In this post, I’ll be providing a step-by-step guide on how to borrow LUSD against your ETH using Liquity.
If you don’t know what Liquity is, it’s a decentralized borrowing protocol that allows you to draw interest-free loans against Ether used as collateral. Loans are paid out in LUSD (a USD pegged stablecoin) and need to maintain a minimum collateral ratio of 110%.
Choosing a Liquity frontend
Choosing an access point for Liquity isn’t as straightforward as other protocols and if you go to liquity.org, you’ll notice there’s several of them.
Full list of frontends here
That’s because Liquity runs on decentralized frontends. In other words, the team behind Liquity doesn’t run a frontend of their own and instead relies on its distributed ecosystem to provide access to the protocol. As a user, this means you’ll have to browse through the available options and pick a frontend that you feel comfortable using. I’ve personally used the three highlighted in the image above.
You’ll see that each frontend has a “kickback rate”. If you’re simply borrowing, this will not affect you. However, these will come in to play when we discuss Stability Pool deposits in a future tutorial.
Opening a Trove
After choosing a frontend, you’ll find a Trove panel that looks something like this:
In Liquity, a Trove represents your debt position. It’s where you deposit your ETH collateral, borrow your LUSD, pay back your debt, and reclaim your ETH collateral. If you’re coming from Maker: this is your Vault.
After finding the Trove panel, you’ll want to specify how much ETH collateral you’d like to deposit and how much LUSD you’d like to borrow. It will look like this:
Here I’m opting to deposit 4 ETH as a collateral in order to borrow 2,000 LUSD — the minimum amount of debt you can have.
You’ll also notice three other important numbers:
- Liquidation Reserve — This is 200 LUSD subtracted from the LUSD you’ll receive that is set aside in case your position is liquidated. It is not a fee and is returned to you upon repayment of debt.
- Borrowing Fee — This is the upfront fee you pay to borrow LUSD from Liquity. There are no interest rates, no fixed loan duration, and no fees upon repayment. Pretty good deal right?
- Collateral ratio — This is the ratio between the value of the collateral in your Trove and your debt in LUSD. The collateral ratio is required to be at least 110% (which is risky). I’ll cover this in more detail in the next section. For now, I’d recommend staying above 150%.
After checking the numbers and ensuring that you’re satisfied with the amount of collateral you’re depositing and debt you’ll be taking out, you can finally borrow your LUSD.
In this case, when the Liquidation Reserve is set aside and the Borrowing Fee is paid, you’ll be actually receiving 1,791.04 LUSD.
Managing Your Trove
Once you’ve borrowed LUSD against your ETH, you’re free to do what you want with it (e.g. sell it for more ETH or deposit to the Stability Pool). Though in order to avoid liquidation, you’ll have to manage your Trove and eventually pay back your debt to reclaim your ETH collateral.
For the most part, managing your Trove is straightforward: make sure your collateral ratio stays above 110% and, if possible, above 150%. If your collateral ratio drops below 110%, your Trove will be liquidated and you will lose your ETH collateral, while you’ll get to keep your borrowed LUSD. Staying above 150% protects you from liquidation if Liquity enters Recovery Mode, but again, I’ll save that topic for a future post. In the meantime, read Liquity’s FAQ on maintaining a safe collateral ratio. I’d also recommend reading Liquidations and Redemptions in Liquity to further understand the risks.
Anyways, the most common cause of a decreasing collateral ratio is ETH’s volatility. When the price of ETH starts drawing down, so will your collateral ratio. If you’ve only borrowed the minimum amount of LUSD (2,000), then the only way to increase your collateral ratio is by depositing more ETH to your Trove. If you’ve borrowed well over 2,000 LUSD, then you can simply pay back some of your debt in order to increase your collateral ratio. All this to say: when ETH is volatile, be sure to keep a close eye on your Trove.
The final step in Trove management is paying back your debt to retrieve your ETH collateral. To do this, simply acquire enough LUSD to pay back your (total debt — 200 LUSD) and click “Close Trove” on your frontend’s borrow panel. This will pay back your debt and give you back your ETH collateral. Your job here is done, degen.
And that’s it! You’re all set to start using Liquity for your borrowing needs.
If you’d like to explore Liquity further, check out their documentation or join the community Discord — You can find me there too!
