Liquity
One of the most decentralized stablecoin protocols in DeFi. Liquity V1 (LUSD, April 2021) is a USD-pegged stablecoin backed solely by ETH at minimum 110% collateral, with interest-free borrowing, hard redemption mechanism, and fully immutable smart contracts — no governance over monetary policy. Liquity V2 (BOLD, 2024) adds user-set interest rates and multi-collateral (ETH, wstETH, rETH) while preserving the immutable, no-governance design. Survived multiple crypto crises without depegging.
Liquity is a decentralized borrowing protocol on Ethereum issuing USD-pegged stablecoins (LUSD in V1, BOLD in V2) backed exclusively by crypto collateral. V1 (April 2021) accepts only ETH at minimum 110% collateral with interest-free borrowing; V2 (2024) adds user-set interest rates and multi-collateral (ETH, wstETH, rETH). Both are deployed as immutable smart contracts with no governance over monetary parameters. From an M69 lens, Liquity is one of the most architecturally aligned DeFi stablecoins: zero fiat collateral, zero monetary governance, fully non-custodial, hard on-chain redemption, and an unbroken 4+ year peg track record through the 2022 crypto winter and 2023 USDC depeg (during which LUSD traded at a premium). Structural limits: USD unit of account, debt-based credit issuance, and DeFi-native rather than real-economy traction. The closest thing in DeFi to 'money as protocol, not policy'.
Key Findings
M69 Score
Scored against the Money2069 Manifesto — see methodology. Higher = more aligned.
Detailed Rating Breakdown
Issuance Model3x3.2
| Code | Question | Score |
|---|---|---|
| IM-01 | Is issuance permissionless?Anyone with ETH (V1) or supported LST collateral (V2) can open a Trove and mint LUSD/BOLD permissionlessly via on-chain action; no KYC, whitelist, or approval. Requires locking collateral. | 4 |
| IM-02 | Is new supply created through debt?All LUSD and BOLD are minted as loans against locked collateral (Troves). This is a purely debt-based, collateralized credit issuance model. | 1 |
| IM-03 | Is issuance tied to measurable real-world economic activity?Supply is tied solely to crypto-native collateral (ETH and ETH LSTs) and borrower demand — no real-economy index or basket. | 2 |
| IM-04 | Does the issuance model have a supply cap or hard ceiling?No hard cap; supply expands and contracts elastically with borrower demand. Recovery Mode (V1, <150% TCR) tightens issuance as a circuit breaker. | 4 |
| IM-05 | Can supply contract (burn/redemption) as well as expand?Full two-way elasticity via permissionless hard redemptions: anyone can redeem 1 LUSD/BOLD for $1 worth of collateral from the lowest-CR Trove, burning supply. Trove closure also burns. | 5 |
Spending Power Stability2x3.6
| Code | Question | Score |
|---|---|---|
| SPS-01 | What mechanism does the protocol use to target spending power stability?Algorithmic on-chain mechanism: hard redemption arbitrage at $1 floor (110% CR floor below $1) plus Stability Pool liquidations enforce the peg. V2 adds user-set rates that adjust borrowing supply dynamically. Fully automatic, no oracle for the peg itself. | 4 |
| SPS-02 | What benchmark is used to measure spending power?LUSD and BOLD are pegged to USD — a single fiat reference with moderate inflation. | 2 |
| SPS-03 | How transparent and verifiable is the stability measurement?Peg mechanism is fully on-chain, immutable, open-source, and auditable in real time by any participant. Chainlink oracle for ETH/USD price with Tellor fallback. | 5 |
| SPS-04 | What is the protocol's historical deviation from its stability target?LUSD has held $0.97–$1.10 range since April 2021 (4+ years live), with brief premium spikes during USDC depeg (March 2023) but no failure to redeem at floor. Annualized deviation <2% on the downside. | 4 |
| SPS-05 | Does the protocol distinguish between short-term volatility and long-term purchasing power drift?Targets short-term USD peg only; no mechanism addresses long-term USD purchasing power erosion (inflation). | 3 |
| SPS-06 | Is the stability mechanism accessible globally?Permissionless smart contracts on Ethereum; redemption and minting accessible globally with no geographic restriction at protocol level. Front-end operators may geo-block but core protocol cannot be. | 5 |
Fiat Independence & Interoperability2x2.9
| Code | Question | Score |
|---|---|---|
| FI-01 | What is the protocol's unit of account?LUSD and BOLD are hard-pegged 1:1 to USD; unit of account is fully borrowed from fiat. | 1 |
| FI-02 | What is the fiat composition of the protocol's collateral or reserves?Zero fiat collateral. V1 accepts only ETH; V2 accepts ETH, wstETH, rETH — all crypto-native, non-fiat assets. No USDC/Treasury reserves anywhere in the system. | 5 |
