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LQTY depth user personal statement: LUSD is the top DeFi stable coin, but facing the expansion of the war

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If you want to have the most censor-resistant, decentralized dollar stablecoin, LUSD might be the way to go.

原文标题：《 LQTY 深度用户亲述：LUSD 是顶级 DeFi 稳定币，却面临扩张之殇》

Original article by darkforest, SevenUp DAO

Recently, the market began to have some fud on USDC,BUSD and even DAI. We can see the change of market sentiment from the trading volume of Curve. The trading volume of 3pool reached $613 million in 24 hours, even exceeding the TVL of pool, which is really quite exaggerated. As crypto players, what exactly do we need to have a stablecoin that will give us freedom from fear? Let me talk a little bit about liquity.

稳定币

As a heavy user of liquity since its launch, I am still deeply attached to the project and deeply hurt by it. Of course, none of the injuries were on liquity, it was just me. However, in this process, I have deepened my understanding of this project, and I hope to share my experience and understanding with the users who are using it or plan to use it in the future, so as to think more deeply about the advantages and disadvantages of entering this project.

If you want to have the most censor-resistant, decentralized dollar stablecoin, $LUSD is the way to go. No matter $USDT, $USDC or $DAI's FUD, $LUSD will always be the king who stands aloof and looks on coldly.

Why do I say $LUSD is the top stablecoin in DEFI?

First, the mortgage has and only ETH and is excess mortgage;

Second, the liquity protocol is non-upgradable, no one can change the smart contract, meaning that if there are no holes in the protocol at the beginning, there will never be a chance to introduce new ones, so it is very safe;

Third, there will be almost no downward unanchoring, because the protocol provides the mechanism of redeeming ETH by 1 dollar, so the value is very guaranteed.

Fourth, anti-censorship, @LiquityProtocol is not responsible for running the front end, he has a lot of third party front ends, it is impossible to block.

Holders of $LUSD definitely enjoy the best times of market volatility, and have been shedding anchor for most of the past year, reaching as high as $1.05, which at one point made me wonder if he would ever come back.

稳定币

随着最近对$USDC 和 $BUSD 的 FUD, liquity 的项目Token $LQTY 突然暴力涨了一波。项目绝对是好项目，但却也并不是一个太赚钱的项目，至少对于 $LQTY Token 的持有者来说，别问我怎么知道的，挖了一年多的 $LQTY 的用户心里苦啊。

这就是一个典型的好项目不等于好 Token 的范例了。

稳定币

Why use liquity, isn't makerDao great?

Before May 2021, all my DEFI career had to do with makerdao. As one of the earliest players to participate in the founding crowdfunding of Ethereum in 2014, my belief in Ethereum can be said to be carved in my genes. It is my consistent style to accumulate Ethereum continuously and never sell one over the years.

But if you need some money to move around in your life or in your investments, defi is the perfect way to do it. Compared with makerdao, liquity has the following advantages in borrowing stablecoin by mortgating ETH:

1. Lower clearing line and higher fund utilization rate.

liquity's col. ratio is only 110%, compared with 150% for makerdao at the same period. That is to say you have pledged $1500 ETH in makerdao and can only lend $1000 dai at most, but if the ETH drops a little, you will be liquidated. On liquity, you can afford to borrow $1,000 from lusd, and the ETH value of the mortgage falls to $1,100.

2. Interest-free loans and interest-bearing loans

You only need to pay 0.5% one-time Borrowing Fee to borrow stablecoin through liquity, while makerdao has annual charge varying from year to year. At present, there are two types, one is low rate borrowing, coll. ratio must be kept above 170%, and annual charge is 0.5% per year. The other is medium rate lending. The coll. ratio must be kept above 145% and the annual fee is 1.5% per year.

For a crypto user who wants to stay out of ETH for good while maintaining some cash flow, liquity is undoubtedly a more rational alternative to makerdao.

Why usage is so Awkward

With all that blowing, it's time to talk about liquity's awkward situation. You say lusd is so good, why doesn't anyone use it?

I think it is because there are very few decentralized stablecoin users who really need to resist censorship. People come to the currency circle mainly to make money, unlike the so-called geeks, who are very silly and naive, with beliefs and ideas. Most people prefer the convenience of a centralized stablecoin, which is fine, but don't panic every time you have FUD.

In my opinion, if you are going to use a cold wallet to lock up a certain amount of cryptocurrency assets and even pass them on to future generations, then for the stablecoin part, you have to use lusd. After all, century-old stores are rare, not to mention the company's centralized stablecoin.

Most of the $lusd borrowed through liquity is in the liquity project's own stability pool (which has been kept between 60% and 70%) and not used in other scenarios.

稳定币

The demise of liquity's expansion and chicken bonds

$lusd lacks applications, and @chicken bonds is the perfect opportunity to address that.

Chicken bonds mechanism is very complex and delicate, simple point said there is the chicken bonds lusd pool is divided into three nominal (pending, reserve, parnament), But only the lusd of one pool can enjoy the full revenue (reserve) of the three pools, and $blusd is used to represent the share of the user in this exclusive revenue pool.

