In the world of cryptocurrencies, stablecoins and decentralized finance (DeFi) protocols are quickly becoming core components of the market. Liquity Protocol is a decentralized lending platform that allows users to use ETH as collateral and withdraw loans with zero interest. This article will introduce in detail the functions, reward mechanism and role of the LQTY token in the Liquidity protocol.
Liquity Protocol Overview
Liquity is a decentralized lending protocol that allows users to use Ethereum (ETH) as collateral to withdraw loans at 0 interest. The main goal of the protocol is to provide a more capital efficient and user-friendly way to borrow the stablecoin LUSD. The Liquity protocol requires no governance, ensuring it remains decentralized.
LQTY token introduction: LQTY is a secondary token issued by the Liquidity protocol. Its main functions include capturing fee revenue generated by the system and incentivizing early adopters and front-end operators. The total supply of LQTY tokens is capped at 100,000,000.
LQTY’s reward mechanism
LQTY rewards are mainly targeted at the following three types of users: 1. Stability pool depositors: users who deposit LUSD into the stability pool. 2. Front-end Operator: The front-end operator that facilitates these deposits. 3. Liquidity provider: LUSD:ETH The liquidity provider of the Uniswap pool.
Starting on April 5, 2021, the Liquidity protocol allocated 1,333,333 LQTY to liquidity providers of the LUSD:ETH Uniswap pool over a 6-week period. Liquidity providers can increase the liquidity of the LUSD:ETH Uniswap pool and receive UNIv2 tokens on the exchange. These UNIv2 tokens can then be put into Liquidity’s Unipool reward contract via the Liquidity frontend, thereby earning LQTY rewards.
How to get LP rewards
Users can obtain LP rewards through the following steps: 1. Increase liquidity: Add liquidity to the LUSD:ETH Uniswap pool. 2. Obtain UNIv2 tokens: Obtain UNIv2 tokens in the exchange. 3. Place the UNIv2 token into the Unipool reward contract through the Liquidity front-end.
If the selected front-end does not support LP rewards, users can find other front-ends that support LP rewards in the Liquidity.org front-end list.
LQTY value analysis: The value of LQTY tokens mainly comes from the fee income generated by its capture system and incentivizes early adopters and front-end operators. LQTY’s reward mechanism is based on the protocol’s pre-programmed functionality and not on claims against Liquidity AG or any third party.
Staking LQTY Tokens
LQTY holders can stake their tokens to earn fees generated from loan issuance and LUSD redemptions. To start staking, users simply deposit LQTY tokens into the Liquidity staking contract. Once completed, users will earn lending and redemption fees in LUSD and ETH proportionally.
Community issuance of LQTY: The community issuance of LQTY follows an annual halving schedule, described by the following function: 32,000,000 * (1 - 0.5^year). This issuance curve is designed to favorably incentivize early adopters while maintaining long-term incentives.
The future of the Liquidity protocol
The Liquidity Protocol will be interpreted differently from different standpoints, but its excellent mechanism gives it a place in the market. Liquity has been constantly optimizing and innovating, and its new liquidation mechanism is superior to other decentralized lending protocols such as MakerDao in terms of efficiency and mortgage rate.
The use cases of LUSD, the stable currency in Liquity, are also constantly penetrating to the outside world. Over time, we believe that the Liquidity protocol will become a decentralized stablecoin system that can be widely used and occupy a considerable market share.
In summary: LQTY token, as an important part of the Liquidity protocol, provides users with abundant income opportunities through its unique reward mechanism and value capture function. As the Liquidity protocol continues to develop and optimize, the value and application prospects of LQTY tokens will continue to grow.