What is Liquity Token?
Borrow against your ETH at zero or user-set interest rates—no middleman required. Liquity is a leading decentralized borrowing protocol that lets you mint a fully-backed stablecoin (LUSD) using ETH as collateral. With its innovative decentralized borrowing design, Liquity removes admin risk and hands full control to users. In this in-depth guide, you'll learn everything about Liquity, including protocol security, tokenomics, differences between V1 and V2, borrowing walkthroughs, risk management, and opportunities for both borrowers and DeFi builders. Discover why Liquity sets the gold standard for transparent, capital-efficient crypto loans in 2024.
What is Liquity and How Does It Work?
Liquity is a decentralized borrowing protocol that lets users generate the LUSD stablecoin by using their ETH as collateral. Unlike traditional lending platforms, Liquity is built with immutability and true decentralization at its core: no governance, no admin keys, and open for anyone to use. The protocol’s ethos is clear—bring censorship-resistant, efficient, and secure borrowing to the DeFi space.
By depositing ETH, users open what's called a "Trove" and borrow LUSD. In V1, borrowing is fee-free after a one-time cost, and in V2, users can set their own interest rates. This approach unifies capital efficiency with flexibility, offering a compelling alternative to legacy DeFi lending. The capital efficiency of Liquity is driven by innovative mechanisms such as low minimum collateral ratios, robust liquidation systems, and decentralization by design.
Core Protocol Concepts
When you open a Trove with Liquity, you deposit ETH and mint LUSD stablecoins. The system enforces a minimum collateral ratio (110% in V1, slightly different in V2), ensuring there’s always more ETH backing the system than LUSD minted. Because smart contracts are immutable, protocol rules can’t be changed—making Liquity highly resistant to protocol-level risks. LUSD itself is a fully-backed, USD-pegged stablecoin, designed to remain stable via liquidations and the Stability Pool.
Borrowing Use Cases
Liquity serves many DeFi needs:
- Leverage trading: Borrow LUSD, buy more ETH, loop.
- Yield strategies: Deploy LUSD into stablecoin farms.
- Composability: Use LUSD and LQTY across DeFi, including DEXs, lending, or payments.
💡 Pro Tip: Integrate LUSD in multi-protocol DeFi strategies for maximized rewards.
Liquity V1 vs V2: Key Differences and Migration Path
Liquity has evolved with the introduction of V2, which brought major upgrades and new features for users. Both versions empower decentralized borrowing but differ in essential aspects such as interest rates, supported tokens, and frontend integrations.
| Feature | Liquity V1 | Liquity V2 |
|---|---|---|
| Lending Rate | 0% (one-time fee) | User-set/negotiated |
| Collateral Ratio | 110% minimum | Flexible/varies |
| Composition | ETH only | ETH + other support |
| New Tokens | LQTY | BOLD, LQTY |
| Frontend Choice | Dozens, open | Expanded, even more |
V1 Highlights
Liquity V1 was renowned for fee-free borrowing (only a one-time upfront fee), strict ETH collateral, and a robust, community-run frontend ecosystem. The minimum collateral ratio of 110% made loans highly capital-efficient. LUSD remains the stablecoin at the center, with LQTY serving protocol incentives and rewards.
V2 Innovations
V2 introduced user-set interest rates: borrowers choose the rates they're willing to pay, letting the market decide rates dynamically. V2 also brought the BOLD token, supporting new distribution schemes, and built-in tools for greater composability. The expanded list of officially supported frontends makes for a more accessible, tailored user experience.
How to Migrate
Ready to upgrade from V1 to V2? The steps are:
- Repay your V1 debt and close your Trove (via official frontend).
- Transfer your ETH to V2-supported wallets.
- Follow the migration guide here, ensuring you use trusted interfaces.
- Enjoy V2’s features, like user-set rates and BOLD incentives.
💡 Pro Tip: Always check you’re using an official or well-established frontend when migrating.
How to Borrow Against ETH Using Liquity
If you want to borrow against your ETH, Liquity offers a beginner-friendly and capital-efficient way to unlock liquidity. Here’s a practical walkthrough.
