Memo to: The Archimedes Community
Re: Liquity: Money for nothing and LUSD for a fee
If you wanted to put your Ether to work, you could collateralize it and borrow some DAI and stake it somewhere like in Curve…OR you could use Liquity. Why would you do such a thing? Well we’re so glad you asked! In this memo, we hop into the deep end of Liquity (see what I did there?).
The first thing that jumps out at you when you visit their website is that you can borrow their stablecoin, LUSD, for 0% interest. Like literally, it is the first thing you see…
Free money you say? Goooo on…
The next cool feature about Liquity is that it is capital efficient, only requiring 110% collateralization rate. However, that low collateralization rate comes with a big ole honking gotcha, which we’ll get into later.
In addition, Liquity is immutable, has its own decentralized stablecoin, blah blah blah…ok now let’s get into how you earn that sweet sweet APY!
With Liquity, you collateralize your ETH in exchange for LUSD. You can take your LUSD and stake it on Curve, exchange it for another token, exchange it for more ETH, or stake it with Liquity in their stability pool. The stability pool is critical for ensuring LUSD can keep its peg to the dollar.
Should you decide to stake with Liquity, you don’t just earn transaction fees but also liquidated ETH at a discount. It works like this, say George wants to put his ETH to work and decides to collateralize it on Liquity to get LUSD. His ETH goes into a ‘trove’, which is the collateral to the LUSD borrowed.
If for whatever reason, George’s collateralization drops below 110% (the minimum allowed collateralization ratio) he can be liquidated immediately! While he gets to keep his LUSD, his collateralized ETH gets redistributed out to the stakers in the Liquity stability pool.
Why this is interesting is because it can be a hedge against a bad market (kinda like the one we’re in right now). You actually want the price of ETH to drop so you can benefit from liquidations. Also, you can see the balance of Liquity’s stability pool to gauge the health of the system and mitigate your risks.
Anyone who participates in the protocol has the right to call the liquidation function on troves that have dipped below 110%. As a reward for triggering the liquidation, you get some bonus ETH and your gas fees covered.
Ok so now we have to talk about leverage. Let’s say George is super stoked on LUSD and wants to lever up his investment. The only way to do it today is to take his LUSD and exchange it for ETH in another liquidity pool. He can then deposit his ETH into his trove and take out more LUSD (as long as his collateralization ratio stays above 110%). George can do this 11x before he is capped off.
Obviously, this method is labor intensive and comes with a risk that the price will change while he’s leveraging up. Why isn’t there a better way???
We’ve accidentally (wink wink) hit on one of the core problems we’re building Archimedes to solve. Let’s say we’re in a future world where we’ve partnered with Liquity. Our system would say to George, ‘Bro it’s so awesome you’d like to lever up with Liquity, how does 5x sound?’ All in the backend, we do all the work of staking the 5x LUSD in the Liquity stability pool. George has just seamlessly levered up and now stands to 5x his returns!
So now that you understand (at least a little), an interesting future strategy to consider is to use Archimedes to lever up your investment on Liquity to capitalize on the downward pressure we’re seeing across all markets. It is a way to hedge against inflation and the drop of value for ETH. The best part is, you don’t have to cash out your ETH! As long as you keep your trove above the 110% collateralization rate, you can ride out this current storm and be ready with fresh ETH to attack the next bull market.
Archimedes is not currently live, but we’re close! If you’d like to learn more c’mon down and visit our site: https://archimedesfi.com/ and join our waitlist.
October 11th, 2022