Bankless - AMA - Liquity & LUSD | Founder Robert Lauko

Episode Date: May 27, 2021

Liquity is a new governance-minimized stablecoin on Ethereum! Liquidity offers some competitive advantages over other decentralized stablecoins - Low collateral requirements. Only 110% collateral is required vs MakerDAOs 150% - Governance minimization. Liquity is attempting to be a protocol, not a platform. Thus, it is trying to minimize human discretion! ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/  🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/  🎖 CLAIM YOUR BADGE: https://newsletter.banklesshq.com/p/-guide-2-using-the-bankless-badge  ------ BANKLESS SPONSOR TOOLS: 💰 GEMINI | FIAT & CRYPTO EXCHANGE https://bankless.cc/go-gemini  🔀 BALANCER | EXCHANGE & POOL ASSETS https://bankless.cc/balancer  👻 AAVE | LEND & BORROW ASSETS https://bankless.cc/aave  🦄 UNISWAP | DECENTRALIZED FUNDING http://bankless.cc/uniswap  ----- Resources: Liquity https://www.liquity.org/  Robert Lauko on Twitter https://twitter.com/robert_lauko?s=20  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures 

Hey, Bankless Nation. Welcome to another Ask Me Anything. This is your opportunity to ask questions of our guests. And this guest is, we're pretty excited about. This is a new money experiment built on top of Ethereum. We're talking about liquidity today. Robert Lauco is the co-founder. He is our guest. Once again, this is your opportunity to ask questions of Robert about the project where it's going, where it's headed, anything burning. in your mind. David and I, of course, will get you started. David, new money experiments on Ethereum is one of our favorite things to talk about. What's the TLDR of Liquity? Why did we decide to bring them on for this Ask Me Anything? Yeah, the TLDR, and I actually use Liquity as an example in my coin, coin desk talk on Monday. The TLDR is that Defi is in this inevitable, highly competitive environment for capital efficiency. And to me, that's what, Liquity represents. It's one of the newer projects that have come and debuted on Ethereum, and it's seen a ton of success in terms of just TVL. Like tons of ETH has been deposited into

liquidity. And the reason why, billions, right? Billions, yeah. Uh-huh. We'll get those numbers up in a sec. And the reason why is because it offers really competitive capital efficiency rates, a hundred and ten percent collateralization ratio and zero percent interest rates, right? Like, like zero percent interest rates on a loan. Like there, there is something, that you pay, so we'll get into those details, but like really competitive, 10% collateralization radio, zero percent interest rates. Like, where else in defy can you get those loans? And that's kind of the story and the through line of defy to me is capital efficiency, capital efficiency, capital efficiency. And so that's my rationale for, you know, why liquidity has seen such success and why

there's been so much demand to get this AMA with Robert. Small disclaimer, I have a small seed investment into liquidity. And so I have that to disclose, I guess. So perhaps some subconscious bias, but just know that. And I think, without further do, Ryan, should we just get into it? We should. I have one quick question for you as well. Not only is this a lending protocol, of course, this is a stable coin, right? Yes, yes. Oh, very, very important detail. Yeah, it's a governance minimized stable coin. So one of the throughlines that we will be asking, Robert is why governance minimization, always a good question, but also like to what degree governance minimization, right? Like there's always a spectrum. And so good to know.

Stable coin crypto dollars, new money experiments, all really exciting things. Guys, we will be back with Robert. Bring your questions in just a minute. But before we bring Robert on, we want to thank the sponsors who made this episode possible. Avey is a borrowing and lending protocol on Ethereum and just recently released Avey version which has a ton of cool new features that makes using AVE even more powerful. With AVE, you can leverage the full power of defy money Legos, yield, and composability all in one application. On AVE, there are a ton of assets that you can deposit in order to gain yield, and all of those

same assets can also be borrowed from the protocol if you have deposited collateral. Here you can see me getting a 200 USDC loan against my portfolio of a number of different defy tokens and ETH. I'll choose a variable interest rate because it's a lower rate than the stable interest rate option, but I could choose the stable interest rate option if I wanted to lock that interest rate in permanently. One of AVE's V2 features is the ability to swap collateral without having to withdraw your assets, trade them on uniswap and then deposit them back into Avey. Avey does all of this for you all in one seamless transaction, so you don't have to repay loans in order to change the collateral you have backing them. Check out the power of Avey at Avey.

That's aave.com. That's aavee.com. Balancer is Defi's most powerful automated market maker. Typical AMMs just have two tokens inside of one liquidity pool, which can lead to fractured liquidity across the many pairs of DeFi. With Balancer, you can access the full power of multiple tokens inside of one single AMM, which unlocks an entirely new playing field of possibility. This makes Balancer an awesome building block for so many different use cases.

Balancer pools can make asset indexes, but instead of paying fees to portfolio managers, Balancer lets you collect fees from traders who use your portfolio for liquidity. Additionally, Balancer smart pools can be programmed to have properties that change according to predetermined rules, such as changing the swap fee based on market conditions, or even liquidity bootstrapping pools, which can help you launch and distribute your token with day one liquidity. At Bankless, we used a liquidity bootstrapping pool to sell our BAPT T-shirts to much success. Balancer V2 brings powerful new features that makes your money work even harder for you. In V2, idle tokens are capable of generating yield in defy without sacrificing liquidity in the pool.

