General
What is Liquid Loans?
Liquid Loans is a decentralized lending protocol that allows you to draw interest-free loans against PLS (PulseChain coin) used as collateral.
Users deposit PLS and mint USDL (stablecoin). These individual collateralized debt positions are called Vaults.
The minted stablecoins are economically geared towards maintaining a value of 1 USDL = $1 USD of PLS value, due to the following properties:
The system is designed to always be over-collateralized.
The dollar value of the locked PLS exceeds the dollar value of the issued stablecoins.
The stablecoins are fully redeemable.
Users can always swap USDL for PLS (minus fees), directly within the system.
The system controls the generation of USDL.
The operations are done algorithmically, through a variable issuance fee.
After opening a Vault, users mint their own stablecoin to a collateral ratio of at least 110%.
As an example, a user with $11,000 worth of PLS can mint up to 10,000 USDL.
The tokens are freely exchangeable – anyone can send or receive USDL tokens. USDL tokens are burned upon repayment of a Vault’s debt or via a direct redemption process.
The Liquid Loans system regularly updates the PLS:USD price via a decentralized data feed.
When a Vault falls below a minimum collateralization ratio (MCR) of 110%, it is considered under-collateralized, and is vulnerable to liquidation. This is to ensure the protocol remains solvent at all times, and 1 USDL can always be redeemed for $1 USD worth of PLS.
Learn more about liquidation.
What are USDL, LOAN and PLS?
The Liquid Loans protocol has two native tokens.
USDL is a decentralized over-collateralized stablecoin that aims to always be worth one US dollar. It is used to pay out loans on the protocol, and can be redeemed against PLS (PulseChain coin), the underlying collateral, at face value, at any time.
Many stablecoins today are fiat-backed. The issuers purport to take real US dollars, put them in a bank account, and then issue tokens that represent those dollars.
But USDL is different. It doesn’t rely on dollars in a bank account.
Instead, USDL is minted when users deposit PLS as collateral.
All USDL within the Liquid Loans ecosystem is backed by a surplus of collateral that has been locked into individual smart contracts called Vaults.
LOAN is the secondary token issued by the protocol. It captures the fee revenue that is generated by the system and incentivizes early adopters through its distribution model.
LOAN is a productive, yield producing asset which is earned by providing USDL to the stability pool in the protocol. The LOAN you receive for providing this service can be staked to earn a share of the fees paid by users of the system when borrowing or redeeming USDL.
Anyone can purchase LOAN and join the global community of LOAN token holders, and by staking LOAN tokens, receive a share of the protocol’s fees.
The community is therefore essentially the “owner” of this decentralized protocol.
PLS is the native coin of PulseChain, and the collateral used by the Liquid Loans protocol.
What’s the motivation behind Liquid Loans?
The protocol was developed to allow owners of PLS a method of extracting value from their holdings, without the need to ever sell their tokens.
By locking up PLS and minting USDL, a PLS holder can take a 0% interest-free loan against their holdings, with no repayment schedule.
Stablecoins are an essential building block on any blockchain. However, the vast majority of this value is made up of centralized stablecoins. Decentralized stablecoins make up only a small portion of the total stablecoin supply.
Liquid Loans addresses this by creating a more capital-efficient and user-friendly way to borrow a decentralized stablecoin.
Furthermore, Liquid Loans is completely immutable, governance-free, and non-custodial.
What are the key benefits of Liquid Loans?
0% interest rate – as a borrower, there’s no need to worry about constantly accruing debt
110% MCR – a low Minimum Collateral Ratio means more efficient usage of your deposited PLS
Governance free – all operations are algorithmic and fully automated, and protocol parameters are set at time of deployment
Directly redeemable – the protocol allows you to exchange 1 USDL stablecoin for $1 USD worth of PLS at any time
Fully decentralized – the contracts have no admin keys and can be accessible via other front ends, making it censorship resistant
Does anyone “own” or operate the protocol?
No. The contract is immutable and therefore has no owner or operator.
Can Liquid Loans be upgraded or changed?
No. The protocol has no admin key, and nobody can alter the rules of the system in any way. The smart contract code is completely immutable once deployed.