| FI-03 | Does the protocol depend on fiat banking infrastructure to function?No banking relationships required; protocol is entirely on-chain. Fiat on/off-ramps are external user concerns, not protocol functions. | 5 |
| FI-04 | Are the protocol's price feeds and oracles fiat-denominated?ETH/USD and LST/USD price feeds (Chainlink + Tellor fallback) are USD-denominated but sourced from decentralized oracles. | 2 |
| FI-05 | What happens to the protocol if the primary fiat currency it references collapses or depegs?A severe USD collapse would dislocate the peg target. Collateral (ETH) would remain intact and redeemable, but the unit of account would lose meaning. Recovery would require new deployment. | 2 |
| FI-06 | Does the project have a credible transition path from fiat-dominated adoption to fiat-independent operation?No documented plan to migrate away from USD peg; USD peg treated as permanent design choice. | 2 |
| FI-07 | Can local or sectoral currencies be denominated in or settle against this currency?LUSD/BOLD are standard ERC-20s and composable in DeFi but the protocol does not natively support issuing local/sectoral currencies that settle against them. Composability is theoretical via general DeFi infrastructure. | 3 |
| FI-08 | Does the protocol define open standards for interoperability with other monetary systems?No protocol-specific monetary interop standard. Interoperability happens via generic ERC-20, DEX, and bridge infrastructure. | 3 |
Traction2x3.3
| Code | Question | Score |
|---|---|---|
| TR-01 | Is the project still active?Fully active; V2 (BOLD) launched 2024 with active development and growing TVL. V1 (LUSD) continues to operate as immutable contracts. | 5 |
| TR-02 | How long has the project been in existence?Launched April 2021 — approximately 4 years of continuous operation as of 2026. | 3 |
| TR-03 | How many active users does the project have?LUSD has had thousands of Trove holders historically (typically 1K–10K active addresses based on Dune analytics); BOLD adds additional users. Aggregate active users in the low tens of thousands range. | 3 |
| TR-04 | How many businesses or organizations accept the project's currency?LUSD/BOLD are accepted by DeFi protocols (Curve, Uniswap, Aave-adjacent integrations, Yearn) but very limited direct merchant acceptance. No meaningful real-economy merchant base. | 2 |
| TR-05 | Is the currency used as a unit of account?LUSD and BOLD are quoted and used at $1 equivalence; not used as native unit of account for pricing, wages, or contracts independent of USD. | 2 |
| TR-06 | Is the founder or core team still actively working on the project?Core team (Robert Lauko, Rick Pardoe, et al.) remained active through V2 launch; team is public and accountable. | 5 |
| TR-07 | What partner organizations or institutions support or integrate the project?Multiple front-end operators, integrated by Curve, Yearn, DeFiSaver, Instadapp, B.Protocol and others; 10+ integrations historically. | 5 |
| TR-08 | Is the project covered or recognized by credible external sources?Significant independent crypto media coverage (Bankless, The Defiant), referenced in academic DeFi research, and analyzed in policy/research reports on decentralized stablecoins. | 4 |
| TR-09 | Is adoption organic — not dependent on subsidies, incentives, or mandates?LQTY incentives bootstrapped Stability Pool early on, but core borrowing utility is organic — users borrow against ETH for leverage/liquidity without ongoing subsidies. | 4 |
| TR-10 | What is the growth trend over the past 12 months?V2 launch (BOLD) has driven renewed growth in 2024–2025; LUSD supply has been variable but the protocol overall trending up with V2. | 4 |
| TR-11 | Does the project have a coherent narrative and cultural identity that drives long-term commitment?Strong 'decentralized stablecoin maximalist' narrative — immutable, governance-free, ETH-only — that draws ideologically committed users beyond yield. Active community identifies with the credibly-neutral mission. | 4 |
Sovereignty4.1
| Code | Question | Score |
|---|---|---|
| SO-01 | Can any single entity shut down the project?Core protocol is immutable Ethereum smart contracts with no admin keys; cannot be shut down by any entity short of Ethereum itself failing. | 5 |
| SO-02 | Is the project's core infrastructure permissionless and self-hostable?Fully open-source (GPL/MIT); multiple independent front-ends exist; anyone can run a front-end or interact via raw contract calls. | 5 |