To top things off, Balancer is reimbursing all gas costs with BALV rewards, meaning that all your gas costs are returned to your wallet with the Balancer governance token. Balancer's mission is to become the primary source of liquidity in DFI by providing the most flexible and powerful platform for asset management and decentralized exchange. Dive into the balancer pools at pools. balancer.exchange. Guys, we are back with this. Bankless Ask Me. anything. We're here with Robert Lauco, who's the founder of liquidity. That is going to be the subject of today, this new monetary experiment on Ethereum called Liquidy. Robert has a PhD in law, interesting background. He's also previously a researcher at DFINITY. So he's seen other

blockchains too. I believe he started this project in 2019 as well. So he's been in the D5 space for a while to. Robert, it's great to have you on bankless. How are you doing today? Hi, yeah, thank you. So I'm really happy to be on this show and yeah, grateful to have this occasion. And yeah, I'm feeling great today. That's awesome. Okay, so I'm going to be kind of the almost the dumb cop here, Robert, because I think David knows a lot more about liquidity than I do. So I'm going to be the guy asking the really kind of dumb, novice beginner type questions. And of course, in DeFi, guys, I say dumb questions. There are no dumb questions. We're all on this exploratory. journey together. So, well, yes, I'll try not to ask the really, really dumb questions,

just the novice questions. So Robert, let's start here. What really is liquidity? So it sounds like it's a stable coin or maybe kind of a crypto dollar, but what is it at the 20,000 foot view? So what liquidity really is all about is borrowing and it tries to make borrowing as attractive as possible to the borrower. And it does that by basically improving or by offering two things, one of them being interest-free loans in a stable coin that it can issue to the borrower itself. And the other advantage is that the loans only need to be collateralized at 110% collateral ratio. So the loans, they are collateralized with ether. That's also collateral type. And that's how the system basically secures the loans.

And then the whole system is completely decentralized immutable and it's based on a network of decentralized front ends, which is also kind of unique in the defy space. So Robert, would you say that borrowing is the main attraction? Because I notice you started there. It's kind of a borrowing protocol. Or would you say the staple coin output, the crypto dollar output is the main attraction? Or are these like kind of two sides of the same coin in your mind? That's a great question. So it all started with borrowing. I really had this idea like one and a half or even two years ago. That what really makes borrowing most attractive? And the two aspects that I just mentioned are among like the most important ones. So it all started with borrowing. But then I realized that in order to achieve those two goals, you need to be able to mint your own currency. because otherwise you have capital costs. I mean, if you're like a matchmaker or you have like a pool-based platform

which takes money from lenders and gives it out to borrowers, then you would need to pay some interest to the lenders so you cannot offer your loans for free or interest-free to the borrowers. So I quickly realized that, hey, this is only possible if we mint our own token. And normally people, they want to get a loan denominated in something, like in some currency that they are familiar with and the currency in which they receive their salaries, and that's for many people, the US dollar. And so it made just sense to create a borrowing platform with this kind of stable coin

in mind, which is a US dollar-packed stable coin, which allows us to offer those two benefits. So what is the main driver here then? is it kind of in terms of expansion and, I guess, success of liquidity? Is it demand for LUSD, the coin itself? Or is it demand for the unique borrowing opportunities that liquidity provides? I mean, at the end of the day, we need both because the system needs to reach some equilibrium. So there needs to be demand for the loans, but also demand for holding or, or investing or using the LUSD.

All-D is the name of our stable coin. So we have basically incentives for both in place. So for the borrowers, it's like we already mentioned them, the fact that they are attractive. But then on the other hand, we also needed to make sure that you can do something with your LUSD that you borrow. I mean, either you sell it to other people who can do something with it, or even you don't need to sell it if you decide to put it in something we call a stability,

pool, which is our main mechanism to liquidate positions that can maybe delve into more into that later. But with this stability pool, we already created something that drives demand for buying and holding LUSD, our stable coin. And on top of that, or in addition to that, we also have a few pools in other systems, like now on Curve. We had one on Unisop. Now it's on Curve, where we give out rewards to the LPs. So let's go into that stabilization mechanism, Robert, because if we take a traditional model of like a central bank and they offer zero percent interest rates, like there's going to be a ton of currency issuance, right?

Like if you make money free for people, people are going to print it, right? And so that's kind of the law of incentives, right? And so if so if there's so much like easy access to, you know, zero percent interest rates with liquidity, or excuse me, liquidity, where does the stabilization of LUSD come from? Why doesn't it just drop down to like, you know, 0.9 cents, 0.8 cents? Like, where does the floor price for LUSD come from? I would say we have two different mechanisms that help us to achieve a stable currency. And one of them is just this like soft bag mechanism that is already present in other.

systems like MakerDAO where borrowers have an incentive to borrow whenever the token is overpriced or overvalued and they have a stronger incentive to repay whenever it's undervalued. But we wanted to have something which is stronger than that. So what we added is a redemption facility, or redemption opportunity for every LSD holder. And that basically means that you have this kind of right to exchange your tokens at face value, for ether. So you get like for a hundred LUSD, you would get back a hundred dollars with ether from the system. And that of course offers an arbitrage cycle or possibility whenever the price trades significantly below one dollar because you can just buy the LUSD on the market for less

than one dollar and exchange it through this redemption for something that's more than one dollar and then sell it and make a profit. So that's just one side like this. Before you go on to the next one, I want to just drill that home a little bit because I think the reasons why you are able to do this and why LSD is able to be stabilized this way, and correct me if I'm wrong, is that... LUSD, David, not LSD. Pardon me. Pardon me. Only one letter off. And so the reason why Liquity is able to stabilize LUSD is because it has extra strong commitments to ether, the acid.

