# Welcome

![](/files/WQl7D1a8Z7dQxTAyZefp)

## LIVE on two of crypto's best chains.

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**CHOOSE YOUR CHAIN TO GET STARTED**
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<figure><img src="/files/ONMaTsDgC8vTcEE0WzZw" alt=""><figcaption><p><a href="/pages/MkKLemSbqWilMcsdngRk"><mark style="color:blue;"><strong>GO TO BASE →</strong></mark></a></p></figcaption></figure>
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<figure><img src="/files/9IKtJ2ymV6SjyxTL8M3g" alt=""><figcaption><p><a href="/pages/HHXTfp746DegKGYWqJ3u"><mark style="color:blue;"><strong>GO TO PULSECHAIN →</strong></mark></a></p></figcaption></figure>
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# Base

Discover Liquid Loans on Base

![](/files/WQl7D1a8Z7dQxTAyZefp)

### Explained (in 4-Minutes)

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**Don't miss this!**  Watch our animated explainer video here:
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{% embed url="<https://www.youtube.com/watch?v=zWp_oNoANUg>" %}

### The Protocol

Liquid Loans is a revolutionary decentralized lending and earning protocol live on Base. Its operations are immutable, non-custodial, and governance-free. It is a finished product with no admin keys.

The protocol was developed to give anyone who owns ETH a method of extracting value from their holdings, without the need to ever sell. By locking up ETH and minting USDL (a USD-pegged, fully backed decentralized over-collateralized stablecoin), ETH holders on Base can take a 0% interest-free loan against their holdings, on a timeless repayment schedule.

### Founders' Vision

“The purpose of Liquid Loans protocol is to support the creation, growth and adoption of a more secure, trustless, and decentralized financial infrastructure, that is community-owned, and brings greater stability and transparency to the crypto landscape.

The Liquid Loans development and support team aim to educate, inspire, create value, and make a real difference.”

### Connect With Us

Join our amazing community on [Telegram](https://t.me/liquidloans) and [Reddit](https://www.reddit.com/r/LiquidLoans/)

Get educated and be inspired on [YouTube](https://www.youtube.com/c/LiquidLoans) and [X](https://x.com/liquidloansio)

Learn more about Liquid Loans on the official website: <https://liquidloans.io/base/>

Use the Liquid Loans yourself on mainnet: <https://go.liquidloans.io/>

Try Liquid Loans yourself on the testnet: <https://testnet.liquidloans.io/>


# General

General | Liquid Loans Docs on Base

### What Is Liquid Loans?

Liquid Loans is a decentralized lending protocol that allows you to draw interest-free loans by using ETH used as collateral on Base Protocol.

Users deposit ETH and mint USDL (stablecoin). These individual collateralized debt positions are called [Vaults](/base/borrowing#what-is-a-vault).

The minted stablecoins are economically geared towards maintaining a value of 1 USDL = $1 USD of ETH value, due to the following properties:

1. **The system is designed to always be over-collateralized.**\
   The dollar value of the locked ETH exceeds the dollar value of the issued stablecoins.
2. **The stablecoins are fully redeemable.**\
   Users can always swap USDL for ETH (minus fees), directly within the system.
3. **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](/base/borrowing#what-is-the-collateral-ratio) of at least 110%.

As an example, a user with $11,000 worth of ETH 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](https://app.gitbook.com/o/tgRkVueuYZNi1cVPKWfe/s/JJkJr09WgXT5H1zLQa4z/redemptions-and-price-stability) process.

The Liquid Loans system regularly updates the ETH:USD price via a decentralized data feed.

When a Vault falls below a[ minimum collateralization ratio](https://app.gitbook.com/o/tgRkVueuYZNi1cVPKWfe/s/JJkJr09WgXT5H1zLQa4z/borrowing#what-is-the-minimum-collateral-ratio-mcr-and-the-recommended-collateral-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 ETH.

Learn more about [liquidation](https://app.gitbook.com/o/tgRkVueuYZNi1cVPKWfe/s/JJkJr09WgXT5H1zLQa4z/stability-pool-and-liquidations#what-are-liquidations).

### What are USDL, LOAN, and ETH?

The Liquid Loans protocol has two native tokens.

![](/files/vXfabRM7sZUmN1zcEkDF)

**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 ETH, 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 ETH 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](/base/stability-pool-and-liquidations#what-is-the-stability-pool) in the protocol. The LOAN you receive for providing this service can be [staked](/base/loan-staking) 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.

<div align="left"><figure><img src="/files/AX3SiQg4373gKbiRpF2g" alt="" width="188"><figcaption></figcaption></figure></div>

**ETH** (Ether) is the native coin of Base, and the collateral used by the Liquid Loans protocol.

### What’s the motivation behind Liquid Loans?

The protocol was developed to allow owners of ETH a method of extracting value from their holdings, without the need to ever sell their tokens.

By locking up ETH and minting USDL, an ETH 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 ETH.
* **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 ETH 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](https://llprod-resource.s3.ap-southeast-2.amazonaws.com/Audit/Base/Halborn+Audit+Report+-+Liquid+Loans+on+Base.pdf).

### What are the main use cases of Liquid Loans?

1. **Borrow** USDL against ETH by opening a ‘​Vault’
2. **Earn** LOAN token by providing USDL to the Stability Pool in exchange for rewards
3. **Stake** LOAN to earn the fee revenue paid for borrowing or redeeming USDL
4. **Redeem** 1 USDL for $1 USD worth of ETH at any time.
5. **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 ETH 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 ETH on the open market.

### Does Liquid Loans charge any fees?

There is a one-off fee whenever USDL is borrowed, and when ETH is redeemed.

* Borrowers pay a borrowing fee on loans as a percentage of the issued amount (in USDL).
* Redeemers who wish to redeem ETH 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](/base/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:

![](/files/1zxE2PyHyeJwOJrYcMWs)

### What is the mechanism that determines the borrowing fee and redemption fee?

The base fee fluctuates when there are USDL redemptions for ETH. 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 ETH revenue from borrowing and redemption fees.
* **Deposit** USDL to the Stability Pool and earn liquidation gains in ETH and LOAN as rewards.
* **Arbitrage** USDL by redeeming for ETH (i.e. 1 USDL for $1 USD worth of ETH).

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](/base/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 ETH is [liquidated](/base/stability-pool-and-liquidations#what-are-liquidations). You will still keep your borrowed USDL, but your Vault will be closed and your collateral will be used to compensate [Stability Pool](/base/stability-pool-and-liquidations#what-is-the-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 ETH in return with a very high probability. However, if ETH 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](https://liquidloans.io/base/protocol-disclaimer)).


# Definitions

Definitions | Liquid Loans Docs on Base

As you read through this Knowledge Base, you may see a number of terms and abbreviations which may require further explanation.

We have chosen to list many of those at the start of this document for quick reference now, and so you can return to them later:

TCR = Total Collateral Ratio

ICR = Individual Collateral Ratio

MCR = Minimum Collateral Ratio

SP = Stability Pool

DIF = Debt In Front

**Individual collateralization ratio (ICR):** a Vault's ICR is the ratio of the dollar value of its entire collateral at the current ETH:USD price, to its entire debt.

**Total collateralization ratio (TCR):** the ratio of the dollar value of the entire system collateral at the current ETH:USD price, to the entire system debt.

**Vault:** a collateralized debt position, bound to a single address. Also referred to as a “CDP” in similar protocols.

**USDL:** The stablecoin that may be issued from a user's collateralized debt position and freely transferred/traded to any compatible address. Intended to maintain parity with the US dollar, and can always be redeemed directly with the system. 1 USDL is always exchangeable for $1 USD value of ETH.

**Active Vault:** a address owns an “active Vault” if there is a node in the SortedVaults list with ID equal to the address, and non-zero collateral is recorded on the Vault for that address.

**Closed Vault:** a Vault that was once active, but now has zero debt and zero collateral recorded on it, and there is no node in the SortedVaults list with ID equal to the owning address.

**Collateral:** any asset which a borrower must provide to take out a loan. ETH is the collateral used on Liquid Loans.

**Active collateral:** the amount of ETH collateral recorded in a Vault.

**Active debt:** the amount of USDL debt recorded in a Vault.

**Entire collateral:** the sum of a Vault’s active collateral plus its pending collateral rewards accumulated from distributions.

**Entire debt:** the sum of a Vault’s active debt plus its pending debt rewards accumulated from distributions.

**Nominal collateralization ratio (nominal ICR, NICR):** a Vault's nominal ICR is its entire collateral (in ETH) multiplied by 100e18 and divided by its entire debt.

