[Company Watch] PolyQuity, the Liquity of Polygon

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Coinmonks

7 min readAug 4, 2021

PolyQuity is a fork of the Liquity protocol, which is a decentralized borrowing protocol on Ethereum, in the Polygon network. PolyQuity has the features and benefits consistent with the Liquity protocol. In addition, based on the concept of Liquity, it has designed a new tokenomics to adapt to the Polygon network.

Like Liquity, the front-end is supposed to be run by third-parties. In the case of Polyquity, it’s run by Liquity.fi, one of Liquity front-end runners. At the time of writing, PolyQuity has $42.0 million in TVL.

Tokens and Tokenomics

For reference of Liquity Protocol, pleaes refer to our earlier article: Liquity, the Challenger of MakerDao.

Mint a Stablecoin: PUSD

PUSD is the native stablecoin of Polygon and can be minted by staking Matic in Polyquity, like staking Ether in Liquity on Ethereum. PUSD pegs to USD and currently can be borrowed and repaid in the PolyQuity protocol. Whilst its market price might not be always $1, at any time it can be redeemed against the underlying collateral at face value. For most of the time, its price was higher than $1, due to the farming incentives of the protocol.

The ability to redeem PUSD for Matic at face value (i.e. 1 PUSD for $1 of Matic) and the minimum collateral ratio of 110% create a price floor and price ceiling (respectively) through arbitrage opportunities. These are “hard peg mechanisms” since they are based on direct processes. PUSD also benefits from less direct mechanisms for USD parity — called “soft peg mechanisms”. One of these mechanisms is parity as a Schelling point. Since PolyQuity treats PUSD as being equal to USD, parity between the two is an implied equilibrium state of the protocol. Another of these mechanisms is the borrowing fee on new debts. As redemptions increase (implying PUSD is below $1), so too does the baseRate — making borrowing less attractive which keeps new PUSD from hitting the market and driving the price below $1.

The Flatform Token: PYQ

PYQ is the secondary token issued by PolyQuity. It captures the fee revenue that is generated by the system and incentivizes early adopters. The total PYQ supply is capped at 1,000,000,000 tokens. PYQ can be staked in the PYQ pool in Polyquity, and be entitled to protocol revenues from:

Borrowing Fee (so far $274k PUSD): the fee charged for minting PUSD
Transfer Fee (1.59m PYQ): the fee charged for transactiong PYQ, starting from 10% and gradually reduced to 1%
Redemption Fee (2027 Matic): the fees charged fro redeeming Matic

At the beginning, transactions of PYQ will incur a cost of 25%, being 10% fee to the PYQ pool and 15% burnt. This will be reduced to 4%+1% after 3m of PYQ is burnt. Therefore, at this moment, transacting PYQ requires changing the slippage tolerance to more than 33.4% for the transaction to go through.

How To Use Polyquity

Borrowing (and Repaying):

PolyQuity protocol offers interest-free loans and. Currently, PolyQuity only supports Matic as collateral. To borrow you must open a Trove which ia similar to Vaults or CDPs from other platforms and deposit a certain amount of collateral (Matic) to it. Then you can draw PUSD up to a collateral ratio of 110%, vs MakerDao’s minimum of 130%. A minimum debt of 100.00 PUSD is required.

Every time you draw PUSD from your Trove, a one-off borrowing fee is charged on the drawn amount and added to your debt. The fee rate is confined to a range between 0.5% and 5% and is multiplied by the amount of liquidity drawn by the borrower. A 10 PUSD Liquidation Reserve charge will be applied as well, but returned to you upon repayment of debt. Loans issued by the protocol do not have a repayment schedule. You can leave your Trove open and repay your debt any time, as long as you maintain the minimum collateral ratio of 110%.

Redemption:

Users can redeem their PUSD for Matic at any time without limitations. However, a redemption fee might be charged on the redeemed amount. Under normal operation, the redemption fee is given by the formula baseRate * Matic drawn. The baseRate increases with each redemption, and decays according to time passed since the last fee event, i.e. the last redemption or issuance of PUSD.

If your Trove is redeemed against, you do not incur a net loss. A redemption is the process of exchanging PUSD for Matic at face value, as if 1 PUSD is exactly worth $1. That is, for x PUSD you get x Dollars worth of Matic in return.owever, you will lose some of your Matic exposure. Your Trove’s collateral ratio will also improve after a redemption. The best way to avoid being redeemed against is by maintaining a high collateral ratio relative to the rest of the Trove’s in the system. The riskiest Troves (i.e. lowest collateralized Troves) are first in line when a redemption takes place.

Two Ways to Invest in PUSD the Stablecoin:

1) Stability Pool

The Stability Pool is funded by users transferring PUSD into it (called Stability Providers). Over time Stability Providers lose a pro-rata share of their PUSD deposits, while gaining a pro-rata share of the liquidated collateral. When any Trove is liquidated, an amount of PUSD corresponding to the remaining debt of the Trove is burned from the Stability Pool’s balance to repay its debt. In exchange, the entire collateral from the Trove is transferred to the Stability Pool. The APY is currently 45.68%.

A Stability Provider also benefits from early adopter rewards. After you open a Trove, borrow PUSD, and deposit it to the Stability Pool, you will start accumulating a reward (in PYQ) proportional to the size of your deposit on a continuous basis. The reward is calculated according to the rewards schedule and the kickback rate of the front end that you used for making the deposit. Rewards will be the highest for early adopters of the system. At any point in time, you can withdraw your pending rewards to your Matic address. You can withdraw the deposit made to the Stability Pool at any time. There is no minimum lockup duration. However, withdrawals are temporarily suspended whenever there are liquidatable Troves with a collateral ratio below 110% that have not been liquidated yet.

2) Farming:

You could also earn PYQ via staking LP tokens. Firstly, you will need to add liquidity on Sushiswap.

The APR is 26.40% currently. However, there is a 25% charge on any transaction of PYQ for now. This will soon decrease to 5% when the number of burned PYQ reaches 3 million.

This means that the real APR after deducting the transfer fee should possibily be 19.8%. This is lower than what Mai Finance is currently offering. At this moment, Polyquity’s competitor, Qi Protocol (the Polygon fork of MakerDao), has a higher APR of 26.43%.

Moreover, it’s possible to autofarm on platforms like Autofarm, for the automatic compounding services at a small fee.

Risks That We Concern

First and foremost, this is an anonynous team. As we mentioned above, it’s run by Liquity.fi, one of Liquity front-end runners. Whilst Liquity is run but a number of front-end runners, Liquity.fi is the only one for Polyquity; and both are anonynous. There might be some association between these two protocols, but the evidence in the public dormain is not sufficient to make any claim.

In addition, another risk that we concern is pertinent to the price of PUSD. Currently, its price is $1.0583. This is the results of high PYQ yields at the moment. As the design of Polyquity is to maintain the PUSD to be $1, this pegging will lead to a loss to the users.

(By YQ, Serenity Team, 4 Aug 2021, twitter: https://twitter.com/SerenityFund )

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[Company Watch] PolyQuity, the Liquity of Polygon

Tokens and Tokenomics

Two Ways to Invest in PUSD the Stablecoin:

Risks That We Concern

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Written by The Serenity Research