asset as the only collateral, right? And so because liquidity is governance minimized and it only has one collateral type, which is ether, which has very strong competitive risk parameters, you are able to offer this redemption rate regardless of what the secondary market price of LUSD is. Is that correct? I would say, I mean, it makes it much easier to offer this redemption because we only need want, we only need to care about like one collateral type. I mean, in a multi-asset or multi-collateral system, it would be much more difficult and harder to achieve the same redemption facility. I mean, ether has this nice property of being decentralized and being like the base currency

of the theorem networks. Of course, it also adds to the stability of the system as a whole. Right. So, okay, cool. All right. So let's go into the secondary mechanism about how L, SD is stabilized. Yes, I mentioned that we have this redemption, which kicks in when the price drops below $1. And probably our system could have done just with this mechanism. So the secondary mechanisms, like a nice to have in some way, like not necessity. But we also wanted to minimize redemptions as far as we could, because redemptions, they affect the borers.

because basically what the system does when somebody redeems LUSD for ether, then it would take the ether from the borrower with the riskiest position, by risk as I mean with the lowest collateral ratio. So redemption from the borrower's perspective means premature repayment, which may not be to the interest of the borrower. So that's why we wanted to minimize this friction for the lowest collateralized borrower's by introducing a fee. And it's basically a double fee because we have a,

a base rate that determines two fees, that determines a borrowing fee and a redemption fee. Now, as the name already says, the redemption fee is a fee on the redeemed amount, and it's a percentage. And the borrowing fee is a one-off fee, like a fee that you paid up front, but only once when you borrow, and it's also determined as a percentage of the borrowed amount. And both of fees, they are basically the same, or except for some minor exceptions, but normally they move in tandem. And the way the system determines the fees is that it would measure like the amounts

or the volumes of the redemptions that happen during a time period. And it would adapt the fee. Like whenever somebody redeems, the fee would go up. And if no redemptions happen over some time period, then the fee would decay slowly and again reach the minimum. And the minimum here is 0.5% for both fees. like there is this minimum cost of a loan, which is 0.5%. So Robert, can you walk me through really quick.

Let's say I want to borrow $1,000, right, LUSD. What fees am I paying? How much are they right now? So right now, I guess it's 0.53 or 54%. So it's almost the minimum. So you would basically then pay $5.40. Like you don't get this amount. It's still part of your debt.

Like basically when you borrow a thousand LSD against, let's say, two ether, then you only get $900. Yes, exactly. You get $995, but your debt would be $1,000. That's what happens. Okay. And you pay that up front. You don't actually pay it, but it's just rolled into the loan up front. And that is the only fee.

There's no interest fee. That's the only fee. And also I want to clarify here because that gets often confused. like the redemption is really, it's not about repaying your loan. Like when the borrower repays their own position, we call them troves. Like when a borrower repays the trove, there is no additional fee on debt. Like repayment is for free. I mean, the only thing is that this kind of borrowing fee was added to the initial debt.

So there's no redemption fee, just to clarify. The only fee you're paying is when you take out the loan initially and that fee will fluctuate, but that is the only fee you're paying. and you don't actually pay that, it just kind of comes out of the, it's rolled into the loan up front. That's it. Right. So we don't, like, we wouldn't use the term redemption for like this process of repaying and retrieving your collateral. I guess it's better to like use the term maybe retrieval or repayment for that because we are using redemption very specifically for this broader type of redemption, which is, let's say, also a thing in, in in Terra, for example, or in centralized or centrally backed stable coins like USDC, where any holder of USDC can exchange USDC for US dollars.

And that's the difference. I see. So you're saying use the term redemption when somebody is exchanging LUSD for ETH, right? That's the term you use. And then retrieval when you're paying off a loan, essentially. Yeah, for repayment. And then retrieval. of your collateral. That's cool. And so the instead of having the you know the interest rates paid

over time in you know LUSD denominated terms you guys offer zero percent but you've taken that that fee and put it somewhere else which is a fee on the principal upon deposit right. And so that you know this isn't completely magic there is a fee somewhere. But instead of on the actual loan it's on on the actual deposit. And this is just one of the principles that we speak of on bank lists. Like, if you can build it, someone will build it, right? And so somebody has built this, you know, credit facility where instead of charging you interest rates over time, it just charges you as a deposit.

And you said that there is like a, you know, a mechanism that perhaps reminds me of the Rye system with control theory where there's this, there are inputs and outputs and the fee will go up or down based on those inputs and outputs, but specifically not governance. It's more of a, of a, you know, more autonomous, more robotic system. And so that control theory of how the fee raises and lowers in an algorithmic fashion and also only have ether, only having ether as collateral, it's like some of the, probably the two biggest reasons why we consider LUSD a governance minimize stable coin. Anything you want to add to that? And I, Did I get that right?