**Total active collateral:** the sum of active collateral over all Vaults. Equal to the ETH in the ActivePool.

**Total active debt:** the sum of active debt over all Vaults. Equal to the USDL in the ActivePool.

**Total defaulted collateral:** the total ETH collateral in the DefaultPool

**Total defaulted debt:** the total USDL debt in the DefaultPool

**Entire system collateral:** the sum of the collateral in the ActivePool and DefaultPool

**Entire system debt:** the sum of the debt in the ActivePool and DefaultPool

**Critical collateralization ratio (CCR):** 150%. When the TCR is below the CCR, the system enters Recovery Mode.

**Borrower:** an externally-owned account or contract that locks collateral in a Vault and issues USDL tokens to their own address. They “borrow” USDL tokens against their ETH collateral.

**Depositor:** an externally owned account or contract that has assigned USDL tokens to the Stability Pool, in order to earn returns from liquidations, and receive LOAN token rewards.

**Redemption:** the act of swapping USDL tokens with the system, in return for an equivalent value of ETH. Any account with a USDL token balance may redeem them, whether or not they are a borrower.

When USDL is redeemed for ETH, the ETHis always withdrawn from the lowest collateral Vaults, in ascending order of their collateralization ratio. A redeemer can not selectively target Vaults with which to swap USDL for ETH.

**Repayment:** when a borrower sends USDL tokens to their own Vault, reducing their debt, and increasing their collateralization ratio.

**Retrieval:** when a borrower with an active Vault withdraws some or all of their ETH collateral from their own Vault, either reducing their collateralization ratio, or closing their Vault (if they have zero debt and withdraw all their ETH)

**Liquidation:** the act of force-closing an undercollateralized Vault and redistributing its collateral and debt. When the Stability Pool is sufficiently large, the liquidated debt is offset with the Stability Pool, and the ETH is distributed to depositors. If the liquidated debt can not be offset with the Pool, the system redistributes the liquidated collateral and debt directly to the active Vaults with >110% collateralization ratio.

Liquidation functionality is permissionless and publicly available – anyone may liquidate an undercollateralized Vault, or batch liquidate Vaults in ascending order of collateralization ratio.

**Collateral Surplus:** The difference between the dollar value of a Vault's ETH collateral, and the dollar value of its USDL debt. In a full liquidation, this is the net gain earned by the recipients of the liquidation.

**Offset:** cancellation of liquidated debt with USDL in the Stability Pool, and assignment of liquidated collateral to Stability Pool depositors, in proportion to their deposit.

**Redistribution:** assignment of liquidated debt and collateral directly to active Vaults, in proportion to their collateral.

**Pure offset:** when a Vault's debt is entirely canceled with USDL in the Stability Pool, and all of its liquidated ETH collateral is assigned to Stability Providers.

**Mixed offset and redistribution:** When the Stability Pool USDL only covers a fraction of the liquidated Vault's debt. This fraction of debt is cancelled with USDL in the Stability Pool, and an equal fraction of the Vault's collateral is assigned to depositors. The remaining collateral and debt is redistributed directly to active Vaults.

**Gas compensation:** A refund, in USDL and ETH, automatically paid to the caller of a liquidation function, intended to at least cover the gas cost of the transaction. Designed to ensure that liquidators are not dissuaded by potentially high gas costs.

**Debt In Front (DIF):** Represents the cumulative total value of USDL debt of all Vaults that have a lower collateral ratio than a specific Vault's individual collateral ratio position. This value can be useful for determining a Vault's redemption risk, since the riskiest Vaults (Vaults with the lowest collateralization ratio in the protocol at the time of redemption) are the ones that are redeemed first.


# Ecosystem

Ecosystem | Liquid Loans Docs on Base

### Explained (in 4-minutes)

{% hint style="success" %}
**Don't miss this!** Watch our animated explainer video here:
{% endhint %}

{% embed url="<https://www.youtube.com/watch?v=U6NFOAeuNT4>" %}

Here is an overview the Liquid Loans ecosystem and how its operations function together:

<figure><img src="/files/7ZyCG4ifbrXUnAhau9TT" alt=""><figcaption></figcaption></figure>

Here is a flow chart of the Liquid Loans ecosystem and how its operations function together:

<figure><img src="/files/2AxaXuZmBu4nTpOJBTWF" alt=""><figcaption></figcaption></figure>

Here is a snapshot of how you might use the protocol, plus the benefits and associated fees:

<figure><img src="/files/zE5hyteuRygqhcRb45Y7" alt=""><figcaption></figcaption></figure>


# Borrowing

Borrowing | Liquid Loans Docs on Base

### Why would I use Liquid Loans for borrowing?

The protocol offers interest-free loans and is more capital efficient than other borrowing systems (i.e. less collateral is needed for the same loan).

Instead of selling ETH to have liquid funds, you can use the protocol to lock up your ETH, borrow against the collateral to withdraw USDL, and then repay your loan at a future date.

### What do you mean by collateral?

Collateral is any asset which a borrower must provide to take out a loan. ETH is the collateral used on Liquid Loans.

This collateral ensures any loans issued in USDL by the protocol is fully redeemable against the ETH used as the collateral. This ensures the protocol’s stability and solvency.

### Is ETH (Ether) the only collateral accepted?

Yes, ETH is the only collateral type accepted by the protocol on Base.

### How can the protocol offer interest-free borrowing?

The protocol charges one-time borrowing and redemption fees that algorithmically adjust based on the amount being redeemed and last redemption time.

For example, if more redemptions are happening than usual (which means USDL is likely trading at less than 1 USD), the borrowing fee would increase, discouraging borrowing.

Other systems (e.g. MakerDAO) require variable interest rates to make borrowing more or less favorable, but do so implicitly since borrowers would not feel the impact upfront. Given that this also needs to be managed via governance, the protocol instead opts for a fully decentralized and direct feedback mechanism via one-off fees. This completely avoids third party intervention and counter-party risk.

### How can I borrow with Liquid Loans?

To borrow you must open a Vault and deposit a certain amount of collateral (ETH) into it. You can then draw USDL up to a collateral ratio of 110%.

**The minimum amount that can be drawn is 2,000 USDL.**

### What is a Vault?

A Vault is where you take out and maintain your loan. Each Vault is linked to a ETH wallet address and each address can have just one Vault. If you are familiar with Collateralized Debt Positions (CDPs) from other platforms, Vaults are similar in concept.

Vaults maintain two balances: one is an asset (ETH) acting as collateral, and the other is a debt denominated in USDL. You can change the amount of each by adding collateral or repaying debt. As you make these balance changes, your Vault’s collateral ratio changes accordingly.

You can close your Vault at any time by fully paying off your debt.

### Do I have to pay fees as a borrower?

Every time you draw USDL from your Vault, a one-off borrowing fee is charged on the drawn amount and added to your debt.

Note that the borrowing fee is variable and determined algorithmically, and has a minimum value of 0.5% under normal operation. The fee is 0% during [Recovery Mode](/base/recovery-mode).

A 200 USDL [Liquidation Reserve](#what-is-the-liquidation-reserve) will be applied as well, but returned to you upon repayment of debt.

### How is the borrowing fee calculated?

The borrowing fee is added to the debt of the Vault. The fee rate is confined to a range between 0.5% and 5%, and is multiplied by the amount of liquidity drawn by the borrower.

**For example:** The borrowing fee stands at 0.5% and the borrower draws 4,000 USDL from his open Vault. The borrower will obtain 3,781 USDL after the Liquidation Reserve and issuance fee are deducted. The borrowing fee is calculated on the borrowed amount less the Liquidation Reserve.

### When do I need to pay my loan back?

Loans issued by the protocol do not have a repayment schedule. You can leave your Vault open and repay your debt any time, as long as you maintain a collateral ratio of at least 110%.

### What is the collateral ratio?

This is the ratio between the US Dollar value of the collateral in your Vault and its debt in USDL.

The collateral ratio of your Vault will fluctuate over time as the price of ETH changes. You can influence the ratio by adjusting your Vault’s collateral and/or debt, i.e. adding more ETH collateral or paying off some of your debt.

For example: Let’s say the current price of ETH is $3,788 and you decide to deposit 3 ETH. If you borrow 3,788 USDL, then the collateral ratio for your Vault would be 300%.

If you instead took out 9,470 USDL that would put your ratio at 120%.

### What is the minimum collateral ratio (MCR) and the "recommended" collateral ratio?

The minimum collateral ratio (or MCR for short) is the lowest ratio of debt to collateral that will not trigger a liquidation under normal operations (aka Normal Mode).

This is a protocol parameter that is set to 110%, so if your Vault has a debt of 10,000 USDL, you would need at least $11,000 worth of ETH value deposited as collateral to avoid being liquidated.

To avoid liquidation during [Recovery Mode](/base/recovery-mode), it is **recommended to keep the ratio comfortably above 150%** (e.g. 200% or, better yet, 500+%).

### What happens if my Vault is liquidated?

You lose your collateral as your debt is paid off through [liquidation](/base/stability-pool-and-liquidations#what-are-liquidations) via the Stability Pool (borrower redistribution in rare circumstances), i.e. you will no longer be able to retrieve your collateral by repaying your debt. A liquidation thus results in a net loss of 9.09% (= 100% \* 10 / 110) of your collateral’s Dollar value.