稳定币

At the beginning of the project, blusd had a very high nominal APR, reaching a very high nominal APR of 70blusd.

So chicken bonds' system could keep rolling. As can be seen from the figure below, the $blusd maret price was once much higher than the fair price at the beginning of the project.

稳定币

The creativity of this mechanism design is really very good, but all the calculus of the mechanism designer has not been realized in practical application. From a macro perspective, chicken bonds hardly bring too many positive externalities to liquity. The TVL of the agreement has not changed much after the launch of chicken bonds. In my opinion, it can only be said that the $lusd originally placed in the stability pool has entered chicken bonds, and there is still mutual fighting between funds in the market. As a result, the initial high APR was just an illusion. The wheels of chicken bonds traveling at high speed gradually stopped slowly due to various frictions and losses in reality.

稳定币

From my personal experience, due to my curiosity about this novel mechanism, I also created three bonds at different times and participated in this experiment. However, two of them were cancelled in the end, and the other one still didn't get his money back after holding it for more than 100 days. Fortunately, the mechanism of chicken bonds does not cause you to lose money. It's just a lot of lost opportunity cost.

At present, the price of $blusd has been infinitely close to his floor price, and is further and further away from the lower limit of the fair price. chicken bonds have already entered a death spiral to some extent.

稳定币

As the price of $blusd went down, no one's bonds were profitable, so no one went to rebond. A large number of users cancelled their bonds to exchange for $lusd and stopped participating. There is also no incentive for newcomers to get in because it no longer pays to create bonds.

This also causes the precipitous plunge of pending pool, the ratio of pending/reserve keeps declining, and the blusd income multiplier also keeps falling, the blusd APR drops sharply, the market premium is negative, and the price of $blusd drops. Hence the death spiral of chicken bonds.

稳定币

From the above logical reasoning, if chicken bonds fail to trigger system externality input, that is to say, it will bring a large number of new users to liquity, improve TVL, and increase the scale of $lusd. It seems that failure is inevitable. As the second law of thermodynamics states, an isolated system spontaneously evolves toward a state of maximum entropy in the direction of thermodynamic equilibrium. A second kind of perpetual motion machine that expects users to keep rebond will never be possible.

Temporary measures:

Can we say that chicken bonds have failed? It may be too early to say. If chicken bonds were to transfer lusd from the permanent pool to the reserve pool, Immediately, the floor price of blusd will be significantly increased, directly benchmarking the net asset value shown in the figure below. This is a potential 6% upside gain, with the risk of actually falling to the current floor price and a 0.9% downside exposure.

稳定币

The chicken bonds might be able to run a little longer after that, but there is no telling whether they will. Personally, I think parnament pool is designed to maintain lusd lusd / 3 CRV on the curve of the pool to balance, since has now been balanced and there is no need to maintain a pool parnament, promote blusd price is the core of the agreement to continue running.

总的来说，我对 chicken bonds 还是比较悲观的，对于没有外部资源输入，仅仅是在封闭系统里空转，不管是 lusd 还是 blusd 的收益，都是来自于 liquity 项目方的 Token 奖励 $lqty，这样的系统花样玩的再多，恐怕也是零和博弈。

While chicken bonds have become the drags on liquity's expansion, $lusd's woes run deeper than that.

Over time, Ethereum itself is undergoing profound technological change. The upcoming shanghai fork is Staking a claim on the riskless interest rate that LSD (Liquid Staking Derivatives) would offer relative to a U.S. Treasury bond on the cryptocurrency side.

This means that simply holding ETH as before has a great opportunity cost. If 100 ethereum pieces in your hand can earn you a risk-free return of 4 ethereum pieces per year, then in various lending platforms now, you may dare to lend out 1/3 position of stablecoin in the long run, not counting the rate. You'd have to earn a steady 12 percent annualized return to barely break even. This level of security and consistent revenue is not easy to find in defi. If you take into account the rates, warehousing fees, and gas fees, I estimate that at least 15% of APY is required to be able to directly participate in Ethereum pledge.

结果就是，很多用户会把 liquity 中的仓位还清，取出 ETH 拿去进行质押，这样 liquity 面临的就是 TVL 不断缩减的局面，更要命的是，用于 stability pool 挖矿的项目 Token $lqty 已经所剩不多，这个矿池相当于是 $lusd 的无风险利率，一旦降到 0，这些 $lusd 还有没有新的去处就会成疑。

As one of liquity's most loyal users, I had to pay off some of my loans and take back some of my aether as collateral because of this thinking. I'd love to see liquity accept some LSD as collateral, but... This would certainly lose $lusd's status as the most censor-resistant, decentralized stablecoin.

Otherwise, $lusd will become a stablecoin used only by a small group of geeks and even hackers, and MakerDao will take over the LSD mortgage and start expanding again.

And this is a very dangerous path for the entire defi and Ethereum community.