Yeah, that's a great summary. It's really governance. Maybe we cannot say it's governance free because it's still reliant on an Oracle which has its own governance. But except for the Oracle, there is no single parameter or anything that we, like as a company or the team or whoever like a governance body could change or adapt. And the Oracle is chain link right now? That's true. We have a fallback Oracle, by the way. So if chain link fails and that's also part of our like,

philosophy, we have a number of rules that are all algorithmically determined, like basically they would detect if there is an issue with chain link and then they would fall back or the system would then use tellor. And it can also switch back when chain link comes back. So there's this. I just want to wrap my head around the borrowing piece again. So one thing that used to drive me a little bit crazy about Maker from a borrower's perspective is you go and you borrow on Maker, right? And then one month you're happy because the rates are

2%. And then something happens in crypto. The next month, right, your rates are suddenly double digit. You know, it's seen rates. I don't know if this was 2018 or 2019. It's all a blur to me now, Robert, but like 20 plus percent on a loan that you kind of took out when rates were like one or two percent. This can't happen. with liquidity because you're paying up front. And correct me if I'm wrong, but you can choose, I'm not going to use the word redemption, you could choose to retrieve the loan, pay off the loan at any point in time. But you don't have to worry about that variability in interest rate. Is that correct? Right. That's exactly one of the setting points that this one of fee makes the loans not

only cheaper if you have a long-term perspective, but also much more predictable. And that's just it. You kind of have to have a long-term perspective because you are paying this fixed percent up front. So like you're not going to want to take this loan for a couple of days and then retrieve it. And you can't go in and out of loans all the time. Like with AVE and compound and maker, you can go in and out, raise your loan, lower your loan. Like you can kind of touch, high touch loans. To me, an LUSD loan via liquidity is more of a low touch, long-term time horizon perspective kind of loan. Exactly. Yeah, there's this trade-off that, yeah, I mean, for very short-term loans, it's like the fee can be significant, but I guess already after

one month, like with the current maker fees, if you compare it, it would become attractive. Very cool. All right. So you talked in there, Robert, a little bit about, LUSD and its redemption mechanism as well. We've had some turbulence lately in crypto, right? Some like pretty historic even drops lately. So can you talk a little bit about how LUSD as a stable coin has, or maybe crypto dollar, David, I don't know what term you'd use for this. Crypto dollar. Crypto dollar. LUSD as a collateral-backed, ETH-backed crypto dollar, how it's performed.

I don't know if the best place to pull this up is on Coin Gecko, but that's where I'm seeing some prices. And it looks like this is the 30-day. It looks like it held up fairly well. You know, maybe during some of these days on Wednesday, black Wednesday, is that what we're calling it? I don't know. It's dark, gray Wednesday.

It wasn't great. We had some variants. Can you talk a little bit about that? Was this kind of to your expectations from a band of about, you know, 98 cents to stretching to a dollar and two cents, like kind of a four cent band on the crypto dollar? Or like, what's your take? How did it hold up during this recent market turbulence?

Maybe one note on that. So we just notice that this chart may not be, like may not reflect the real price because it had apparently has some issues. with the curve pools. So I mean, we, our largest LUSD pools are currently on curve. And from what we can see there, I mean, we just created our own chart. It, it, I mean, it was a bit more volatile around like May 20th or when this happened. But the deviation was a bit lower. I guess it wasn't more than three cents, at least on curve. So yeah, but. I mean, there was the very few spikes in both directions, which, I mean, it's hard to say why that happened.

So we like what we can say, I mean, what we would expect is that whenever there is a sharp ether price drop, then people would want to repay their loans or some people would want to top up their collateral, but others don't have the means. So the only thing that they can do is either partially or fully repay the loans to prevent. liquidation. I mean, they don't want to be liquidated because then they lose even more. So, and if people are trying to close their loans, so to say that would have an impact on the LSD price, so normally, or in theory, that should rather drive the price up than down. And that's what happened with Dye and USDA a year ago or a bit more than a year ago in this Black Swan event.

and there were like there are also some like academic papers on that very topic. But now in our situation, it was a bit different. So around that day and also the following days, the price, it was hovering maybe around 99, 98, 99 cents. And the reason for that, I guess, I mean, it's hard to tell is that, I mean, we have this stability pool. So in our system, people and many borrowers have their own tokens in the stability pool. And if they don't, they can, or if there is somebody in the pool, he may have an incentive to take out the LUSD from the pool and put it like or sell it somewhere in the market because this pool gets less attractive as the LUSD drops below $1. So this kind of stability pool can also act as a stabilizer in some way. So it would basically give more liquidity to the market so that borrowers have more liquidity available to buy in order to repair the loan.

So that may be one reason why we didn't have this kind of sun spike upwards. And also another reason is maybe that, I mean, LSD is quite a new project or liquid is quite a new project. And LSD is not acting as a safe heaven maybe as USDC when people are like just selling their ether for, for like whatever stable currency. Yeah, I guess I was going to say like it seemed to perform relatively well in not quite a black swan, but a gray swan type event. 60% ether lost. We would call that a black swan if the COVID crash hadn't already happened.

Yeah. Or definitely if we were in mainstream finance, that would be like like incredible volatility, unprecedented volatility. But like I guess it seems to me LUSD held up fairly well in these types of conditions. So it's nice to, I mean, you guys are LUSD is like what a month or so in, launched in April. And you have one of these 60% drawdowns in month two. Not too bad. Yeah.

Yeah. So we are really happy with this outcome. And it was like an early stress test of our system. And I guess this will also give. some users or some prospective users, like confidence in the system so that they know, oh, this system has already survived, something which is almost a black swan event. So, yeah, they should trust it even more than before. Robert, you mentioned that the coin gecko price for LUSD might not be the best place to view the price.