### What is the Liquidation Reserve?

When you open a Vault and draw a loan, 200 USDL is set aside as a way to compensate gas costs for the transaction sender in the event your Vault is liquidated.

The Liquidation Reserve is fully refundable if your Vault is not liquidated, and is credited to you while you close your Vault by repaying your debt.

The Liquidation Reserve counts as debt and is taken into account for the calculation of a Vault's collateral ratio, slightly increasing the actual collateral requirements.

### Do I lose the 200 USDL if my Vault is liquidated?

Yes, if your Vault is liquidated you will lose the 200 USDL gas reserve. This reserve is compensation to those spending the time executing the liquidation transactions.

### What happens if my Vault is redeemed against?

When USDL is redeemed, the ETH provided to the redeemer is allocated from the Vault(s) with the lowest collateral ratio (even if it is above 110%). If, at the time of redemption, you have the Vault with the lowest ratio, you will give up some of your collateral, but your debt will be reduced accordingly.

The USD value by which your ETH collateral is reduced corresponds to the nominal USDL amount by which your Vault’s debt is decreased. You can think of redemptions as if somebody else is repaying your debt and retrieving an equivalent amount of your collateral.

As a positive side effect, redemptions improve the collateral ratio of the affected Vaults, making them less risky.

Redemptions that do not reduce your debt to 0 are called ‘partial redemptions’, while redemptions that fully pay off a Vault’s debt are called ‘full redemptions’. In such a case, your Vault is closed, and you can claim your collateral surplus and the Liquidation Reserve at any time.

Let’s say you own a Vault with 1.06 ETH collateralized and a debt of 3,200 USDL. The current price of ETH is $3,788. This puts your collateral ratio (CR) at 125%.

Let’s imagine this is the lowest CR in the Liquid Loans system and look at two examples of a partial redemption and a full redemption:

**Example of a partial redemption**

* Somebody redeems 1,200 USDL for 0.32 ETH and thus repays 1,200 USDL of your debt, reducing it from 3,200 USDL to 2,000 USDL. In return, 0.32 ETH, worth $1,200, is transferred from your Vault to the redeemer. Your collateral goes down from 1.06 ETH to 0.74 ETH, while your collateral ratio goes up from 125% to 140%.

**Example of a full redemption**

* Somebody redeems 6,000 USDL for 1.58 ETH. Given that the redeemed amount is larger than your debt minus 200 USDL (set aside as a Liquidation Reserve), your debt of 3,200 USDL is entirely cleared and your collateral gets reduced by $3,000 of ETH.

### How can you offer a collateral ratio as low as 110%?

By making liquidation instantaneous and more efficient, the protocol needs less collateral to provide the same guarantee level as similar protocols that rely on lengthy auction mechanisms to sell off collateral in liquidations.

### Why did the collateral and debt of my Vault increase without my intervention?

If Vaults are liquidated and the Stability Pool is empty (or gets emptied due to the liquidation), every borrower will receive a portion of the liquidated collateral and debt as part of a redistribution process.

### Are there notifications to inform the user about collateralization levels prior to borrowing?

Yes. Information will be displayed on what the minimum collateralization level is, and how to effectively reduce the risk of liquidation.

The system also displays the Total Collateral Level at any point in time.

**As long as your&#x20;*****individual collateral level remains above 150% your collateral is safe*****&#x20;from liquidation, even during recovery mode.**

### How are Vaults sorted and ordered?

Liquid Loans relies on a particular data structure: a sorted, doubly-linked list of Vaults that remains ordered by individual collateralization ratio (ICR), i.e. the amount of collateral in USD value of ETH divided by the amount of debt in USDL.


# Stability Pool & Liquidations

Stability Pool & Liquidations | Liquid Loans Docs on Base

### What is the Stability Pool?

The Stability Pool is the first line of defense in maintaining system solvency. It achieves that by acting as the source of liquidity to repay debt from [liquidated](#what-are-liquidations) Vaults, ensuring that the total USDL supply always remains backed.

When any [Vault](/base/borrowing#what-is-a-vault) is liquidated, an amount of USDL corresponding to the remaining debt of the Vault is burned from the Stability Pool’s balance to repay its debt. In exchange, the entire collateral from the Vault is transferred to the Stability Pool.

The Stability Pool is funded by users transferring USDL into it (called Stability Providers). Over time, Stability Providers lose a pro-rata share of their USDL deposits, while gaining a pro-rata share of the liquidated collateral.

However, because Vaults are likely to be liquidated at just below 110% collateral ratios, it is expected that Stability Providers will receive a greater dollar-value of collateral relative to the debt they pay off.

### Why should I deposit USDL to the Stability Pool?

Stability Providers will make Vault liquidation gains in ETH and receive rewards in the form of LOAN tokens. Staked LOAN tokens can earn a portion of revenue from the system.

### What are liquidations?

To ensure that the entire stablecoin supply remains fully backed by collateral, Vaults that fall under the minimum collateral ratio of 110% are subject to being closed (liquidated).

The debt of the Vault is canceled and absorbed by the Stability Pool, and its collateral distributed among Stability Providers.

The owner of the Vault still keeps the full amount of USDL borrowed but loses \~10% value overall, hence it is critical to always keep the ratio above 110% – ideally above 150%.

### What’s the Liquidation Logic?

The precise behavior of liquidations depends on the ICR of the Vault being liquidated and global system conditions: the total collateralization ratio (TCR) of the system, the size of the Stability Pool, etc.

### Who can liquidate Vaults?

Anyone can liquidate a Vault as soon as it drops below the Minimum Collateral Ratio of 110%. The initiator receives a gas compensation (200 USDL + 0.5% of the Vault's collateral) as reward for this service.

### How am I compensated for liquidating a Vault?

The liquidation of Vaults is connected with certain gas costs which the initiator has to cover. The cost per Vault was reduced by implementing batch liquidations of up to 160 - 185 Vaults but with the aim of ensuring that liquidations remain profitable.

In times of high gas prices, the protocol offers a gas compensation given by the following formula:

* **gas compensation = 200 USDL + 0.5% of Vault's collateral (ETH)**

The 200 USDL is funded by a [Liquidation Reserve](/base/borrowing#what-is-the-liquidation-reserve) while the variable 0.5% part (in ETH) comes from the liquidated collateral, slightly reducing the liquidation gain for Stability Providers.

### How do I benefit as a Stability Provider from liquidations?

As liquidations happen just below a collateral ratio of 110%, you will most likely experience a net gain whenever a Vault is liquidated.

Let’s say there is a total of 1,000,000 USDL in the Stability Pool and your deposit is 100,000 USDL.

Now, a Vault with a debt of 200,000 USDL and collateral of 57.57 ETH is liquidated at an ETH price of $3,788, and thus at a collateral ratio of 109% (= 100% \* (57.57 \* 3,788) / 200,000).

Given that your pool share is 10%, your deposit will go down by 10% of the liquidated debt (20,000 USDL), i.e. from 100,000 to 80,000 USDL. In return, you will gain 10% of the liquidated collateral, i.e. 5.757 ETH, which is currently worth $21,800. Your net gain from the liquidation is $1,800.

Note that depositors can immediately withdraw the collateral received from liquidations and sell it to reduce their exposure to ETH, if the USD value of ETH is expected to decrease.

### Will I be rewarded for being an early adopter?

Yes. To do this, you first need to open a Vault, borrow USDL, or purchase from the open market, and deposit it into the Stability Pool or DEX farming opportunity (while available).

After making your deposit, you will start accumulating a reward (in LOAN) proportional to the size of your deposit on a continuous basis. The reward is calculated according to the rewards schedule, which will be the highest for early adopters of the system.

You can withdraw your pending rewards to your wallet address at any point in time.

### Can I withdraw my deposit whenever I want?

As a general rule, you can withdraw the deposit made to the Stability Pool at any time. There is no minimum lockup duration.

However, withdrawals are temporarily suspended whenever there are liquidatable Vaults with a collateral ratio below 110% that have not been liquidated yet.

### What oracle are you using to determine the price of ETH?

At deployment, the protocol aims to use Chainlink Oracle’s ETH:USD price feed, falling back to the Tellor ETH:USD oracle under the following (extreme) conditions:\
\
–– Chainlink Oracle price has not been updated for more than 4 hours,\
–– Chainlink Oracle response call reverts and returns an invalid price or an invalid timestamp,\
–– The price change between two consecutive Chainlink Oracle price updates is >50%.

### Can I lose money by depositing funds to the Stability Pool?

While liquidations will occur at a collateral ratio well above 100% most of the time, it is theoretically possible that a Vault gets liquidated below 100% in a flash crash or due to an oracle failure. In such a case, you may experience a loss since the collateral gain will be smaller than the reduction of your deposit.

If USDL is trading above $1 worth of ETH value, liquidations may become unprofitable for Stability Providers even at collateral ratios higher than 100%. However, this loss is hypothetical since USDL is expected to return to the peg, so the “loss” only materializes if you had withdrawn your deposit and sold the USDL at a price above $1 worth of ETH value.

