In the current world of blockchain and decentralized finance (DeFi), Liquidity is a high-profile project. As a governance-free lending platform, Liquity allows users to lend the stablecoin LUSD and earn income by staking LQTY tokens. This article will introduce in detail how to perform LQTY token staking operations in Liquity, as well as the related benefits and risks.
How to perform LQTY token pledge operation? To start staking, you first need to deposit your LQTY tokens into Liquity’s staking contract. The specific steps are as follows:
Prepare LQTY tokens: Make sure you have enough LQTY tokens.
Connect wallet: Connect to the Liquity platform using a compatible wallet such as MetaMask.
Deposit LQTY tokens: Deposit LQTY tokens into Liquity’s staking contract.
Once you complete these actions, you will start earning a proportional share of your lending and redemption fees in LUSD and ETH.
Pledge income calculation
How much profit can you get from staking LQTY tokens? This mainly depends on the following factors:
Fees incurred: The moment a fee is incurred, your LQTY token stake will receive a share of the fee equal to your share of the total LQTY stake.
Total staked: The more total LQTY tokens staked, the smaller share of the proceeds you receive, and vice versa.
It is worth noting that Liquidity has no lock-up period and you can withdraw your pledged funds at any time.
Purpose of pledge
The staked LQTY tokens will not be used to support the Liquity system, nor will they be used for governance. This is different from other DeFi projects (such as Maker) because Liquity is a governance-free system.
What is recovery mode? In the Liquity system, recovery mode is activated when the total collateral ratio (TCR) falls below 150%. The purpose of the recovery mode is to encourage borrowers to quickly increase their TCR above 150% and incentivize LUSD holders to quickly replenish the stability pool.
Total Collateral Ratio (TCR)
The total collateral ratio is the ratio of the total USD value of collateral at the current ETH:USD price to the total debt across the entire system. In other words, it is the sum of the collateral of all Troves expressed in USD divided by the debt of all Troves expressed in LUSD.
Operation of recovery mode: When the system enters recovery mode, the treasury of borrowers with mortgage rates lower than the TCR will be liquidated. Additionally, the system blocks borrowers’ transactions, further reducing TCR. New LUSD can only be achieved by increasing the mortgage rate of an existing treasury or opening a new treasury with a mortgage rate >=150%.
Cost during recovery mode
In recovery mode, redemption fees are not affected, but borrowing fees are set to 0% to maximize incentives for borrowing (within the limits mentioned above).
How do I protect my vault in recovery mode? To protect your hoard in recovery mode, you need to increase your collateral ratio to 150% or higher. This can be achieved by:
Add Collateral: Increase your ETH collateral.
Debt Repayment: Pay off some or all of your LUSD debt.
Simultaneous operations: increasing collateral and paying down debt at the same time.
If your vault's collateral ratio falls below 150%, you will be exposed to liquidation risk.
Liquidation process: In recovery mode, liquidation losses are capped at 110% of the collateral in the treasury. Any remaining portion, i.e., collateral above 110% (and below TCR), can be recovered by the liquidated borrower using a standard web interface. This means that if your vault is liquidated, you will face the same liquidation "penalty" as in normal mode (10%).
in conclusion
Staking LQTY tokens in Liquity is a relatively simple process, but it requires you to understand the associated benefits and risks. By staking LQTY tokens, you can earn lending and redemption fees in LUSD and ETH. At the same time, understanding the recovery model and its operating mechanism can help you better protect your treasure trove and avoid liquidation risks.
Overall, Liquidity provides a decentralized lending platform that requires no governance and provides users with multiple income opportunities. However, as a user, you need to keep an eye on the system's total collateral ratio and take action when necessary to ensure the safety of your assets.