Where do you go when you want to see the general value of LUSD on the secondary markets? Is there a resource that we can point our listeners to? So we just created a new Dune page for the curve price. I'm not sure if I can share it. Maybe I could do that. Put a link in the chat and I'll show it on my screen in just a minute. And I'll put it into the YouTube comments. Right.

I think I have it right ready. Cool. Robert. It's still a working progress. So this may change a little bit. Okay, let me just show that really quick. So this is Dune. Man, Dune does everything, don't they?

Jobses. It's just still loading. Let me share it as soon as it loads here. Cool. I hope my death created this will forgive me for showing off his early bird. It's like kind of in progress. So you've seen the middle chart, it is, we have to,

the axes are a bit like off, But you can see that there was this like underpriced event. But if you hover over it, it should show, I guess, the price. It was like three cents off the USDC. Wow. Wow. That's crazy. Because like, you know, three cents is far off the peg.

But like, we have to put things into perspective. Ether drop 60%. Three price, three percent or three, yeah, three percent off the dollar for a, you know, call it 24, not even 24 hours, relatively is like really good. That is what stability looks like. Well, last time. So just what's interesting, I think, about liquidity in this protocol is like, last time we had such an event, 60% drawdown was actually Black Thursday in March. And I remember looking at Maker that day and just like crossing my fingers, like, come on, die. Come on, pull through. But like price is spiked to $1.8 cents, $1.9 cents, a dollar 10 cents on some exchanges.

And what's interesting about that is the remedy. Part of the remedy following Black Thursday for Maker was, what are we going to do? We have to add a whole bunch of centralized, collateralized bank crypto dollars. I'm using the term accurately now, David, not stable coins, crypto dollars. So USDC. And now we have a point where, you know, the compilation of dye has changed over time and it's gone up and down. But now I think it's something like a third of die is backed by USDC. And as advocates, like the show is called bankless, right? Like the show is called bankless guys. Coinbase is, God bless them, crypto bank.

We like them as a bridge to this new world. But if all we're left with is crypto dollars from a crypto bank, what have we accomplished here? Right. Right. So that's why this is a really interesting niche. Like Maker, great experiment. It's running, hugely supportive of MKR, die, defy. But this is another experiment, and it's not backed by any centralized bank crypto dollars.

It's backed purely by ETH. and it held up in a gray swan 60% drawdown event. That's what's cool here in my opinion. Yeah, there is something to note of, you know, ex-essential risk of like what happens if all of MakerDAO is really just one collateral type. And if that one collateral type is ether, that's one thing. If that one collateral type is USDC, there's existential risk with, you know, Circle and whoever controls the U.S.E smart contracts kind of has leverage over the Maker Dow system. But then also it ultimately ends up just becoming an extension of the actual central bank, right? If the collateral is just like the dollar, the actual dollar, not crypto dollars.

And so comparing and contrasting maker to something like liquidies are really helpful in this scenario. And kind of why, like, you know, Ryan and I, when we put on our ethmaxy hats and we see a, an L-U-S-D that's-Bankless maxi, sir. Bankless maxi-hats. Yeah. Well, Ether as one of the most bankless assets in the world. It's very, very competitive to a system that seems to be like, like Ether to me is like the uncorruptible asset, right? And so having the uncorruptible asset as the only collateral type.

And then having that stable coin stay up, awesome. Robert, I got to ask here because like this seems like Maker with tweaks, really cool tweaks, to be honest. what about that Oracle thing? Can we get that out? So Chainlink, had Chainlink got on, explained oracles to us, awesome. But it is also an attack vector. Do you have any thoughts on how oracles might progress

and whether we can get to an even more trustless set of oracles oracle solution with liquidity? Yeah, that's an involved question. So, I mean, given that we cannot upgrade our system, even if a new Oracle became available in the future, we cannot simply just take it and include it. I mean, we will need to deploy a new version. But, I mean, maybe that would be a good reason at some point for a version two.

But generally speaking, I don't quite see that many options in the Oracle space right now. That would be a good alternative. I mean, we have Taylor, for example, as our fallback. I mean, it has this kind of deal. decentralization approach as well, which I really like. But it's the thing that I see with Oracle's is that there is a very sharp or difficult trade-off between security and decentralization. Because, I mean, at least with the current gas prices, Oracle providers need to be paid,

but at least compensated for the costs. And if you want to do that in a completely decentralized fashion, somebody needs to pay for it. And this may become an issue because you also need to somehow, I mean, if you do it, really decentralized, then you need stakes that are locked up that can be punished or slashed if people misreport or like the providers misbehave. So you need to be able to extract enough revenue from your users using your Oracle so that you can give it back to the Oracle price providers or give back a high enough yield so that they would stake like millions or billions of ether or worth of ether so that you can then secure a system that now like our system has

like maybe a TVL of 2.5 billions. So you need to create an Oracle that has a similar TVL that the system or even a higher TVL that the defy applications that is that it is powering. And that's kind of difficult to achieve. What about uniswap and sort of a time weighted average Oracle solution that they have put together? Is that helpful in any way? So it also comes with its own tradeoffs and I'm not even thinking of the fact that you have this T-WP period where you have the issue that you need to set like a long enough period in order to have higher attack costs but then your Oracle won't be as like up to date. But there's, is this other thing. I mean, UNISOP is only able to give you a price for between two tokens.