ETH price is not compared to USDL but rather USD value via oracle price feeds. Borrower’s loans are subject to the same standards as all others and would have to increase ETH collateral as price moves down if they are in jeopardy of liquidation.

### What happens if the Stability Pool is empty when liquidations occur?

If the Stability Pool is empty, the system uses a secondary liquidation mechanism called redistribution. In such a case, the system redistributes the debt and collateral from liquidated Vaults to all other existing Vaults. The redistribution of debt and collateral is done in proportion to the recipient Vault's collateral amount.

Here's an example from the [whitepaper](https://www.liquidloans.io/base/whitepaper):

<figure><img src="/files/uso8hi2P1gfHOUsgtyeu" alt=""><figcaption></figcaption></figure>


# Redemptions & Price Stability

Redemptions & Price Stability | Liquid Loans Docs on Base

### How does USDL closely follow the price of USD?

The ability to redeem USDL for ETH at face value (i.e. 1 USDL for $1 value worth of ETH) and the minimum collateral ratio of 110% create a price floor and price ceiling (respectively) through arbitrage opportunities. These are called "hard peg mechanisms" since they are based on direct processes.

USDL also benefits from less direct mechanisms for USD parity, which are called "soft peg mechanisms". One of these mechanisms is parity as a Schelling point (cooperation without communication). Since Liquid Loans treats USDL as being equal to the USD value of an asset, parity between the two is an ‘implied’ equilibrium state of the protocol.

Another of these mechanisms is the borrowing fee on new debts. As redemptions increase (implying USDL is below $1 value worth of ETH), so too does the *baseRate* — making borrowing less attractive, which keeps new USDL from hitting the market and driving the price below $1 value worth of ETH.

### What is the USDL token redemption?

Any USDL holder (whether or not they have an active Vault) may redeem their ETH directly with the system. Their USDL is exchanged for ETH, at face value: redeeming x USDL tokens returns $x worth of ETH value (minus a redemption fee).

When USDL is redeemed for ETH, the system cancels the USDL debt from Vaults, and the ETH is drawn from their collateral.

In order to fulfil the redemption request, Vaults are redeemed from, in an ascending order of their collateralization ratio.

A redemption sequence of n steps will fully redeem from up to n-1 Vaults, and, and partially redeem from up to 1 Vault, which is always the last Vault in the redemption sequence.

Redemptions are blocked when TCR < 110% (there is no need to restrict ICR < TCR). At that TCR, redemptions would likely be unprofitable, as USDL is probably trading above $1 of ETH value if the system has crashed that badly, but it could be a way for an attacker with a lot of USDL to lower the TCR even further.

Note that redemptions are disabled during the first 14 days of operation immediately following deployment of the protocol to protect the monetary system in its infancy.

* **Partial redemption**

Most redemption transactions will include a partial redemption, since the amount redeemed is unlikely to perfectly match the total debt of a series of Vaults.

The partially redeemed Vault is re-inserted into the sorted list of Vaults and remains active, but with reduced collateral and debt.

* **Full redemption**

A Vault is defined as “fully redeemed from” when the redemption has caused its debt to be fully absorbed. Then, its Liquidation Reserve is cancelled (and returned to the borrower) and the debt is zeroed.

Before closing, we must handle the Vault’s collateral surplus; that is, the excess ETH collateral remaining after redemption, due to its initial over-collateralization.

This collateral surplus is sent to a collateral surplus pool, and the borrower can reclaim it later. The Vault is then fully closed.

### How do redemptions create a price floor?

Economically, the redemption mechanism creates a hard price floor for USDL, ensuring that the market price stays at or near to $1 USD value of ETH.

### Is a redemption the same as paying back my debt?

No, redemptions are a completely separate mechanism. All one has to do to pay back their debt is adjust their Vault's debt and collateral.

### How is the redemption fee calculated?

Under normal operation, the redemption fee is given by the formula (*baseRate* + 0.5%) \* ETH drawn.

### How is the *baseRate* calculated?

Redemption fees are based on the *baseRate* state variable in Liquid Loans, which is dynamically updated. The *baseRate* increases with each redemption, and decays according to time passed since the last fee event – i.e. the last redemption or issuance of USDL.

Upon each redemption: *baseRate* is decayed based on time passed since the last fee event – *baseRate* is incremented by an amount proportional to the fraction of the total USDL supply that was redeemed – the redemption fee is given by (*baseRate* + 0.5%) \* ETH drawn

### As a borrower, do I lose money if I'm redeemed against?

If your Vault is redeemed against, you do not incur a net loss. However, you will lose some of your ETH exposure. Your Vault's collateral ratio will also improve after a redemption.

### How can I avoid being redeemed against?

The best way to avoid being redeemed against is by maintaining a high collateral ratio relative to the rest of the Vault's in the system.

Consider using a Debt In Front (DIF) indicator to gauge the cumulative total value of USDL debt of all Vaults that have a lower collateral ratio than your Vault's individual collateral ratio position.

This value can be useful for determining a Vault's redemption risk, since the riskiest Vaults (Vaults with the lowest collateralization ratio in the protocol at the time of redemption) are first in line when a redemption takes place.

### Can the USDL stablecoin become unstable?

Yes. The outside market may trade the stablecoin for less than the one USD equivalent. However, the redemption function decreases the likelihood, because anyone can redeem 1 USDL for $1 USD of ETH value at any time.

### How does the protocol know how much USDL to mint from deposited ETH?

It looks at the price of ETH:USD and mints the required amount of USDL being requested, assuming the chosen parameters meet the minimum loan requirements defined within the protocol.


# LOAN Rewards

LOAN Rewards | Liquid Loans Docs on Base

### What is LOAN?

LOAN is the secondary token issued by the Liquid Loans protocol. It captures the fee revenue that is generated by the system and incentivizes early adopters.

LOAN rewards will only accrue to Stability Providers,  i.e. users who deposit USDL to the Stability Pool and liquidity providers of the USDL:ETH pool.

*As technical rewards, they are based on a preprogrammed functionality of the protocol and not on a claim towards Liquid Loans frontend or any third party.*

### What is LOAN's max supply?

Total LOAN max supply is 5.5 trillion.

### Is LOAN a governance token?

No. LOAN is not a governance token, as there is no Liquid Loans governance.

### How can I earn LOAN?

LOAN is earned in two ways:

* Depositing USDL into the Stability Pool.
* Providing liquidity to the USDL:ETH pool.

### What can I do with LOAN?

LOAN holders can stake their tokens to earn the fees generated by loan issuance (borrowing fees) and ETH redemptions (redemption fees).

Learn more about [staking](/base/loan-staking).


# LOAN Staking

LOAN Staking | Liquid Loans Docs on Base

### How does staking work in Liquid Loans?

To start staking, all you need to do is deposit your LOAN token to the Liquid Loans staking contract. Once done you will start earning a pro rata share of the borrowing and redemption fees in USDL and ETH.

### How much will my staked LOAN earn?

Your LOAN stake will earn a share of the fees equal to your share of the total LOAN staked, at the instant the fee occurred.

### Is there a lock-up period?

No, you can withdraw your staked funds at any time.

### Can I stake USDL?

You can only stake LOAN tokens. USDL can be deposited into the [Stability Pool](/base/stability-pool-and-liquidations#what-is-the-stability-pool) for LOAN rewards.

### Can I stake ETH?

You can only stake LOAN tokens. ETH is used as collateral to secure your USDL loan.

### Are staked LOAN tokens used to backstop the system (like Maker) or for governance?

No, staked LOAN tokens are not used to backstop the Liquid Loans system, and are not used for governance as there is no Liquid Loans governance.


# Recovery Mode

Recovery Mode | Liquid Loans Docs on Base

### What is Recovery Mode?

Recovery Mode kicks in when the [Total Collateral Ratio (TCR)](#what-is-the-total-collateral-ratio) of the system falls below 150%.

During Recovery Mode, liquidation conditions are relaxed, and the system blocks borrower transactions that would further decrease the TCR.

New USDL may only be issued by adjusting existing Vaults in a way that improves their ICR, or by opening a new Vault with an ICR of >=150%.

In general, if an existing Vault's adjustment reduces its ICR, the transaction is only executed if the resulting TCR is above 150%.

<figure><img src="/files/seNP8WZ5GaZxs0m1D7xL" alt=""><figcaption></figcaption></figure>

### What is the Total Collateral Ratio?

The Total Collateral Ratio or TCR is the ratio of the Dollar value of the entire system collateral at the current ETH:USD price, to the entire system debt.

In other words, it's the sum of the collateral of all Vaults expressed in USD, divided by the debt of all Vaults expressed in USDL.

### What is the purpose of Recovery Mode?

The goal of Recovery Mode is to incentivize borrowers to behave in ways that promptly raise the TCR back above 150%, and to incentivize USDL holders to replenish the Stability Pool.