Setting Up Your Wallet
Start by selecting an Ethereum-compatible wallet (MetaMask, Ledger, Coinbase Wallet, etc.). For best security, use hardware wallets or browser wallets with 2FA enabled. Familiarize yourself with handling LUSD—tokens will be sent to your connected wallet upon borrowing. Always double-check URLs to avoid phishing attacks.
Opening a Trove and Withdrawing
- Navigate to a recommended frontend, like the official Liquity app.
- Connect your wallet.
- Choose the amount of ETH to deposit (ensure it surpasses the minimum requirement; usually around 2 ETH for V1/V2—always confirm current thresholds).
- Input the desired LUSD to borrow, ensuring the resulting collateral ratio meets the protocol’s minimum.
- Confirm the transaction and receive LUSD straight to your wallet.
Fees depend on the version: a one-time fee in V1; user-set interest in V2.
Managing Repayments and Liquidation Risk
To repay, send LUSD back to your Trove and unlock your ETH. Monitoring is crucial: if your collateral ratio drops below the minimum (e.g., due to an ETH price drop), your position can be liquidated. To avoid liquidation:
- Keep a healthy collateral buffer (aim for 130%+).
- Consider depositing LUSD to the Stability Pool for rewards and additional security.
- Set up alerts via integration tools or bots.
Understanding Stability Pools, Liquidation, and Capital Efficiency
The Stability Pool is at the heart of Liquity’s protocol safety. It’s where LUSD can be staked to absorb liquidations, maintain LUSD’s peg, and reward proactive participants.
Stability Pool Participation
Anyone can deposit LUSD into the Stability Pool. If a Trove is liquidated, LUSD from the pool is used to cover the debt, and depositors receive the ETH collateral at a discount. This creates a win-win: protecting the protocol's health and earning you LQTY and BOLD rewards (depending on the version). Risks include potential partial loss if ETH prices sharply fall, but historically the system remains robust.
Liquidation Mechanics
A liquidation occurs when a Trove’s collateral ratio falls below the set minimum. In this case, the system automatically repays the Trove's debt using Stability Pool LUSD, and the corresponding ETH is redistributed. This process keeps LUSD fully backed and ensures protocol stability—a key reason why Liquity is trusted for large-scale borrowing.
For detailed strategies, explore our DeFi security tips.
Security, Immutability, and Protocol Audits
Security and trust are non-negotiable for large-scale decentralized borrowing. Liquity has undergone top-tier audits and features groundbreaking decentralization: no admin controls or backdoors.
Key Audit Findings
Liquity V1 and V2 smart contracts have been audited by leading firms including Trail of Bits, Quantstamp, and Coinspect. These audits found no critical vulnerabilities and confirmed the protocol’s security assumptions. You can review full reports on Liquity’s official site and GitHub.
No Admin Controls
There are no admin keys or governance: once deployed, Liquity can’t be changed or censored. This eliminates human risk—no unilateral upgrades, no paused contracts, just pure code. Immutability ensures all users play by the same rules forever. This transparent design differentiates Liquity from most DeFi protocols.
Protocol Risks & Insurance Coverage
Using any DeFi protocol carries risk—Liquity is no exception, although its decentralization minimizes admin threats. Main risks include:
- Smart contract risk: Bugs in immutable code.
- Oracle risk: Malfunction in ETH price feeds.
- Market risk: Sudden ETH price drops could trigger liquidations.
To hedge, users can buy DeFi insurance (e.g., via Nexus Mutual), offering coverage for smart contract failure. To get insured:
- Visit your chosen provider (Nexus, Unslashed, or others).
- Input the relevant contract address.
- Purchase coverage for the period and amount you need.
If you’re new to DeFi risk management, check our broader guide.
LQTY, LUSD, and BOLD: Tokens, Exchanges & Market Data
Liquity features a trio of tokens, each with unique roles and markets.
| Token | Type | Utility | Where to Buy |
|---|---|---|---|
| LUSD | Stablecoin | USD-pegged borrowing & payments | DEXs (Uniswap, Curve), CEXs |
| LQTY | Protocol | Staking rewards, protocol fees | OKX, Binance, Uniswap |
| BOLD | Protocol (V2) | Incentives, governance | Limited CEXs, DEXs |
- LUSD: A fully-backed, dollar-pegged stablecoin for borrowing and DeFi integration.