And then like what would be the other token against which we can measure LUSD? I mean, we can measure it either against our competitors. So to say stable coin or again, centralized stable coins. So then it becomes, it inherits these issues from like the fact that centralized stable coins may go down maybe in the future. And then this would also have an effect on the Oracle price. So. Even that wouldn't be a perfect solution. Robert, one last thing before we break for sponsors. I just want to show this screen, which is ETH locked in liquidity.

Actually, this is, yeah, this is ETH locked in liquidity over time, April 5th, all the way to now. We've got had over a million ETH locked in liquidity. 1%. And 1% of EF. 5 billion dollars at its peak. And of course, that's related to price of ETH too. How did this happen so fast? Yeah, we were blown away by this growth ourselves.

So already during the first 10 days, it reached $1 billion. And then around two weeks into the life of liquidity, there was one big trove or like a super... This one? I think I see it. I mean, we don't know it for sure, but rumors had. it that it was Justin's son who just opened a crow with 660,000. 6,600k or 1,000 ether, which is kind of crazy. Yeah, but even like without him, I guess the rest is already remarkably high.

And yeah, I mean, we wouldn't have expected this, but now it's there and it happened like amazingly fast. when liquidity on troncer is it coming we don't have to answer that question Robert we have a bunch of YouTube questions that we want to get to and thanks everyone who have been in the YouTube asking questions and patiently waiting for me and Ryan to get to those

so in the second half of this AMA we were going to get to all of those YouTube questions but first a moment to talk about some of these fantastic sponsors that make the show possible Bankless is proud to be supported by Uniswap Uniswap is a new paradigm in asset exchange infrastructure. Instead of a cumbersome order book system where trades are matched with other humans, Uniswap is an autonomous piece of software on Ethereum, which is what Ryan and I call

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I've been a customer of Gemini since I first got into crypto in 2017, and it's been my main exchange of choice to make my crypto buys and sells. Gemini is available in all 50 states and in over 50 countries worldwide, and on Gemini there are markets for over 30 various. different crypto assets, including many of the hot defy tokens, and it's one of the few exchanges that has liquid dye markets. Gemini just launched their Earn program where you can earn up to to 7.4% interest on 26 various crypto assets. If you're tired of paying fees in Defi, or you don't want to worry about defy exploits, but you still want to earn interest on your crypto assets,

Gemini Earn is the product for you. Another product I'm stoked to get my hands on is the Gemini crypto-back credit card, which gives you 3% cash back on all of you. of your purchases, but paid to you in your preferred crypto asset. When I get my Gemini credit card, I'm going to make sure that I get my cash back in ETH. So whenever I buy something, I get a little bit of ETH bonus back to me at the same time. You can open up a free account in under three minutes at Gemini.com slash go bankless. And if you trade more than $100 within the first 30 days after sign up, you'll be gifted a free $15 Bitcoin bonus. Check them out at Gemini.com slash go bankless. All right, guys, we are back with Robert from Liquidy, and we have a bunch of questions from the YouTube that we want to get through.

Starting with a question from Justin Dover, are there any other assets coming to Liquity other than Ether? Is that possible? And is that something that's on the roadmap? It's technically impossible with the current version, and it's not in our short term or not part of our short term roadmap, but we are still. open for future asset types that become available and that are suitable for for liquidity being like a decentralized and and like systems so those collateral types need to fulfill a certain set of criteria like being large enough like the market cap needs to be like large enough so that we don't become the main driver of the price and also it should be decentralized and like high quality

just to be short. But then maybe... Go ahead. Yeah, so when this becomes available, we would, of course, evaluate the possibilities and see what we can do about. Robert, when I say things like

ETH is the only trustless collateral on Ethereum, people sometimes call me an ETH Maxi. Sir, are you an ETH Maxi? Yeah, I wouldn't say I'm not an eth-maxis. So I think it's just trustless in its own way. I mean, in its own right. And nothing has come really close,

but you never know what will happen in the future and what people come up with. So you should always stay open for new innovations. And yeah, I mean, that's, I think my philosophy. There's um, uh, we've come across a number of conversations that have, uh, had some sort of just like, sure, that's possible, but we would have to redeploy, uh, liquidity into like a version two, right? Like if we wanted to update the oracles, if we wanted to add a collateral type. So is that something that you guys are, are chewing on like a liquidity version two where we take

a bunch of positive ideas and integrate them? Or is this something that you're, the jury still kind of out on and you guys aren't yet convinced about? We are in this phase that our system is still young, and there are a few things that have already come up that we are like evaluating some inputs or some things that we may want to improve in a future version. But I mean, it's not like currently our short-term goal that we would start working on a version two, but we keep collecting improvements, new ideas that could at some point in the future lead to a version to. that would be like a massive improvement over the current system. And Robert, am I right here when we talk about version two's, right? Like we're not talking about governance being able to vote and, you know, change kind of multi-stig holders and redeploy updates and deploy updates,

that sort of thing. We're talking about a version two in the way like uniswap has a version two, where version one doesn't really die. You know, version two comes along, version three comes along. And if the market wants those versions, then it goes. and starts using them. That's sort of the governance by fork, I guess, you know, approach that you guys are taking too, similar to Uniswap. Is that correct? Exactly. So that's the idea that people would choose either to leave or stay. Love that. Another question from Justin Dover. Dover,

do you have any migration plans to go to optimism, Polygon, perhaps Arbitrum? Do you have any implementations with L2s that you guys are working on? That's a bit similar, though we have maybe put a bit more effort into exploring those solutions. We are currently in this weight in C phase. I mean, we see that there are a few options like there is Polygon, which is already quite popular. But there are a few technical issues with all of the solutions that we have come across.