Economically, Recovery Mode is designed to encourage collateral top-ups and debt repayments, and also itself acts as a self-negating deterrent; the possibility of it occurring actually guides the system away from ever reaching it.

**Recovery Mode is not a desirable state for the system.**

### What are the fees during Recovery Mode?

While Recovery Mode has no impact on the redemption fee, the borrowing fee is set to 0% to maximally encourage borrowing (within the limits described above).

### How can I make my Vault safe in Recovery Mode?

By increasing your collateral ratio to 150% or greater, your Vault will be protected from liquidation. This can be done by adding collateral, repaying debt, or both.

### Can I be liquidated if my collateral ratio is below 150% in Recovery Mode?

Yes, you can be liquidated below 150%. In order to help avoid liquidation in Normal Mode and Recovery Mode, it is recommended that users keep their collateral ratio above 150%.

| Condition                                 | Liquidation Behavior                                                                                                                                                                                                                                                                                                                                                                         |
| ----------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ICR <=100%                                | Redistribute all debt and collateral (minus ETH gas compensation) to active Vaults.                                                                                                                                                                                                                                                                                                          |
| 100% < ICR < MCR & SP USDL > Vault debt   | USDL in the Stability Pool equal to the Vault's debt is offset with the Vault's debt. The Vault's ETH collateral (minus ETH gas compensation) is shared between depositors.                                                                                                                                                                                                                  |
| 100% < ICR < MCR & SP USDL < Vault debt   | The total Stability Pool USDL is offset with an equal amount of debt from the Vault. A fraction of the Vault's collateral (equal to the ratio of its offset debt to its entire debt) is shared between depositors. The remaining debt and collateral (minus ETH gas compensation) is redistributed to active Vaults.                                                                         |
| MCR <= ICR < 150% & SP USDL >= Vault debt | The Stability Pool USDL is offset with an equal amount of debt from the Vault. A fraction of ETH collateral with dollar value equal to 1.1 \* debt is shared between depositors. Nothing is redistributed to other active Vaults. Since its ICR was > 1.1, the Vault has a collateral remainder, which is sent to the CollSurplusPool and is claimable by the borrower. The Vault is closed. |
| MCR <= ICR < 150% & SP USDL < Vault debt  | Do nothing.                                                                                                                                                                                                                                                                                                                                                                                  |
| ICR >= 150%                               | Do nothing.                                                                                                                                                                                                                                                                                                                                                                                  |

### How much of a Vault’s collateral can be liquidated in Recovery Mode?

In Recovery Mode, liquidation loss is capped at 110% of a Vault's collateral. Any remainder, i.e. the collateral above 110% (and below the TCR), can be reclaimed by the liquidated borrower using the standard web interface.

This means that a borrower will face the same liquidation “penalty” (10%) in Recovery Mode as in Normal Mode if their Vault gets liquidated.


# Audits

Audits | Liquid Loans Docs on Base

The Liquid Loans protocol on Base is a fork of the Liquid Loans protocol on PulseChain, and inherits all risks of that protocol.

The Liquid Loans development team has only made the necessary changes to Liquid Loans original set of smart contracts to ensure it operates successfully.

These changes may include pointing the code to oracles (such as ChainLink) and decentralized exchanges.

Now that the protocol has launched on the Base mainnet, 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 [read and download here](https://llprod-resource.s3.ap-southeast-2.amazonaws.com/Audit/Base/Halborn+Audit+Report+-+Liquid+Loans+on+Base.pdf).

<figure><img src="/files/Ow4Zx9foreyY6BY3FpKW" alt="Liquid Loans Audit Report by Halborn.jpeg" width="375"><figcaption></figcaption></figure>

We also strongly recommend you review the following Liquid Loans on PulseChain audit.

* Audit by [Halborn](https://llprod-resource.s3.ap-southeast-2.amazonaws.com/Audit/Liquid_Loans_Protocol_Smart_Contract_Security_Assessment_Report_Halborn.pdf) June 2023


# Deployment

Deployment | Liquid Loans Docs on Base

### Is there a LOAN lockup and token vesting period?

Some LOAN is reserved for team members and advisors, and is locked up after system deployment.

**In the first year after launch:**

* All team members and advisors are only able to access a portion of their locked up LOAN tokens, paid out monthly.
* The Liquid Loans admin address may transfer tokens only to verified lockup contracts with an unlock date after system deployment

Also, separate LOAN allocations are made at deployment to an EOA (externally owned account) that will hold an amount of LOAN for bug bounties / hackathons and to a bonus rewards contract.

Aside from these allocations, the only LOAN made freely available is the LOAN publicly issued to Stability Providers.

Note that the Liquid Loans admin address has no extra privileges and does not retain any control whatsoever over the Liquid Loans protocol once deployed.


# Contracts

Contracts | Liquid Loans Docs on Base

## Contract Addresses

| **Mainnet**           | **Address**                                |
| --------------------- | ------------------------------------------ |
| usdlToken             | 0x78E8CF657742e10eaC8F64007615AA741fC76414 |
| loanToken             | 0x68B8102D404C46b5B4ADFCaeeEEE415ECfE4203F |
| activePool            | 0xa7d587fe21392FA6c2C4A0a3357EC8937B393044 |
| borrowerOperations    | 0x7f6ba848B5DAb6ADa942F599882bc391cD85F4D6 |
| collSurplusPool       | 0xF9DeA0FF3D899b39AE5Ea7ff79965f2675c18d09 |
| communityIssuance     | 0x40D561a42B36d1906aCF0af5edc7896989F39Db5 |
| gasPool               | 0xb242C806197A6F490d1d7D2939d8B6d35236478F |
| loanStaking           | 0x9e991A40E7d08B8A85AD51A0D00B921B92Dc649E |
| multiVaultGetter      | 0x9a4ac6B4d13dCa4083c5225Aaad4bEedE088F016 |
| UniswappairETHUSDL    | 0xF3c951DFc50dd4C2fb81bd853D7893d00405aD6d |
| Uniswap Pool          | 0x57139483191cD26474C6a26f83ECB89c242D0375 |
| priceFeed             | 0x76Ada222f62D4709CFCbF5CAF57cE8350277D278 |
| sortedVaults          | 0x6F2b2218Cc4FfB87d09eE8B3f6543e3D4CdD2B20 |
| stabilityPool         | 0x76826F9bE2BbFeFaC089E9EF016B7e749a4F500E |
| teamA                 | 0xC0A202B38eCDAca1d9Fe8c25FEea4F3B97641dD0 |
| teamB                 | 0x0E97a8A5A3b25F1a4A1e133360C5e2622a453a96 |
| vaultManager          | 0x6B2983E7d345EEa1C385468bc110Df94eBa4029d |
| defaultPool           | 0x529Ad5E88c8F53CE6A18b6E874a69c91c53a585E |
| hintHelpers           | 0x53C4279ced8f64ECcAad0a957D1842Eb6304dF37 |
| lockupContractFactory | 0xCc296fb3C1d477129e0d5cfCb4a840f46781Aa7e |
| lockupContractCreator | 0x57Ed23F9D729031886ecE75C31AEf3F41bD58b3f |


# PulseChain

![](/files/WQl7D1a8Z7dQxTAyZefp)

### Explained (in 4-Minutes)

{% hint style="success" %}
**Don't miss this!**  Watch our animated explainer video here:
{% endhint %}

{% embed url="<https://youtu.be/9cpa1v8AC68>" %}

### The Protocol

Liquid Loans is the first truly-decentralized lending protocol built specifically and exclusively for PulseChain. Its operations are immutable, non-custodial, and governance-free. It is a finished product with no admin keys.

The protocol was developed to allow owners of PulseChain coin (PLS) a method of extracting value from their holdings, without the need to ever sell. By locking up PLS coins and minting USDL (a USD pegged, fully backed decentralized over-collateralized stablecoin), a PLS holder can take a 0% interest-free loan against their holdings, on a timeless repayment schedule.

### Founders Vision

*“The purpose of Liquid Loans protocol is to support the creation, growth and adoption of a more secure, trustless, and decentralized financial infrastructure, that is community-owned, and brings greater stability and transparency to PulseChain.*

*The Liquid Loans development and support team are all PulseChain community members, and as a team, we aim to educate, inspire, create value, and make a difference.”*

### FAQs Video Interview

CEO Cristian and COO Dave answer 35 random questions about Liquid Loans here:

{% embed url="<https://youtu.be/f_fwKGPgCJo>" %}

### Connect With Us

Join our amazing community on [Telegram](https://t.me/liquidloans) and [Reddit](https://www.reddit.com/r/LiquidLoans/)

Get educated and be inspired on [YouTube](https://www.youtube.com/c/LiquidLoans) and [Twitter](https://twitter.com/liquidloansio) and [Medium](https://medium.com/@liquidloans)

Learn more about Liquid Loans on the official website: <https://liquidloans.io/>

Use the Liquid Loans yourself on the PulseChain mainnet: <https://go.liquidloans.io/>

Try Liquid Loans yourself on the PulseChain testnet: <https://testnet.liquidloans.io/>


# 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](/pulsechain/borrowing#what-is-a-vault).

The minted stablecoins are economically geared towards maintaining a value of 1 USDL = $1 USD of PLS value, due to the following properties:

1. **The system is designed to always be over-collateralized**.