| SO-03 | Is the project subject to the jurisdiction of a single nation-state?Liquity AG is based in Switzerland but the protocol itself is jurisdiction-agnostic immutable code. Front-end operators are globally distributed. | 4 |
| SO-04 | Does the project control or custody user funds?Fully non-custodial; users retain control of collateral via their own keys; no intermediary at any point. | 5 |
| SO-05 | Is the project resilient to key-person risk?Immutable contracts eliminate operational key-person risk for V1 entirely. V2 development team is distributed but core launch knowledge concentrated in original team. | 4 |
| SO-06 | Does the project depend on any third-party service that could be revoked?Depends on Ethereum L1 (large ecosystem, no tested migration) and Chainlink/Tellor oracles. Oracles have fallback redundancy. | 3 |
| SO-07 | Can the project be censored — can specific users or transactions be blocked?Core protocol has no blacklist or freeze function; censorship technically impossible at contract level. Front-ends can geo-block but are replaceable. | 5 |
| SO-08 | Does the protocol protect transaction privacy as a monetary right?Standard Ethereum pseudonymity — transactions and addresses are public but not linked to identity at protocol level. No additional privacy features. | 3 |
| SO-09 | Does the technology enforce the project's monetary rules such that governance cannot silently override them?V1 contracts are immutable — issuance, redemption, liquidation, and stability mechanics cannot be changed by anyone. V2 follows the same pattern. Fully on-chain, open-source, auditable in real time. | 5 |
Governance4.4
| Code | Question | Score |
|---|---|---|
| GO-01 | How are decisions about the project made?No governance over deployed protocols — by design. Off-chain development decisions about new versions (e.g., V1 → V2) are made transparently by the core team but deployed contracts are immutable. | 4 |
| GO-02 | Who has voting or decision-making power, and how is that power distributed?No voting over monetary policy. LQTY is a reward token, not a governance token. Off-chain decisions concentrated in core team. | 4 |
| GO-03 | Is the governance process — and the monetary mechanism itself — transparent and publicly auditable?Monetary mechanism is fully on-chain, open-source, and auditable in real time by anyone. There is no off-chain governance process for monetary policy to be transparent about — there isn't one. | 5 |
| GO-04 | Can governance be captured by a small group or hostile actor?No governance to capture. Capture-resistant by design for deployed protocol. New version deployment requires core team but cannot affect existing deployments. | 5 |
| GO-05 | How are upgrades and changes to the protocol or project proposed and executed?No upgrades possible — contracts are immutable. New versions (V2 BOLD) are deployed as separate, independent systems with public announcement and lead time. | 5 |
| GO-06 | Is there a separation between governance over monetary policy and governance over operational decisions?Total separation — monetary policy is encoded immutably and ungovernable; only off-chain operational decisions (front-end, marketing) involve discretion. | 5 |
| GO-07 | Does the project have a constitution, charter, or set of immutable principles?The immutable smart contracts themselves function as a constitution — monetary principles (110% CR, hard redemption, no governance) are enforced by code that cannot be amended. Stated principles around decentralization are well-documented. | 4 |
| GO-08 | Can the project's issuance rules be changed, and are monetary policy changes subject to stronger constraints than operational changes?Issuance rules in deployed protocols are immutable — cannot be changed by any process. | 5 |
Resilience3.7
| Code | Question | Score |
|---|---|---|
| RE-01 | Has the project survived a major crisis or adversarial event?Survived multiple severe crises: May 2021 ETH crash (-50%+), Terra/3AC/FTX collapse 2022, USDC depeg March 2023 (LUSD traded at premium and gained inflows), without mechanism failure or governance intervention (none possible). | 5 |
| RE-02 | Does the project have redundancy in its critical infrastructure?Multiple independent front-ends, dual oracle (Chainlink primary, Tellor fallback), open-source code. Single L1 (Ethereum) is a concentration point. | 4 |
| RE-03 | Can the project recover from a catastrophic failure?All code is open-source and all state is on Ethereum public chain — anyone can re-deploy or fork. Recovery from Ethereum-level failure would be more complex. | 4 |