- LQTY: The protocol reward token, earned by staking or providing Stability Pool liquidity, with a capped max supply and known unlocking schedule.
- BOLD: New with V2, adds governance and additional incentives.
Liquidity is strong: LQTY trades on major centralized exchanges (OKX, Binance) and top DEXs. Always check trading volumes and spreads before large trades. For real-time stats, review CoinGecko LQTY and LUSD pages.
💡 Pro Tip: Prefer OKX for high-liquidity, low-fee LQTY and LUSD trading.
Liquity Developer & Frontend Ecosystem
Liquity’s open infrastructure has nurtured a vibrant developer and frontend ecosystem. All core smart contracts and interfaces are open-source, inviting innovation.
- GitHub: Find main contracts and frontend code at Liquity’s GitHub.
- Frontends: Anyone can launch an independent frontend—providing UX diversity and censorship resistance. Major frontends include Liquity’s official app, B.Protocol, and community builds.
- Composability: LUSD and LQTY integrate seamlessly with DeFi dApps—yield platforms, wallets, and DEXs. Past forks demonstrate the protocol’s flexibility and trust among builders.
To launch a frontend, follow Liquity’s docs and join the developer community on Discord.
Frequently Asked Questions
Is Liquity safe to use?
Liquity is among the most secure DeFi protocols—audited by top firms, fully decentralized, and immutable. No admin or upgrade keys exist. For added precaution, users can purchase insurance from Nexus Mutual and similar providers to cover smart contract risk.
What is the minimum ETH required to borrow on Liquity?
Typically, the minimum is around 2 ETH for both V1 and V2, but this can change depending on protocol parameters and gas costs. The minimum exists to ensure economically viable liquidations and protocol health—always check the frontend for the current value.
How does Liquity maintain LUSD stability?
LUSD is kept stable by overcollateralizing all borrowers, instant liquidations below the minimum ratio, and the Stability Pool. If liquidity falls, the system uses pool LUSD to repay bad debt, distributing ETH to pool participants and maintaining the dollar peg.
Where can I buy LQTY tokens?
You can buy LQTY on leading centralized exchanges like OKX and Binance, or on decentralized platforms such as Uniswap. Be sure to distinguish LQTY (rewards token) from LUSD (stablecoin).
How is Liquity different from MakerDAO?
Liquity features 0% or user-set rates, supports ETH-only collateral, requires no governance or admin upgrades, and operates fully immutable smart contracts—removing human intervention and political risk common in MakerDAO’s system.
What happens if my Trove is liquidated?
When your Trove is liquidated, part or all of your collateral is used to repay your LUSD debt. You’ll lose some ETH and pay a liquidation penalty. To avoid this, maintain healthy collateral ratios and use Stability Pool incentives/alerts for risk management.
Conclusion
Liquity stands out as a transformative protocol for decentralized borrowing: it’s capital efficient, transparent, and built around strong security principles. Whether you’re looking to borrow against your ETH, earn rewards through Stability Pool participation, or build new DeFi integrations, Liquity offers a future-proof foundation.
- Unmatched decentralization: no admin keys, immutable contracts.
- User-set or 0% interest rates for optimal capital efficiency.
- Strong token utility and ecosystem composability.
Remember, DeFi borrowing comes with risks—always use protocol insurance, stay above safe collateral ratios, and follow best DeFi security tips. Explore a recommended frontend and start your Liquity journey today. For more on stablecoins, visit our stablecoin guide or see step-by-steps in how to borrow crypto.
Risk disclaimer: All borrowing, lending, and DeFi activity carries risk of loss. Invest and borrow responsibly; consider professional advice as needed.
© 2025 OKX. This article may be reproduced or distributed in its entirety, or excerpts of 100 words or less of this article may be used, provided such use is non-commercial. Any reproduction or distribution of the entire article must also prominently state: “This article is © 2025 OKX and is used with permission.” Permitted excerpts must cite to the name of the article and include attribution, for example “Article Name, [author name if applicable], © 2025 OKX.” Some content may be generated or assisted by artificial intelligence (AI) tools. No derivative works or other uses of this article are permitted.