So it's not like as easy that you could just simply take the system and. deploy it on an L2 solution, even though they are EVM compatible, but there are a few minor details that are not that minor that you need to change. And we don't want to rush into those in this decision. Probably there will be something, because ether or Ethereum is just not scalable. And it would be nice, like a very system that's much faster. But for the meantime, I would say it's more real, or for the short term, It's more realistic to expect some maybe like only partial integrations, maybe in the sense that

LUSD would become tradable on a layer two solutions so that you can trade it like for much lower gas costs over there and then maybe bridge it, like get back to the main chain like through a bridge. What about LUSD integrations into various different DFI apps? We just talked about how, you know, Ryan and I are, have, you know, some concerns in the back of our minds about too much USDC inside of MakerDAO to help stabilize the dye price? Like, what about LUSD in MakerDA? Like that, I think, would be a positive step in a good direction. Any other places where LUSD can get integrated into DFI that you guys have your sites on?

Yeah, so MakerDA would be interesting, though. We haven't really thought of that, right? So other DFI projects that could be interesting or like alchemics, for example, but also freaks, where it could be used as collateral. I mean, there are also other places which are a bit easier or even more obvious, like just the Dex's, like Curve and other maybe sushi swap where we would just spread, make sure that liquidity is available on different places. And yeah, I mean, we are also happy to see that some wallet and automation services are popping

up or they are now close to ready to integrate our system and to name a few. I mean, yeah, I'm not sure if I should name them. But there will be some news on that in the short term future. Like, you know, we are already on Xeroon and we are also in Argent, but they're similar, like automation tools. Yeah, that's super cool. Like, we do not want DFI to be dependent on a centralized bank crypto dollars, right? And like with USD and USDC, like these are all options and alternatives, but if Defy

becomes dependent on these, then we lose something. So having LUSD there is really fantastic. The other thing that I find interesting is you guys don't build your own user interfaces, which is kind of different, right? So like your approach with user interfaces, correct me if I'm wrong, is like you're providing the smart contract in physical. structure, you're building the protocol, but there's no like official blessed liquid user interface. You're depending on like Zapper or Zerion or anyone who wants to spin up

their own user interface. And so we have tons of different UIs available. Is that the case and why that decision? That's a great question. It's not as that we wouldn't or that we haven't released any UI. It's just that we are not running it. So what we did is we launched with the relatively the basic barebones UI launch kit, which it provided for free, like for download. And the protocol has some enshrined incentives that make it attractive for third parties to run a front end because they get like the share of the reward based on the turnover that they generate or the users generate. And I mean, what we expect from that is some kind of competition and innovation from our

front end operators because they are like competing with each other. They also have another lever which is a kickback rate. They can set a rate which determines which part of the reward should go to the end user and which part of the reward should remain with the front end. And then also they can compete by adding new features, by improving upon our launch kit. And we have already seen some innovation, but we expect to see more in the future. And we know that some front ends are already working on really interesting features, which, yeah, will become available probably.

in the next two weeks. Maybe the bankless Dow is listening to this. So there's some incentive to build front ends to bankless products. Somewhat interesting. Can we talk about the incentive? So is this like almost like a liquidity mining type campaign? So if I, if somebody builds a front end, what is the incentive? And maybe this turns into the liquidity tokens next, LQTY. Can you talk about the incentives there. And let's start talking about that token, too. Yeah, maybe I should start with the token. At the beginning, I mentioned we have two fees, like the system generates revenue from the borrowing fee and the redemption fee. And it captures this revenue and it gives it out or it pays it to the stakers of our secondary token, the LQTY.

So everybody can stake the token and then become eligible for prorata share of the fee revenue. So that's what makes the token valuable in the first place. And on top of that, we have a liquidity or mining or yield farming system, if you want to use that word, which basically gives the stability depositors, like whoever secures the system by depositing LUSD to the stability pool would then become eligible for like kind of a community payout. Like the system would pay out like newly minted LQTY tokens to those who are in the pool, like again on a prorata basis. So the more you deposit to the stability pool, the larger your share is.

And then you can basically by staking or sorry, by depositing LQTY to the pool, you will get some LQTY over time. And then you can stake your LQTY in order to get the fee revenue. So that's the system. how it plays together. And then also we have the front ends and they tie in through this stability pool. So whenever a user that goes through a specific front end deposits aliasly to the stability pool, then this user would become eligible for like getting a continuous payout of liquidity tokens, but the system would maybe only pay out 95% to this user because this 5%

would remain with the frontend, like the front end could set this kind of kickback rate, and then the 95% would be the kickback, which is paid out to user, and the 5% would save it the front end. It's like a referral fee, basically. Yes, and it's, yeah, and it's based on the turnover, so it's not just based on user camp, but it's also adding a ton of surface area for competition, which at the end of the day, competition is always good for the customer. And so I think it's pretty cool that you're leaving a lot of competitive innovation into the hands of the implementers rather than the team itself.

