What is Liquity (LQTY)?
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🟢 The simple version
Plain English — no jargon. Start here.
Liquity is a decentralised ETH-only lending protocol where you borrow LUSD (a $1 stablecoin) against ETH collateral at 0% interest — you only pay a one-time borrowing fee and a refundable 0.5% liquidation reserve, making it one of the most capital-efficient CDP protocols in DeFi.
How 0% interest is possible
Traditional lending (Aave, Compound) charges ongoing variable interest. Liquity charges nothing ongoing — just a one-time fee of 0.5-1% when you open a position. The protocol earns money from this one-time fee (plus the 0.5% refundable liquidation reserve, which is returned when you close the position). For borrowers holding their position for more than a few months, Liquity is dramatically cheaper than variable-rate protocols. A borrower at 5% APY on Aave pays 5% per year; a Liquity borrower pays 0.5% once, forever.
LUSD is the stablecoin minted by Liquity. It is backed 110%+ by ETH (minimum collateral ratio). The $1 peg is maintained through: (1) hard redemptions — anyone can always redeem 1 LUSD for $1 of ETH directly from the cheapest collateralised positions; (2) stability pool — LUSD depositors in the stability pool earn ETH from liquidations, incentivising liquidity.
Immutability — Liquity's radical choice
Liquity has no admin keys, no governance, and no ability to upgrade the protocol. The smart contracts are permanently deployed and immutable. This is a deliberate design: governance introduces risk (governance attacks, bad parameter changes) and trust requirements. By removing governance entirely, Liquity gives users a predictable protocol that cannot be changed under them. The tradeoff: no new features, no bug fixes, no chain expansions — what you see is what you get forever.
Is LQTY legal in India?
Yes. LQTY qualifies as a Virtual Digital Asset (VDA) under Indian law. 30% tax on gains and 1% TDS applies. Always consult a tax professional.
🟡 A bit more detail
For when you want to go a little deeper.
Liquity v2
While Liquity v1 is immutable, the Liquity team built Liquity v2 as a separate protocol. v2 introduces multi-collateral support (not just ETH), user-set interest rates (borrowers choose their rate, which affects their redemption priority — lower rate = higher redemption risk), and other improvements. v2 is a new deployment; v1 continues operating independently with its own LUSD. Both coexist.
LQTY token — fee capture
LQTY earns fees from Liquity's borrowing activity. Staking LQTY earns LUSD (from borrowing fees) and ETH (from redemption fees). This is real yield — not emission rewards but actual protocol revenue from borrowing and redemption activity. LQTY total supply: 100 million. Unlike most governance tokens, LQTY has no governance function — it is purely a fee-sharing token, since the protocol is immutable.
Liquity's immutability means discovered bugs cannot be patched. This has worked so far — the protocol has operated without exploits since 2021 — but it remains a theoretical risk. The no-governance model also means LUSD cannot be added to new DeFi integrations that require governance approval for new collateral types. Live data: CoinGecko
🟣 The full technical picture
For the technically curious.
Key facts
- Token: LQTY (fee-sharing — no governance, immutable protocol)
- Stablecoin: LUSD ($1 peg, ETH-backed)
- Interest: 0% ongoing — one-time 0.5-1% borrowing fee only
- Collateral: ETH only (v1), minimum 110% collateral ratio
- Immutable: No admin keys, no upgrades, no governance — permanently deployed
- Peg mechanism: Hard redemptions (1 LUSD = $1 ETH always) + stability pool
- v2: Separate new deployment — multi-collateral, user-set rates
- Total supply: 100 million LQTY
- Backing: Pantera Capital, Polychain; raised ~$6M seed
Hard redemption mechanism
Liquity's LUSD peg is enforced via hard redemptions: anyone holding LUSD can at any time redeem it for exactly $1 worth of ETH from Liquity's collateral positions. The protocol automatically targets the riskiest (lowest collateral ratio) position first — that borrower has their ETH taken and their LUSD debt cleared. This creates a floor for LUSD: if LUSD trades below $1, arbitrageurs buy LUSD cheaply, redeem it for $1 of ETH, and profit. The arbitrage is risk-free as long as the protocol has sufficient ETH collateral, which is guaranteed by the 110% minimum ratio. This hard peg mechanism is more robust than soft pegs that rely purely on market confidence.