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Stablecoin Spotlight on Liquity USD (LUSD)

A simpler version of DAI


  • LUSD is a simpler version of DAI and can only be collateralised by Ether, not by USD or WBTC or anything else

  • LUSD just has one standardized offering, with liquidation thresholds at 110% and 150% collateralisation

  • A note on smart contract security

LUSD is a simpler version of DAI

DAI is a crypto backed stablecoin issued by Maker against crypto collateral. At present, much of the issued DAI is backed by USDC, which in principle can be blocked/seized by Circle, it’s issuer.

Liquity USD only allows for collateralisation by Eth, so it’s simpler in that regard.

LUSD just has one standardized offering, with liquidation thresholds at 110% and 150% collateralisation

Maker allows DAI to be issued more flexibly, so there are a range of collateralisation limits (and hence interest rates) possible:

LUSD instead has no borrow rates but has a one-off borrow fee (0.5% right now) that varies in an automatic way depending on market conditions. So, LUSD has more homogenous backing. This is nice if you are borrowing against your Eth because, while you do have to worry about collateralisation, you don’t have to worry about soaring interest rates if market conditions change. has the full details of the liquidation mechanism. It’s a cascaded mechanism, and the protocol pays incentives to cover gas costs to liquidators.

A Note on Smart Contract Security

Just a comparison from on Maker versus Liquity and one can see Liquity scoring more highly:

When you dig deeper, you see that MakerDAO scores less well on quality of code and also on Team.

Decentralisation and Risks

From the start, the founders have made Liquity governance minimised, which I’m a fan of. I do note at least the following risks, take from Palazov and Kalinov:

Overall Thoughts

Part of me thinks that the only secure (in the sense of de-peg risk) stablecoins are those that are fiat collateralised (and they come with risk of de-peg via seizure or blockage of the underlying collateral).

Still, if I’m to give a chance to overcollateralised coins, then I think those with robust liquidation systems are perhaps in with a the best chance. I like the simplicity of Liquity USD and see how it is particularly attractive as a tool for leverage (which one should always be wary of overusing). I’ve bought a very small amount of LQTY and will try out borrowing LUSD. Risky stuff though, I very much expect most of these stables to fail.

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