Kevin Awaki on our state of the nation's dream yesterday talked about decentralizing stress. And so handing off responsibility over to people who want to compete for reward sounds like an interesting way to do that. Robert, we're coming down to the end of our time here. And so we just have a few more questions that we want to get through. and everyone who's watching on the YouTube, thanks for being here. It's your last chance to get in questions. Also subscribe to the channel and like the video. And Robert, I want to ask about the LQTY token, the Liquity token.

Using the MKR token as a mental model, MKR gets minted or issued or diluted to, in the event of liquidations where the system cannot come up with enough collateral. Is there a similar mechanism with the LQTY token, or what is the LQTY token in response or in relationship to the protocol? We don't have a similar mechanism. So there is no minting in case of an emergency. So the RQTIY token has a hard cap.

It's 100 million on its supply. What we have instead is a recovery mode, which kind of acts as a loss, like as a way to rescue the system in case of an under collateralization risk. But we don't need to dilute the equity-dye supply. And so how does the LQTY token capture value? I'm assuming there's some sort of fee capture mechanism going into the liquidity token. Yeah, so we have the two fees, the borrowing fee and the redemption fee,

and they are both captured and paid out to the stakers of equity-y tokens. So it's not a buy-back and burn model. It's a fee revenue model. It's a capital asset. It's like a dividend payout rather than a buy-tubey. back. Why do you like that better? Good question. It's somehow easier to reason about, I would

say, though economically speaking, I think in a perfectly rational world, the two should be economically equivalent, but for some people, it's easier to reason about, like, or that you can keep your principle, like you gain something. It's like psychologically maybe more

attractive than just the outlook of a rising token price. Why did you say over the long term, a buyback and burn model or a capital asset model is logically the same? How do those converge upon the same things over time? Yeah, it's probably hard to tell. I mean, the idea is that you, I mean, when you burn tokens, you would do that, I mean, to get some value. I mean, there is some reason why the system can burn tokens. And that's like for, like, let's say, like you capture the fee through burning.

and it's the same value that you can capture through burning that you would be able to pay out to the stakers. Maybe there is one slight difference here, which is that when you stake, there will always be non-stakers. Like, it's not realistic to assume that 100% of the tokens will be staked. So it means that the lazy or like maybe the ignorance, they will lose out. So whoever is a staker would get like a higher relative share. While with the burning mechanism, every holder benefits in the end because the value... A bit more active. Yeah.

And so how do you think, do you think that fees paid to the system are going to be like relatively stable over the long term or is there going to be waves of high fees and troughs of low fees? What kind of data or speculation do you have on this? So what we have seen so far is that the fee revenue. is very variable. Like it worries from day to day and it can go up by 10x and then plummet by 20x and like it's really, but you have to look at it like in a longer term perspective. Like you cannot say that the revenue will be stable. So that's like maybe the part in our system which is a bit like unpredictable for for the staker. But you have also have to take into account that you have no risk. I mean as a staker, you get your principal back. So it's like a yield that you get without any

added risk. I think what's cool about that is I think we'd only see a design like that in a DeFi protocol because in the traditional financial world, that level of variability, I mean, it probably wouldn't like that. A traditional bank having, you know, a 10x spike and then nothing for, you know, a period of time and then another huge spike. But like a protocol doesn't care. Anyway, I have a final question for you, Robert. It's been a a pleasure having you on today to explain this. I'm really excited about what Liquidy is doing. What other stablecoin or crypto dollar projects out there seem the most interesting to you?

I would say I like the hybrid approach taken by Frex. It's an interesting approach because we have seen that purely algorithmic stablecoins were probably are probably destined to fail while other protocols like liquidity or like need to be over collateralized. But then there is maybe a middle ground that can can work, which is less or even more capital efficient if you look at the macroeconomic numbers than liquidity. But I mean, it's a completely different system. It doesn't use like borrowing as its main driver and backing mechanism.

And then in general on the category. Gores, it sounds like you're kind of bearish on purely algorithmic stable coins. Is that correct? Do you think a good stable coin crypto dollar design needs to be collateral backed in some form? I fear that it doesn't really work without any collateral. Now there are like some projects like Terra, for example, and synthetics in a sense that are kind of using their own collateral, which is a bit similar to the algorithmic ones, but also it's also kind of a high. approach between the fully algorithmic stable coins and the fully backed stable coins. And I mean, they have proven to work so far, but nobody knows what will happen in the future.

And Tara recently had some troubles with that Grey Swan event. But hey, Grayson Bankless, let a thousand flowers bloom. We are experimenting. And, you know, the best protocols will rise to the top over time. So, Robert, thank you for guiding us through that. Yeah, thank you for having me. Robert, if people want to find out more about Liquity and join the community, where should they go? They should go to Liquity.org and just find our Discord and join the community.

It's a very active community. Awesome, awesome. Well, guys, thank you again for coming to this bank list, bi-weekly, excuse me, AMA with Robert from Liquidy. If you guys are watching on the YouTube, make sure to like and subscribe, because we do this every other week. And we also want to know from you, who do you guys want to have on next on the show? What questions, what projects, what people in the space do you guys have questions for? And that's why you should subscribe to the YouTube. And Ryan, will you please do

the canonical disclaimer? Of course I will. Guys, eat is risky. Defi is risky. So is liquidy. All of this stuff is risky. You could lose what you put in. But we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.