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During the speech, Liquity co-founder Robert Lauko introduced Liquity, an interest-free lending and stablecoin system, in detail.

Robert Lauko shows how Liquity works with the main example. The first example involves borrowing and lending our stablecoin LUSD using ETH. The second example is to deposit LUSD to get LQTY (another token in the Liquity system). The final third example is to stake LQTY to earn protocol fees.

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Example 1: Pledge ETH to borrow LUSD

The principle of operation of lending LUSD is relatively simple. Liquity is first and foremost a lending protocol that makes lending as attractive as possible by charging a 0% lending rate. Not only that, but it only charges a very low (one-time), minimum 0.5% borrowing fee. It can be higher, but the default is 0.5%. In addition, as a borrower, the minimum collateralization ratio that needs to be maintained (because the loan is secured by ETH) is only 110%, which is unique in the field of decentralized finance. The LUSD token obtained by staking ETH is a stable currency pegged to the US dollar.

You can borrow some ETH in exchange for LUSD. The system will create a so-called "treasure house" for you. A "treasure vault" is where your debts and collateral are kept. This is the same as a collateralized debt position or "vault" in other protocol systems. Now you can do anything you want with LUSD, hold your borrowing for as long as you want, as long as you maintain your minimum collateralization ratio at the same time. It must be at least 110%, although it can be higher. Then, when you decide to pay back, the system takes the LUSD and destroys it, returning your ETH (collateral).

What guarantees price stability? Now, let's take a look at how the system achieves price stability for the stablecoin LUSD. You may already know of other existing CDP platforms like MakerDAO, which charge variable interest rates to borrowers. But on the other hand, their stablecoins themselves cannot be directly redeemed or exchanged for the collateral itself. Just through its system, as a holder of DAI you cannot exchange his/her tokens for ETH. These systems therefore rely on a rather slow and ineffective "soft peg" mechanism that works by adjusting interest rates. Raising interest rates makes lending less attractive, thereby dampening the creation of new stablecoins and bringing their prices back to stability, and vice versa.

On the other hand, Liquity, as mentioned above, charges a 0% interest rate and allows all LUSD holders to exchange 1 LUSD for $1 worth of ETH. You can exchange it for any amount at face value. So you basically get value in USD, while paying in ETH. This forms what we call a "hard hook".

LUSD will have a price floor around $1, because every time the price drops below $1, you can buy LUSD in the market for less than $1, exchange it for ETH, and immediately sell it for more than $1. Sell ​​ETH at the price of the original purchase price, thereby obtaining arbitrage income. This is why there will be a floor for the price of LUSD.

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Example 2: Deposit LUSD to get LQTY (plus ETH liquidation proceeds)

Now let's take a look at Example 2, deposit LUSD to get LQTY, and you can also get the liquidation income of ETH. Let's see how it works. Basically any holder of LUSD can be the guarantor of the borrower. As a holder of LUSD, you can ensure that the system can liquidate treasuries or borrowers whose collateral ratio falls below 110%. You can deposit LUSD into the stable pool at any time. You can also call the stability pool the insurance pool for the loan.

This stable pool can also collect ETH. Let's see how it works. We assume that a borrower has repayment problems, that is, his collateral ratio has dropped below 110%. If someone triggers a liquidation of this position, what the system will do is cancel this borrower's debt and burn the same amount of LUSD tokens from the stability pool.

The collateral, that is, the ETH held by the liquidated borrower, can also be obtained from the stable pool and distributed to the stable pool's LUSD depositors. Now we see that the stable pool will receive some ETH, and the amount of LUSD tokens here will also decrease as they are used to pay off the debt that was liquidated.

This means that liquidations happen a little less than 110% of the time (most of the time), you will gain by getting ETH, since the value of the ETH you received should exceed the value of the LUSD you lost here. Therefore, you should have a net gain as a saver.

Now, the LUSD depositors or stability providers (you can call them that) of the stability pool have another income - stable stakers can get LQTY rewards. LUSD depositors in the stable pool will be rewarded with LQTY, our second protocol token. The process is relatively simple. Every user who wants to be a stability provider has to choose a frontend to achieve this. As a company, we don't run our own front end, but we delegate it to some distributed independent front end operators.

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Example 3: Staking LQTY to earn fees

Now let's see what a user can do with the LQTY he received or the LQTY he or she bought in the marketplace. There is a very simple mechanism on Liquity, the pledge mechanism, which allows any LQTY holder to put LQTY into the pledge pool. Once tokens are in the pool, they will start earning protocol income from the system. I mentioned earlier that we have a redemption mechanism that keeps prices stable, but we also have a lending mechanism that requires some fees. These two fees, the redemption fee charged by ETH and the borrow fee charged by LUSD, will be issued to the pledger and paid in proportion to the pledged amount.

The Liquity mainnet has been launched on the ETH network since April 5, 2021, and has now attracted more than $2.8 billion in total locked volume.