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What is Liquity (LQTY)?
Quick Facts
- Blockchain: Ethereum
- Protocol type: Decentralized borrowing and stablecoin protocol
- V1 stablecoin: LUSD (USD-pegged); V2 stablecoin: BOLD
- Loan model: Interest-free in V1; user-set rates in V2
- Minimum collateral ratio: 110%
- LQTY role: Fee capture, staking rewards, and liquidity incentive direction
- Launched: April 2021 on Ethereum mainnet
- Protocol design: Immutable smart contracts, no admin keys
Introduction
Liquity is an Ethereum-based decentralized borrowing protocol that lets users take out loans against their ETH collateral without paying ongoing interest. Loans are issued as a USD-pegged stablecoin — LUSD in V1 and BOLD in V2 — giving ETH holders liquidity without requiring them to sell their assets.
LQTY is the protocol's secondary token. It captures fee revenue generated by the system and rewards participants who support protocol stability.
History & Background
Liquity was conceived in 2019 by Robert Lauko, a former research associate at DFINITY. He partnered with lead engineer Rick Pardoe in 2020, and after 18 months of development, the protocol launched on Ethereum mainnet in April 2021.
The project secured funding from well-known crypto investors including Pantera Capital, Dragonfly Capital, and NFX. Its open-source codebase attracted significant attention, spawning over 35 forks across EVM-compatible networks.
In 2024–2025, Liquity released V2, introducing the BOLD stablecoin, support for liquid staking tokens (LSTs) as collateral, and a redesigned economic model for LQTY.
How Liquity Works
Borrowers lock ETH (or LSTs in V2) into a smart contract position called a Trove. In return, they receive freshly minted stablecoins. Each Trove must maintain a minimum collateralization ratio of 110%, keeping the system overcollateralized at all times.
Liquidity providers deposit stablecoins into the Stability Pool, which acts as the first line of defense in liquidations. When an undercollateralized Trove is liquidated, Stability Pool depositors absorb the debt and receive the collateral at a discount — creating a built-in profit incentive.
The protocol is fully immutable: once deployed, its smart contracts cannot be upgraded, and no admin keys or governance committees can alter its parameters. Frontends are operated permissionlessly by independent third parties.
Tokenomics
LQTY is the secondary token of the Liquity protocol. It does not confer governance rights over V1 but serves two key functions: capturing fee revenue through staking, and incentivizing stability providers.
Stakers who lock LQTY earn a share of borrowing and redemption fees generated by the protocol — making it a real-yield token backed by actual protocol revenue rather than inflation alone.
In V2, LQTY gains an additional role via a Protocol Incentivized Liquidity (PIL) model inspired by Curve's vote-escrow mechanics. Staked LQTY holders can direct protocol revenue toward liquidity pools they choose, giving the token a governance-adjacent utility.
Token allocations span the LQTY rewards pool, the team and advisors, investors, a community reserve, and an endowment held by Liquity AG.
|
Circulating supply
| 98.73 million LQTY |
|---|---|
| |
|
Total supply
| 98.21 million LQTY |
|
Max supply
| -- LQTY |
Ecosystem & Use Cases
Liquity's frontend operator model allows any developer to permissionlessly build an interface on top of the protocol. This creates a decentralized layer of UX competition while keeping the core protocol neutral.
LQTY is used to stake for fee revenue, earn rewards as a Stability Pool depositor, and — in V2 — direct protocol incentives. BOLD and LUSD can be used across DeFi for trading, lending, and yield strategies.
Team, Governance & Community
Liquity was founded by Robert Lauko (head of research) and Rick Pardoe (lead engineer), operating under the corporate entity Liquity AG. The V1 protocol is deliberately governance-free, meaning even the founding team cannot modify its smart contracts after deployment.
V2 introduces a soft governance layer via the PIL mechanism, allowing LQTY stakers to influence liquidity incentives without controlling core protocol parameters.
Advantages
- No ongoing interest — V1 charges a one-time borrowing fee instead of variable rates
- Immutable and trust-minimized — no admin keys, no multisigs, no upgradeable contracts
- Capital efficiency — 110% minimum collateral ratio is lower than many competing protocols
- Real yield — LQTY stakers earn from actual protocol fees, not token inflation
- Permissionless frontends — decentralizes UX layer and reduces single points of failure
Risks & Challenges
- Liquidation risk — borrowers must monitor collateral ratios or face automatic liquidation
- ETH price dependency — heavy reliance on ETH as collateral means sharp price drops threaten protocol health
- Immutability trade-off — the inability to upgrade contracts limits rapid responses to market changes or bugs
- LUSD demand decline — V1's stablecoin saw reduced adoption, motivating the V2 redesign
- Smart contract risk — as with all DeFi protocols, bugs in audited-but-immutable code carry permanent risk
Long-Term Vision
Liquity's long-term goal is to serve as a foundational DeFi borrowing primitive on Ethereum — immutable, censorship-resistant, and accessible to anyone. With V2 expanding collateral support to LSTs and introducing market-driven borrowing rates and the BOLD stablecoin, the protocol aims to stay relevant as the DeFi landscape matures. LQTY's evolving role in directing protocol incentives positions it as a key coordination tool within that ecosystem.
Frequently Asked Questions
- What is LQTY used for?
LQTY is the secondary token of the Liquity protocol. Holders can stake it to earn a share of protocol fees generated from borrowing and redemptions, and in V2 they can also direct protocol incentives toward liquidity pools of their choice.
- What is the difference between LQTY and LUSD?
LUSD (and BOLD in V2) are the USD-pegged stablecoins that borrowers receive when they take out loans. LQTY is the incentive and fee-capture token that rewards Stability Pool depositors and frontend operators.
- How does borrowing on Liquity work?
Users lock ETH as collateral in a smart contract position called a Trove and receive stablecoins in return. The loan carries no ongoing interest in V1 — only a one-time fee — and the position must stay above a 110% collateral ratio.
- What happens if my collateral drops in value?
If a Trove falls below the 110% minimum collateral ratio, it can be liquidated. The Stability Pool absorbs the outstanding debt, and depositors receive the liquidated collateral at a discount as compensation.
- Is Liquity safe from governance attacks?
V1 is fully immutable with no admin keys or governance mechanism, meaning no party — including the founding team — can alter its smart contracts. This design minimizes governance risk but also limits the protocol's ability to adapt quickly.
- What changed in Liquity V2?
V2 introduced the BOLD stablecoin, support for liquid staking tokens as collateral, user-configurable borrowing rates, and the Protocol Incentivized Liquidity (PIL) model, which gives LQTY stakers the ability to direct protocol revenue.
- Who founded Liquity?
Liquity was founded by Robert Lauko, a former DFINITY researcher, and Rick Pardoe, a Solidity developer. They launched the protocol on Ethereum mainnet in April 2021 after approximately 18 months of development.
- Does staking LQTY give governance rights?
In V1, staking LQTY provides no governance rights — the protocol is intentionally governance-free. In V2, staked LQTY holders gain the ability to direct protocol liquidity incentives through the PIL mechanism, a governance-adjacent but limited function.