| RE-04 | Is the project's design simple enough to be maintained and understood long-term?V1 is elegant and minimal — Trove + Stability Pool + redemption is conceptually compact and well-documented. V2 adds interest rate complexity. | 4 |
| RE-05 | Is the project dependent on a specific technology that could become obsolete?Built on Ethereum/Solidity — large, widely-supported ecosystem; the code logic is portable in principle but not formally migrated. | 4 |
| RE-06 | How does the project handle economic stress (bank runs, liquidity crises, collateral crashes, inflation/deflation shocks)?Explicit stress mechanisms: Stability Pool absorbs liquidations, Recovery Mode (V1, <150% TCR) tightens issuance, hard redemption maintains $1 floor. Tested live through multiple crashes without failure. | 5 |
| RE-07 | Does the project have sustainable funding for long-term maintenance?Protocol fees (issuance fee in V1, interest in V2) flow to LQTY stakers / protocol incentivized contracts. Liquity AG raised early funding and protocol generates revenue. Sustainability over decade-scale not proven but funding model is real. | 3 |
| RE-08 | Can the system operate across extreme latency, disconnected networks, and multi-century timescales?Inherits Ethereum's assumption of low-latency global connectivity. Smart contract logic is durable but tightly coupled to Ethereum consensus and current internet. | 2 |
| RE-09 | Is the system designed for a world where AI agents are primary economic actors?Fully programmable smart contracts; AI agents can interact identically to humans via standard EVM interfaces. No CAPTCHA or human-only gating. | 4 |
Inclusivity3.7
| Code | Question | Score |
|---|---|---|
| IN-01 | Can anyone in the world participate regardless of nationality, wealth, or status?Permissionless protocol with no KYC at contract level. Some front-ends apply geoblocks but raw contract access is global. Practical barriers: internet, ETH gas, minimum 1800 LUSD debt (V1). | 4 |
| IN-02 | What is the minimum cost to start using the project?V1 requires minimum 1800 LUSD debt + 110% ETH collateral; Ethereum gas costs (often $20–100+) create meaningful barrier. V2 BOLD has similar floor. High cost to begin for low-income users. | 2 |
| IN-03 | Does the project actively serve underbanked or financially excluded populations?Not designed for underbanked users; serves crypto-native users with significant ETH holdings. Theoretical access exists; practical use among financially excluded is minimal. | 2 |
| IN-04 | Does the project distribute economic benefits — including seigniorage — broadly, or concentrate them among insiders?LQTY token had ~35.3% allocation to team/investors/endowment per public tokenomics; remainder to community/Stability Pool LPs. Protocol fees flow to LQTY stakers — broadly distributable but with meaningful insider allocation at genesis. | 3 |
| IN-05 | Does the project treat all participants equally under the same rules?Identical contract-level rules for every user; no tiered access, no preferential rates, no whitelists. Borrowing parameters apply uniformly. | 5 |
| IN-06 | Does the project require identity documentation or surveillance to participate?Zero KYC or identity requirement at protocol level; fully pseudonymous Ethereum participation. Optional fiat ramps may require KYC but are external. | 5 |
| IN-07 | Does the project have mechanisms to prevent wealth concentration over time?No anti-concentration mechanisms. LQTY staking rewards proportional to holdings; larger borrowers can lever larger positions. Neither active concentration design nor counter-mechanism. | 3 |
Frequently Asked Questions
What is Liquity and what problem does it solve?
Liquity is a decentralized borrowing protocol on Ethereum that issues USD-pegged stablecoins (LUSD in V1, launched April 2021; BOLD in V2, launched 2024) backed exclusively by crypto collateral. It enables users to mint stablecoins against ETH (and ETH liquid staking tokens in V2) without any centralized issuer, governance over monetary parameters, or fiat reserves. Liquity solves the problem of building a credibly-neutral, censorship-resistant stablecoin with hard on-chain peg enforcement.
How is money created on Liquity?
Every LUSD or BOLD in existence is minted as a loan against locked crypto collateral via a 'Trove'. V1 requires minimum 110% ETH collateralization with a one-time issuance fee and no ongoing interest. V2 allows user-set interest rates and accepts ETH, wstETH, and rETH. Issuance is permissionless (no KYC, no whitelist) but debt-based — a key M69 structural limitation. Supply contracts via permissionless hard redemptions: anyone can swap 1 LUSD/BOLD for $1 worth of collateral, burning supply.
