Library Credit and stable value2021Design paperCorpus record

Liquity: Decentralized Borrowing

Liquity. Robert Lauko and Rick Pardoe.

Borrow a stable-value token against ether, with a one-time fee instead of an interest rate. Troves are liquidated into a stability pool. Redemptions let the token be swapped for the collateral of the weakest trove. The paper does not promise a peg.

Liquity lets a borrower lock ether and mint a stable-value token, with a one-time fee rather than an interest rate. Liquidations are absorbed by a stability pool. Redemptions against the weakest loans are the peg mechanism. Neither is a promise that the token trades at a dollar.

The five-minute read

The trove is the position

Collateral goes in, the stable token comes out, and the collateral ratio has to stay above a floor. There is no interest clock. There is a fee when the loan is opened, which is a different incentive.

The stability pool eats liquidations

Depositors of the stable token repay underwater debt and receive the collateral. They are volunteering to buy seized ether at the protocol's terms. That can help them or hurt them. It is not a quoted yield.

Redemption is aimed at the weakest

Anyone can turn the stable token in and receive ether from the troves with the lowest collateral ratios. That is how the paper pushes the price back up when the token trades below face value. It does it by shrinking weak loans, not by promising a treasury.

Recovery mode is a second regime

When the system-wide ratio is low, troves can be liquidated at ratios that would have been safe a day earlier. Reading only the normal floor misstates the risk.

One action, walked through

A borrower deposits ether and mints the stable token, paying the issuance fee, subject to the minimum ratio.
If the ether price falls and the trove crosses the floor, it can be liquidated into the stability pool.
Stability-pool depositors lose some of the stable token and gain a share of that ether.
If the stable token trades cheap, a redeemer buys it on the market and redeems it for ether from the riskiest troves.
Those troves shrink or close. The supply of the stable token falls.

The argument, unpacked

Governance minimisation is not the absence of rules

The paper's point is to freeze the liquidation and redemption rules so a vote cannot quietly change them. A later deployment that adds governance has left that point. A frozen bad parameter is also still bad. Immutability is not wisdom.

The peg is a trade, not a reserve

There is no claim, in this design, that dollars sit in a bank. The token is worth what redemption and liquidation make it worth. Compare that with a reserve stablecoin and with Terra's reflexive mint, which is a third thing and a failure case.

What has to be true

Someone liquidates underwater troves promptly. A delayed liquidation leaves the pool with debt that the collateral no longer covers.
The ether price used by the system is available. The paper inherits an oracle problem it does not solve by slogan.
Stability-pool depositors exist. An empty pool changes who bears the loss.
Redemptions are not switched off. If they are, the paper's peg mechanism is not the one running.

What happened after the paper

Liquity shipped a version of this design and later discussed versions with different collateral and governance. The whitepaper is the citation for interest-free troves, the stability pool, and redemption against the weakest loans. It is not a description of every fork's parameters, and it is not evidence that the token held a peg on any given day.

What to check before you use the idea

Is the fee one-time or an interest rate?
Who receives seized collateral: an auction bidder or a stability pool?
Can the stable token be redeemed, and against which loans?
What does recovery mode change about the floor?

Terms

Trove: One borrower's collateral and debt position.
Redemption: Burning the stable token for collateral taken from the lowest-ratio loans.

The problem the paper names

Maker's design uses governance and a stability fee. Liquity asks for a borrowing system whose rules are hard to change, and whose liquidation does not depend on an auctioneer showing up in the same way.

What the design proposes

A trove: collateral in, stable token out, above a minimum collateral ratio.
A stability pool that absorbs liquidated debt and receives the collateral.
Redemption at face value against the lowest-ratio troves, which is the peg mechanism in the paper.

How the mechanism is specified

If a trove falls below the threshold, the stability pool pays its debt and takes its collateral. Depositors in that pool are taking liquidation inventory, not a quoted yield.
Recovery mode tightens the system when the overall ratio is low. Individual troves can be liquidated even above the normal floor.
Redemption is what should push the token back toward face value when it trades below. It costs the weakest borrowers their collateral.

What this page does not treat as proven

A design without a governance token does not mean a design without parameters, or without a later version that changed them.
The stable token is a claim on the mechanism, not a claim on dollars in a bank.
Nothing here is a rate a person should expect to earn. Stability-pool inventory can fall in value.

Why a venture studio still reads it

Compare the liquidation sink. Maker's paper uses an auction. Liquity uses a pool of depositors. If you cannot name who eats the collateral, you have not read the design.

This is Blockchain Lab's reading of a public design paper. It is not the paper, not a copy of it, and not an offer of tokens, equity, custody or a partnership. Later network behaviour can diverge from the text. Nothing here is investment, legal or technical advice.

Research status: Design paper. Last reviewed: 1 October 2026. This is a reading of a public paper, not investment, legal or security advice.