LibraryCredit 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.
- Evidence
- Primary paper
- Re-measured
- No
- Assumptions
- 4
- Records linked
- 6
Code
Source, repository, and what is actually hosted
- Liquity whitepaperhttps://github.com/liquity/dev/blob/main/papers/Liquity-Whitepaper.pdf
- liquity/devRepository taken from the source URL. No other study cites this repository. This is not an audit.
- Full text is not mirrored. Public availability is not a licence to copy the file onto this site.
- Add to a reading list
01 Claim ledger
What the paper is allowed to say
Each row is a sentence already in the study. The status is the same on every row: a model claim, not a live measurement.
Claim 01 · Paper model
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.
Claim 02 · Paper model
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.
Claim 03 · Paper model
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.
Claim 04 · Paper model
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.
02 Three cuts
Observation, model, falsifier
A desk does not stop at the summary. Each claim is cut three ways, using only this study's own assumptions and checks. Nothing here is a new figure.
01 The trove is the position
Observation
What the study says
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.
Model
What has to hold
Someone liquidates underwater troves promptly. A delayed liquidation leaves the pool with debt that the collateral no longer covers.
Falsifier
What would retire it
Can the stable token be redeemed, and against which loans?
02 The stability pool eats liquidations
Observation
What the study says
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.
Model
What has to hold
Someone liquidates underwater troves promptly. A delayed liquidation leaves the pool with debt that the collateral no longer covers.
03 Redemption is aimed at the weakest
Observation
What the study says
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.
Model
What has to hold
The ether price used by the system is available. The paper inherits an oracle problem it does not solve by slogan.
Falsifier
What would retire it
Can the stable token be redeemed, and against which loans?
04 Recovery mode is a second regime
Observation
What the study says
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.
Model
What has to hold
Someone liquidates underwater troves promptly. A delayed liquidation leaves the pool with debt that the collateral no longer covers.
Falsifier
What would retire it
What does recovery mode change about the floor?
03 Sequence
One action, as an operating tape
- 01A borrower deposits ether and mints the stable token, paying the issuance fee, subject to the minimum ratio.
- 02If the ether price falls and the trove crosses the floor, it can be liquidated into the stability pool.
- 03Stability-pool depositors lose some of the stable token and gain a share of that ether.
- 04If the stable token trades cheap, a redeemer buys it on the market and redeems it for ether from the riskiest troves.
- 05Those troves shrink or close. The supply of the stable token falls.
04 Load-bearing
The argument, and where a pitch drops it
Governance minimisation is not the absence of rules
The cut
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.
Why it carries weight
If this cut is skipped, the paper's name is being used without the mechanism that makes the name mean anything.
Where it is dropped
A design without a governance token does not mean a design without parameters, or without a later version that changed them.
The peg is a trade, not a reserve
The cut
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.
Why it carries weight
If this cut is skipped, the paper's name is being used without the mechanism that makes the name mean anything.
Where it is dropped
The stable token is a claim on the mechanism, not a claim on dollars in a bank.
05 Register
What has to be true
Network · Not re-measured
Someone liquidates underwater troves promptly. A delayed liquidation leaves the pool with debt that the collateral no longer covers.
Data · Not re-measured
The ether price used by the system is available. The paper inherits an oracle problem it does not solve by slogan.
Model · Not re-measured
Stability-pool depositors exist. An empty pool changes who bears the loss.
Model · Not re-measured
Redemptions are not switched off. If they are, the paper's peg mechanism is not the one running.
06 Divergence
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.
A later client, parameter set, or reward formula is a different object. Cite this paper for the mechanism. Cite a primary release for the network. This desk has not re-run the proof.
07 Pre-mortem
What to check before you use the idea
- 0 of 4 marked on this browser. A mark is a reading note, not a pass, a rating, or a recommendation.
08 Anatomy
The paper, in the order a builder needs
The problem it 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 the desk 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.
09 Lexicon
Terms, opened into the record
- Trove
- One borrower's collateral and debt position.
- Redemption
- Burning the stable token for collateral taken from the lowest-ratio loans.
10 Repository
Every linked record on this page
Underlined words open a page that already exists: a concept, a protocol profile, a failure record, or another paper. If a word is not underlined, this desk does not have a record for it.
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.