   The dollar value of the locked PLS exceeds the dollar value of the issued stablecoins.
2. **The stablecoins are fully redeemable**.

   Users can always swap USDL for PLS (minus fees), directly within the system.
3. **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](/pulsechain/borrowing#what-do-you-mean-by-collateral) 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](/pulsechain/redemptions-and-price-stability) 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](/pulsechain/borrowing#what-is-the-minimum-collateral-ratio-mcr-and-the-recommended-collateral-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](/pulsechain/stability-pool-and-liquidations#what-are-liquidations).

### What are USDL, LOAN and PLS?

The Liquid Loans protocol has two native tokens.

![](/files/vXfabRM7sZUmN1zcEkDF)

**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](/pulsechain/stability-pool-and-liquidations#what-is-the-stability-pool) in the protocol. The LOAN you receive for providing this service can be [staked](/pulsechain/loan-staking) 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.

![](/files/K2NJzMFhECbD8IqsWanI)

**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](/pulsechain/borrowing#what-is-the-minimum-collateral-ratio-mcr-and-the-recommended-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](/pulsechain/audits).

### What are the main use cases of Liquid Loans?

1. **Borrow** USDL against PLS by opening a ‘​Vault’
2. **Earn** LOAN token by providing USDL to the Stability Pool in exchange for rewards
3. **Stake** LOAN to earn the fee revenue paid for borrowing or redeeming USDL
4. **Redeem** 1 USDL for $1 USD worth of PLS at any time&#x20;
5. **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](/pulsechain/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:

![](/files/1zxE2PyHyeJwOJrYcMWs)

### 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](/pulsechain/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](/pulsechain/stability-pool-and-liquidations#what-are-liquidations). You will still keep your borrowed USDL, but your Vault will be closed and your collateral will be used to compensate [Stability Pool](/pulsechain/stability-pool-and-liquidations#what-is-the-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](https://liquidloans.io/protocol-disclaimer)).


# Definitions

As you read through this Knowledge Base, you may see a number of terms and abbreviations which may require further explanation.

We have chosen to list many of those at the start of this document for quick reference now, and so you can return to them later:

**TCR** = Total Collateral Ratio

**ICR** = Individual Collateral Ratio

**MCR** = Minimum Collateral Ratio

**SP** = Stability Pool

**DIF** = Debt In Front

**Individual collateralization ratio** (ICR): a Vault's ICR is the ratio of the dollar value of its entire collateral at the current PLS:USD price, to its entire debt.

**Total collateralization ratio** (TCR): the ratio of the dollar value of the entire system collateral at the current PLS:USD price, to the entire system debt.

**Vault**: a collateralized debt position, bound to a single PulseChain address. Also referred to as a “CDP” in similar protocols.

**USDL**: The stablecoin that may be issued from a user's collateralized debt position and freely transferred/traded to any PulseChain address. Intended to maintain parity with the US dollar, and can always be redeemed directly with the system. 1 USDL is always exchangeable for $1 USD value of PLS.

**Active Vault**: a PulseChain address owns an “active Vault” if there is a node in the SortedVaults list with ID equal to the address, and non-zero collateral is recorded on the Vault for that address.

**Closed Vault**: a Vault that was once active, but now has zero debt and zero collateral recorded on it, and there is no node in the SortedVaults list with ID equal to the owning address.

**Collateral**: any asset which a borrower must provide to take out a loan. PLS is the collateral used on Liquid Loans.

**Active collateral**: the amount of PLS collateral recorded in a Vault.

**Active debt**: the amount of USDL debt recorded in a Vault.

**Entire collateral**: the sum of a Vault’s active collateral plus its pending collateral rewards accumulated from distributions.

**Entire debt**: the sum of a Vault’s active debt plus its pending debt rewards accumulated from distributions.

**Nominal collateralization ratio** (nominal ICR, NICR): a Vault's nominal ICR is its entire collateral (in PLS) multiplied by 100e18 and divided by its entire debt.

**Total active collateral**: the sum of active collateral over all Vaults. Equal to the PLS in the ActivePool.

**Total active debt**: the sum of active debt over all Vaults. Equal to the USDL in the ActivePool.

**Total defaulted collateral**: the total PLS collateral in the DefaultPool

**Total defaulted debt**: the total USDL debt in the DefaultPool

**Entire system collateral**: the sum of the collateral in the ActivePool and DefaultPool

**Entire system debt**: the sum of the debt in the ActivePool and DefaultPool

**Critical collateralization ratio** (CCR): 150%. When the TCR is below the CCR, the system enters Recovery Mode.

**Borrower**: an externally-owned account or contract that locks collateral in a Vault and issues USDL tokens to their own address. They “borrow” USDL tokens against their PLS collateral.

**Depositor**: an externally owned account or contract that has assigned USDL tokens to the Stability Pool, in order to earn returns from liquidations, and receive LOAN token rewards.

**Redemption**: the act of swapping USDL tokens with the system, in return for an equivalent value of PLS. Any account with a USDL token balance may redeem them, whether or not they are a borrower.

When USDL is redeemed for PLS, the PLS is always withdrawn from the lowest collateral Vaults, in ascending order of their collateralization ratio. A redeemer can not selectively target Vaults with which to swap USDL for PLS.

**Repayment**: when a borrower sends USDL tokens to their own Vault, reducing their debt, and increasing their collateralization ratio.

**Retrieval**: when a borrower with an active Vault withdraws some or all of their PLS collateral from their own Vault, either reducing their collateralization ratio, or closing their Vault (if they have zero debt and withdraw all their PLS)

**Liquidation**: the act of force-closing an undercollateralized Vault and redistributing its collateral and debt. When the Stability Pool is sufficiently large, the liquidated debt is offset with the Stability Pool, and the PLS is distributed to depositors. If the liquidated debt can not be offset with the Pool, the system redistributes the liquidated collateral and debt directly to the active Vaults with >110% collateralization ratio.

Liquidation functionality is permissionless and publicly available – anyone may liquidate an undercollateralized Vault, or batch liquidate Vaults in ascending order of collateralization ratio.

**Collateral Surplus**: The difference between the dollar value of a Vault's PLS collateral, and the dollar value of its USDL debt. In a full liquidation, this is the net gain earned by the recipients of the liquidation.

**Offset**: cancellation of liquidated debt with USDL in the Stability Pool, and assignment of liquidated collateral to Stability Pool depositors, in proportion to their deposit.

**Redistribution**: assignment of liquidated debt and collateral directly to active Vaults, in proportion to their collateral.

**Pure offset**: when a Vault's debt is entirely canceled with USDL in the Stability Pool, and all of it's liquidated PLS collateral is assigned to Stability Providers.

**Mixed offset and redistribution**: When the Stability Pool USDL only covers a fraction of the liquidated Vault's debt. This fraction of debt is cancelled with USDL in the Stability Pool, and an equal fraction of the Vault's collateral is assigned to depositors. The remaining collateral and debt is redistributed directly to active Vaults.

**Gas compensation**: A refund, in USDL and PLS, automatically paid to the caller of a liquidation function, intended to at least cover the gas cost of the transaction. Designed to ensure that liquidators are not dissuaded by potentially high gas costs.

**Debt In Front** (DIF): Represents the cumulative total value of USDL debt of all Vaults that have a lower collateral ratio than a specific Vault's individual collateral ratio position.  This value can be useful for determining a Vault's redemption risk, since the riskiest Vaults (Vaults with the lowest collateralization ratio in the protocol at the time of redemption) are the ones that are redeemed first.


# Ecosystem

### Explained (in 4-minutes)

{% hint style="success" %}
**Don't miss this!** Watch our animated explainer video here:
{% endhint %}

{% embed url="<https://youtu.be/9cpa1v8AC68>" %}

Here is an overview the Liquid Loans ecosystem and how its operations function together.

<figure><img src="/files/d3CpHIYwitKj60EjBFdb" alt=""><figcaption></figcaption></figure>

Here is a flow chart of the Liquid Loans ecosystem and how its operations function together.

![(click to open the graphic and zoom in)](/files/sN3FIeOdnTXrmovn1Neq)

Here is a snapshot of how you might use the protocol, plus the benefits and associated fees.

![(click to open the graphic and zoom in)](/files/EPAe1L65GUJS3BZOzb09)


# Borrowing

### Why would I use Liquid Loans for borrowing?

The protocol offers interest-free loans and is more capital efficient than other borrowing systems (i.e. less collateral is needed for the same loan).

Instead of selling PLS to have liquid funds, you can use the protocol to lock up your PLS, borrow against the collateral to withdraw USDL, and then repay your loan at a future date.