Has the protocol been third-party verified, certified, and/or audited?
Yes. The Liquid Loans protocol has been professionally reviewed and audited by leading international blockchain security firm, Halborn.
The final report is publicly available for you to download and read here.
What are the main use cases of Liquid Loans?
Borrow USDL against PLS by opening a ‘Vault’
Earn LOAN token by providing USDL to the Stability Pool in exchange for rewards
Stake LOAN to earn the fee revenue paid for borrowing or redeeming USDL
Redeem 1 USDL for $1 USD worth of PLS at any time
Arbitrage potential gains if the 1 USDL peg falls below $1 USD
What do I need in order to use Liquid Loans?
To borrow USDL, all you need is a wallet (e.g. MetaMask) and sufficient PLS to open a Vault and pay the gas fees.
To help provide stability, you’ll need USDL to deposit into the Stability Pool.
To become a LOAN staker, naturally you’ll need LOAN tokens.
You can also use a decentralized exchange to buy LOAN, USDL and PLS on the open market.
Does Liquid Loans charge any fees?
There is a one-off fee whenever USDL is borrowed, and when PLS is redeemed.
Borrowers pay a borrowing fee on loans as a percentage of the issued amount (in USDL).
Redeemers who wish to redeem PLS need to pay a redemption fee. Note that redemption is separate from repaying your loan as a borrower, which is free of charge.
Both fees depend on the redemption volumes, i.e. they increase upon every redemption as a function of the redeemed amount, and decay over time as long as no redemptions take place.
The intent is to throttle large redemptions with higher fees, and to throttle borrowing directly after large redemption volumes.
The fee decay over time ensures that the fee for both borrowers and redeemers will “cool down”, while redemptions volumes are low.
The fees cannot become smaller than 0.5% (except in Recovery Mode), which protects the redemption facility from being misused by arbitrageurs front-running the price feed.
The borrowing fee is capped at 5%, keeping the system attractive for borrowers even in phases where the monetary supply is contracting due to redemptions.
Other than that, the two fees are identical and are depicted as "Fee" in the following chart:
What is the mechanism that determines the borrowing fee and redemption fee?
The base fee fluctuates when there are USDL redemptions for PLS. As more occur and the frequency increases, the base rate goes up.
As redemptions subside, the base rate goes down. There is always a default of 0.5% + variable base rate.
How can I earn yield using Liquid Loans?
There are many different ways to generate revenue using Liquid Loans, including:
Earn LOAN tokens by providing liquidity to a liquidity pool.
Stake LOAN and earn USDL and PLS revenue from borrowing and redemption fees.
Deposit USDL to the Stability Pool and earn liquidation gains in PLS and LOAN as rewards.
Arbitrage USDL by redeeming for PLS (i.e. 1 USDL for $1 USD worth of PLS).
In addition, you may also choose to facilitate peer-to-peer transactions in traditional markets by accepting USDL and/or LOAN tokens.
Can I lose my funds?
As a non-custodial system, all tokens sent to the protocol will be held and managed algorithmically without the interference of any person or legal entity. That means your funds will only be subject to the rules set forth in the smart contract code.
Learn more about Audits.
There are a few scenarios under which you may lose a part of your funds:
You are a borrower (Vault owner) and your collateral in PLS is liquidated. You will still keep your borrowed USDL, but your Vault will be closed and your collateral will be used to compensate Stability Pool depositors and/or other Vault owners (during redistribution).
You are a borrower and either Recovery Mode is activated or redemptions occur. You could lose 110% collateral and any remainder would be claimable. This would result in collateral loss, which is why a suggested higher collateral ratio helps reduce risk.
You are a Stability Pool depositor and your deposited USDL is used to repay debt from liquidated borrowers. Since liquidations are triggered any time borrowers’ collateral drops below 110%, you will receive more PLS in return with a very high probability. However, if PLS decreases in price and you maintain exposure, you may lose value in your total pool deposits.
Please note that although the system is diligently audited, a hack or a bug that results in losses for the users can never be fully excluded (see disclaimer).
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