowing and repaying users with the borrowing and repaying fees of high-frequency borrowing and repaying users and the ETH of liquidated users.
There ain't no such thing as a free lunch.
There is never a free lunch.
Three-digit APR God Mine & Triple Matryoshka
Trail of Bits Audit Report:https://github.com/trailofbits/publications/blob/master/reviews/Liquity.pdf
Optimal participation strategy: It is recommended to participate with more than 50 ETH, otherwise it may not be enough to cover short-term gas consumption
ETH mint LUSD is used in lending, and the pledge rate is recommended to be controlled above 200%
Pledge LUSD in the stable pool, wait for 12 hours, and take a short break (get LQTY mining rewards)
After 12 hours, take out the rewarded LQTY and put it into the LQTY pledge pool (obtain LUSD handling fee reward)
At present, the annualized rate is more than three digits, and the risk is low. In addition to the contract security risk, except for the 0.5% of borrowing and redemption, the risk exposure is only the pledge rate of ETH, and it is enough to ensure that it will not be liquidated.
A little explanation about 3 and 4: LQTY does not have a second pool, and the big exchange has not yet launched, and its liquidity is poor. The current price is around $50. As a near-lossless mine on ETH, the mining TVL is expected to continue to grow to more than 1B. There is a high probability that mining income can cover the selling price. Of course, players with lower risk appetite can also choose to sell LQTY directly.
The next "wild Fed"?
The point that FEI is often criticized is that it has no usage scenarios other than on-site games (about FEI, a lot of logic can be referred to last year’s CORE, and I personally think that after the short-term “reduction of the balance sheet”, it can approach stability in the medium term), and it cannot form a stable currency. network effects. Although Liquity does not have an all-star lineup such as Coinbase, A16Z, and Framework, there is no lack of influential top institutions such as Pantera among investment institutions, which may also promote the adoption of trading pairs such as Curve or mainstream exchanges.
As for me personally? The cost of capital is close to 0, what kind of bicycle do you need, whether it is the wild Fed, or there is no network effect, you need to use the stable currency to lend LUSD, and then exchange it back to DAI / USDT / USDC.
No interest anyway.
Really fragrant.