### What do you mean by collateral?

Collateral is any asset which a borrower must provide to take out a loan. PLS is the collateral used on Liquid Loans.

This collateral ensures any loans issued in USDL by the protocol is fully redeemable against the PLS used as the collateral. This ensures the protocol’s stability and solvency.

### Is PLS (PulseChain coin) the only collateral accepted?

Yes, PLS is the only collateral type accepted by the protocol.

### How can the protocol offer interest-free borrowing?

The protocol charges one-time borrowing and redemption fees that algorithmically adjust based on the amount being redeemed and last redemption time.

For example, if more redemptions are happening than usual (which means USDL is likely trading at less than 1 USD), the borrowing fee would increase, discouraging borrowing.

Other systems (e.g. MakerDAO) require variable interest rates to make borrowing more or less favorable, but do so implicitly since borrowers would not feel the impact upfront. Given that this also needs to be managed via governance, the protocol instead opts for a fully decentralized and direct feedback mechanism via one-off fees. This completely avoids third party intervention and counter-party risk.

### How can I borrow with Liquid Loans?

To borrow you must open a Vault and deposit a certain amount of collateral (PLS) into it. You can then draw USDL up to a collateral ratio of 110%.

**The minimum amount that can be drawn is 2,000 USDL.**

### What is a Vault?

A Vault is where you take out and maintain your loan. Each Vault is linked to a PLS wallet address and each address can have just one Vault. If you are familiar with Collateralized Debt Positions (CDPs) from other platforms, Vaults are similar in concept.

Vaults maintain two balances: one is an asset (PLS) acting as collateral, and the other is a debt denominated in USDL. You can change the amount of each by adding collateral or repaying debt. As you make these balance changes, your Vault’s collateral ratio changes accordingly.

You can close your Vault at any time by fully paying off your debt.

### Do I have to pay fees as a borrower?

Every time you draw USDL from your Vault, a one-off borrowing fee is charged on the drawn amount and added to your debt.

Note that the borrowing fee is variable and determined algorithmically, and has a minimum value of 0.5% under normal operation. The fee is 0% during [Recovery Mode](/pulsechain/recovery-mode).

A 200 USDL [Liquidation Reserve](#what-is-the-liquidation-reserve) will be applied as well, but returned to you upon repayment of debt.

### How is the borrowing fee calculated?

The borrowing fee is added to the debt of the Vault. The fee rate is confined to a range between 0.5% and 5%, and is multiplied by the amount of liquidity drawn by the borrower.

For example: The borrowing fee stands at 0.5% and the borrower draws 4,000 USDL from his open Vault. The borrower will obtain 3,781 USDL after the Liquidation Reserve and issuance fee are deducted. The borrowing fee is calculated on the borrowed amount less the Liquidation Reserve.

### When do I need to pay my loan back?

Loans issued by the protocol do not have a repayment schedule. You can leave your Vault open and repay your debt any time, as long as you maintain a collateral ratio of at least 110%.

### What is the collateral ratio?

This is the ratio between the US Dollar value of the collateral in your Vault and its debt in USDL.

The collateral ratio of your Vault will fluctuate over time as the price of PLS changes. You can influence the ratio by adjusting your Vault’s collateral and/or debt, i.e. adding more PLS collateral or paying off some of your debt.

For example: Let’s say the current price of PLS is $0.01 and you decide to deposit 3,000,000 PLS. If you borrow 10,000 USDL, then the collateral ratio for your Vault would be 300%.

![](/files/l3wKXiY450GrTIA1y5lH)

If you instead took out 25,000 USDL that would put your ratio at 120%.

### What is the minimum collateral ratio (MCR) and the "recommended" collateral ratio?

The minimum collateral ratio (or MCR for short) is the lowest ratio of debt to collateral that will not trigger a liquidation under normal operations (aka Normal Mode).

This is a protocol parameter that is set to 110%, so if your Vault has a debt of 10,000 USDL, you would need at least $11,000 worth of PLS value deposited as collateral to avoid being liquidated.

To avoid liquidation during [Recovery Mode](/pulsechain/recovery-mode), it is **recommended to keep the ratio comfortably above 150%** (e.g. 200% or, better yet, 500+%).

### What happens if my Vault is liquidated?

You lose your collateral as your debt is paid off through [liquidation](/pulsechain/stability-pool-and-liquidations#what-are-liquidations) via the Stability Pool (borrower redistribution in rare circumstances), i.e. you will no longer be able to retrieve your collateral by repaying your debt. A liquidation thus results in a net loss of 9.09% (= 100% \* 10 / 110) of your collateral’s Dollar value.

### What is the Liquidation Reserve?

When you open a Vault and draw a loan, 200 USDL is set aside as a way to compensate gas costs for the transaction sender in the event your Vault is liquidated.

The Liquidation Reserve is fully refundable if your Vault is not liquidated, and is credited to you while you close your Vault by repaying your debt.

The Liquidation Reserve counts as debt and is taken into account for the calculation of a Vault's collateral ratio, slightly increasing the actual collateral requirements.

### Do I lose the 200 USDL if my Vault is liquidated?

Yes, if your Vault is liquidated you will lose the 200 USDL gas reserve. This is higher than gas fees on PulseChain because the contract will run forever and gas fees may increase over time, as we’ve seen with Ethereum. This reserve is compensation to those spending the time executing the liquidation transactions.

### What happens if my Vault is redeemed against?

When USDL is redeemed, the PLS provided to the redeemer is allocated from the Vault(s) with the lowest collateral ratio (even if it is above 110%). If, at the time of redemption, you have the Vault with the lowest ratio, you will give up some of your collateral, but your debt will be reduced accordingly.

The USD value by which your PLS collateral is reduced corresponds to the nominal USDL amount by which your Vault’s debt is decreased. You can think of redemptions as if somebody else is repaying your debt and retrieving an equivalent amount of your collateral.

As a positive side effect, redemptions improve the collateral ratio of the affected Vaults, making them less risky.

Redemptions that do not reduce your debt to 0 are called ‘partial redemptions’, while redemptions that fully pay off a Vault’s debt are called ‘full redemptions’. In such a case, your Vault is closed, and you can claim your collateral surplus and the Liquidation Reserve at any time.

Let’s say you own a Vault with 2,000,000 PLS collateralized and a debt of 3,200 USDL. The current price of PLS is $0.002. This puts your collateral ratio (CR) at 125% (= 100% \* (2,000,000 \* .002) / 3,200).

Let’s imagine this is the lowest CR in the Liquid Loans system and look at two examples of a partial redemption and a full redemption:

**Example of a partial redemption**

* Somebody redeems 1,200 USDL for 600,000 PLS and thus repays 1,200 USDL of your debt, reducing it from 3,200 USDL to 2,000 USDL. In return, 600,000 PLS, worth $1,200, is transferred from your Vault to the redeemer. Your collateral goes down from 2,000,000 to 1,400,000 PLS, while your collateral ratio goes up from 125% to 140% (= 100% \* (1,400,000 \* .002) / 2,000).

**Example of a full redemption**

* Somebody redeems 6,000 USDL for 3,000,000 PLS. Given that the redeemed amount is larger than your debt minus 200 USDL (set aside as a Liquidation Reserve), your debt of 3,200 USDL is entirely cleared and your collateral gets reduced by $3,000 of PLS, leaving you with a collateral of 500,000 PLS (= 4,000 - 3,000 / .002).

### How can you offer a collateral ratio as low as 110%?

By making liquidation instantaneous and more efficient, the protocol needs less collateral to provide the same guarantee level as similar protocols that rely on lengthy auction mechanisms to sell off collateral in liquidations.

### Why did the collateral and debt of my Vault increase without my intervention?

If Vaults are liquidated and the Stability Pool is empty (or gets emptied due to the liquidation), every borrower will receive a portion of the liquidated collateral and debt as part of a redistribution process.

### Are there notifications to inform the user about collateralization levels prior to borrowing?

Yes. Information will be displayed on what the minimum collateralization level is, and how to effectively reduce the risk of liquidation.

The system also displays the Total Collateral Level at any point in time.

**As long as your&#x20;*****individual collateral level remains above 150% your collateral is safe*****&#x20;from liquidation, even during recovery mode.**

### How are Vaults sorted and ordered?

Liquid Loans relies on a particular data structure: a sorted, doubly-linked list of Vaults that remains ordered by individual collateralization ratio (ICR), i.e. the amount of collateral in USD value of PLS divided by the amount of debt in USDL.


# Stability Pool & Liquidations

### What is the Stability Pool?

The Stability Pool is the first line of defense in maintaining system solvency. It achieves that by acting as the source of liquidity to repay debt from [liquidated](#what-are-liquidations) Vaults, ensuring that the total USDL supply always remains backed.