How does Liquity maintain its peg?
Liquity uses a fully algorithmic, fully on-chain peg mechanism with no governance intervention. The hard redemption floor (anyone can redeem 1 LUSD for $1 of ETH) enforces a $1 floor through arbitrage. The Stability Pool absorbs liquidations of under-collateralized Troves. V2 adds user-set interest rates that adjust borrowing supply dynamically. LUSD has held the $0.97–$1.10 range for 4+ years since April 2021, briefly trading at a premium during the March 2023 USDC depeg.
How is Liquity independent from fiat?
Liquity is best-in-class on the collateral side: zero fiat reserves, zero USDC or Treasury exposure, only ETH and ETH LSTs. The protocol requires no banking relationships and is entirely on-chain. However, the unit of account is still USD — LUSD and BOLD are hard-pegged to $1. This is the protocol's largest M69 gap: fiat-independent collateral with a fiat-anchored denomination. There is no documented transition plan to a non-USD benchmark.
How is Liquity governed?
Liquity has no governance over deployed protocols — by design. V1 and V2 contracts are immutable; nobody, including the founders or LQTY token holders, can change issuance rules, redemption mechanics, or stability parameters. LQTY is a reward token, not a governance token. New versions (V1 → V2) are deployed as separate, independent systems by the core team rather than upgrades. This 'governance-free' design is the most M69-aligned monetary governance posture in DeFi.
Can Liquity be censored or shut down?
No — the core protocol is immutable Ethereum smart contracts with no admin keys, no blacklist function, no freeze capability. It cannot be shut down by any entity short of Ethereum itself failing. Multiple independent front-ends exist; users can also interact via raw contract calls. Liquity AG is based in Switzerland, but the protocol itself is jurisdiction-agnostic. Front-ends can apply geoblocks but are easily replaceable.
How resilient is Liquity to crisis?
Liquity has a rare and valuable crisis-tested track record. It survived the May 2021 ETH crash (-50%+), the 2022 collapses of Terra/3AC/FTX, and the March 2023 USDC depeg (during which LUSD traded at a premium and gained inflows) — all without mechanism failure and without governance intervention (none was possible). The Stability Pool absorbs liquidations, Recovery Mode tightens issuance during stress, and hard redemption maintains the $1 floor. Few stablecoins have demonstrated this kind of stress performance.
Who can use Liquity?
Anyone in the world with ETH and an Ethereum wallet can use Liquity permissionlessly — no KYC, no identity, no whitelist at the protocol level. However, practical barriers exist: V1 requires a minimum 1800 LUSD debt position; Ethereum gas costs ($20–100+) create meaningful entry friction; the protocol mainly serves crypto-native users with substantial ETH holdings. Some front-ends apply geographic blocks, but the underlying contracts are globally accessible.
What is the difference between LUSD (V1) and BOLD (V2)?
LUSD V1 (launched April 2021) accepts only ETH at minimum 110% collateral, uses a one-time issuance fee with no ongoing interest, and is fully immutable. BOLD V2 (launched 2024) supports multi-collateral (ETH, wstETH, rETH) and introduces user-set interest rates where borrowers choose their own borrowing rate, with the protocol redeeming first against the lowest-rate Troves. Both versions are deployed as immutable contracts with no governance over monetary parameters. V1 continues to operate alongside V2.
What is Liquity's M69 alignment score and what does it mean?
Liquity scores 3.5 / 5.0 on the M69 framework — 'Substantially aligned'. It excels on Governance (4.4), Sovereignty (4.1), and Resilience (3.7) thanks to immutability, non-custodial design, and a crisis-tested track record. It scores lower on Issuance Model (3.2, due to debt-based credit issuance) and Fiat Independence (2.9, due to the USD peg). Liquity is a textbook example of how to build the rails for debt-free, sovereign money while still using fiat as the unit of denomination — the closest thing in DeFi to 'money as protocol, not policy'.
What are LQTY tokens used for?
LQTY is the protocol's secondary token used for reward distribution rather than governance. LQTY holders can stake to earn a share of protocol fees (issuance fees in V1, interest in V2). LQTY also incentivizes Stability Pool depositors who provide LUSD to absorb liquidations. LQTY does NOT vote on monetary policy — the protocol has no monetary governance by design. The original LQTY allocation reserved ~35.3% for team/investors/endowment, with the remainder distributed to community participants and Stability Pool LPs.