When any [Vault](/pulsechain/borrowing#what-is-a-vault) is liquidated, an amount of USDL corresponding to the remaining debt of the Vault is burned from the Stability Pool’s balance to repay its debt. In exchange, the entire collateral from the Vault is transferred to the Stability Pool.

The Stability Pool is funded by users transferring USDL into it (called Stability Providers). Over time, Stability Providers lose a pro-rata share of their USDL deposits, while gaining a pro-rata share of the liquidated collateral.

However, because Vaults are likely to be liquidated at just below 110% collateral ratios, it is expected that Stability Providers will receive a greater dollar-value of collateral relative to the debt they pay off.

### Why should I deposit USDL to the Stability Pool?

Stability Providers will make Vault liquidation gains in PLS and receive rewards in the form of LOAN tokens. Staked LOAN tokens can earn a portion of revenue from the system.

### What are liquidations?

To ensure that the entire stablecoin supply remains fully backed by collateral, Vaults that fall under the minimum collateral ratio of 110% are subject to being closed (liquidated).

The debt of the Vault is canceled and absorbed by the Stability Pool, and its collateral distributed among Stability Providers.

The owner of the Vault still keeps the full amount of USDL borrowed but loses \~10% value overall, hence it is critical to always keep the ratio above 110% – ideally above 150%.

### What’s the Liquidation Logic?

The precise behavior of liquidations depends on the ICR of the Vault being liquidated and global system conditions: the total collateralization ratio (TCR) of the system, the size of the Stability Pool, etc.

### Who can liquidate Vaults?

Anyone can liquidate a Vault as soon as it drops below the Minimum Collateral Ratio of 110%. The initiator receives a gas compensation (200 USDL + 0.5% of the Vault's collateral) as reward for this service.

### How am I compensated for liquidating a Vault?

The liquidation of Vaults is connected with certain gas costs which the initiator has to cover. The cost per Vault was reduced by implementing batch liquidations of up to 160 - 185 Vaults but with the aim of ensuring that liquidations remain profitable.

In times of high gas prices, the protocol offers a gas compensation given by the following formula:

* **gas compensation = 200 USDL + 0.5% of Vault's collateral (PLS)**

The 200 USDL is funded by a [Liquidation Reserve](/pulsechain/borrowing#what-is-the-liquidation-reserve) while the variable 0.5% part (in PLS) comes from the liquidated collateral, slightly reducing the liquidation gain for Stability Providers.

### How do I benefit as a Stability Provider from liquidations?

As liquidations happen just below a collateral ratio of 110%, you will most likely experience a net gain whenever a Vault is liquidated.

Let’s say there is a total of 1,000,000 USDL in the Stability Pool and your deposit is 100,000 USDL.

Now, a Vault with a debt of 200,000 USDL and collateral of 400,000,000 PLS is liquidated at an PLS price of $0.000545, and thus at a collateral ratio of 109% (= 100% \* (400,000,000 \* .000545) / 200,000).

Given that your pool share is 10%, your deposit will go down by 10% of the liquidated debt (20,000 USDL), i.e. from 100,000 to 80,000 USDL. In return, you will gain 10% of the liquidated collateral, i.e. 40,000,000 PLS, which is currently worth $21,800. Your net gain from the liquidation is $1,800.

Note that depositors can immediately withdraw the collateral received from liquidations and sell it to reduce their exposure to PLS, if the USD value of PLS is expected to decrease (for an exception please read ‘[Can I withdraw my deposit whenever I want?](#can-i-withdraw-my-deposit-whenever-i-want)’ below.

### Will I be rewarded for being an early adopter?

Yes. To do this, you first need to open a Vault, borrow USDL, or purchase from the open market, and deposit it into the Stability Pool or DEX farming opportunity (while available).

After making your deposit, you will start accumulating a reward (in LOAN) proportional to the size of your deposit on a continuous basis. The reward is calculated according to the rewards schedule, which will be the highest for early adopters of the system.

You can withdraw your pending rewards to your PulseChain address at any point in time.

### Can I withdraw my deposit whenever I want?

As a general rule, you can withdraw the deposit made to the Stability Pool at any time. There is no minimum lockup duration.

However, withdrawals are temporarily suspended whenever there are liquidatable Vaults with a collateral ratio below 110% that have not been liquidated yet.

### What oracle are you using to determine the price of PLS?

At deployment, the protocol aims to use Fetch Oracle’s PLS:USD price feed, falling back to the PulseX V2 PLS:USD oracle under the following (extreme) conditions:

–– Fetch Oracle price has not been updated for more than 4 hours,

–– Fetch Oracle response call reverts and returns an invalid price or an invalid timestamp,

–– The price change between two consecutive Fetch Oracle price updates is >50%.

### Can I lose money by depositing funds to the Stability Pool?

While liquidations will occur at a collateral ratio well above 100% most of the time, it is theoretically possible that a Vault gets liquidated below 100% in a flash crash or due to an oracle failure. In such a case, you may experience a loss since the collateral gain will be smaller than the reduction of your deposit.

If USDL is trading above $1 worth of PLS value, liquidations may become unprofitable for Stability Providers even at collateral ratios higher than 100%. However, this loss is hypothetical since USDL is expected to return to the peg, so the “loss” only materializes if you had withdrawn your deposit and sold the USDL at a price above $1 worth of PLS value.

PLS price is not compared to USDL but rather USD value via oracle price feeds. Borrower’s loans are subject to the same standards as all others and would have to increase PLS collateral as price moves down if they are in jeopardy of liquidation.

### What happens if the Stability Pool is empty when liquidations occur?

If the Stability Pool is empty, the system uses a secondary liquidation mechanism called redistribution. In such a case, the system redistributes the debt and collateral from liquidated Vaults to all other existing Vaults. The redistribution of debt and collateral is done in proportion to the recipient Vault's collateral amount.

Here's an example from the [whitepaper](https://www.liquidloans.io/whitepaper):

![](/files/GIFIh83GbmIt3woAXleS)


# Redemptions & Price Stability

### How does USDL closely follow the price of USD?

The ability to redeem USDL for PLS at face value (i.e. 1 USDL for $1 value worth of PLS) and the minimum collateral ratio of 110% create a price floor and price ceiling (respectively) through arbitrage opportunities. These are called "hard peg mechanisms" since they are based on direct processes.

USDL also benefits from less direct mechanisms for USD parity, which are called "soft peg mechanisms". One of these mechanisms is parity as a Schelling point (cooperation without communication). Since Liquid Loans treats USDL as being equal to the USD value of an asset, parity between the two is an ‘implied’ equilibrium state of the protocol.

Another of these mechanisms is the borrowing fee on new debts. As redemptions increase (implying USDL is below $1 value worth of PLS), so too does the *baseRate* — making borrowing less attractive, which keeps new USDL from hitting the market and driving the price below $1 value worth of PLS.

### What is the USDL token redemption?

Any USDL holder (whether or not they have an active Vault) may redeem their PLS directly with the system. Their USDL is exchanged for PLS, at face value: redeeming x USDL tokens returns $x worth of PLS value (minus a redemption fee).

When USDL is redeemed for PLS, the system cancels the USDL debt from Vaults, and the PLS is drawn from their collateral.

In order to fulfil the redemption request, Vaults are redeemed from, in an ascending order of their collateralization ratio.

A redemption sequence of n steps will fully redeem from up to n-1 Vaults, and, and partially redeem from up to 1 Vault, which is always the last Vault in the redemption sequence.

Redemptions are blocked when TCR < 110% (there is no need to restrict ICR < TCR). At that TCR, redemptions would likely be unprofitable, as USDL is probably trading above $1 of PLS value if the system has crashed that badly, but it could be a way for an attacker with a lot of USDL to lower the TCR even further.

Note that redemptions are disabled during the first 14 days of operation immediately following deployment of the protocol to protect the monetary system in its infancy.

* **Partial redemption**

Most redemption transactions will include a partial redemption, since the amount redeemed is unlikely to perfectly match the total debt of a series of Vaults.

The partially redeemed Vault is re-inserted into the sorted list of Vaults and remains active, but with reduced collateral and debt.

* **Full redemption**

A Vault is defined as “fully redeemed from” when the redemption has caused its debt to be fully absorbed. Then, its Liquidation Reserve is cancelled (and returned to the borrower) and the debt is zeroed.

Before closing, we must handle the Vault’s collateral surplus; that is, the excess PLS collateral remaining after redemption, due to its initial over-collateralization.

This collateral surplus is sent to a collateral surplus pool, and the borrower can reclaim it later. The Vault is then fully closed.

### How do redemptions create a price floor?

Economically, the redemption mechanism creates a hard price floor for USDL, ensuring that the market price stays at or near to $1 USD value of PLS.

### Is a redemption the same as paying back my debt?

No, redemptions are a completely separate mechanism. All one has to do to pay back their debt is adjust their Vault's debt and collateral.

### How is the redemption fee calculated?

Under normal operation, the redemption fee is given by the formula (*baseRate* + 0.5%) \* PLS drawn.

### How is the *baseRate* calculated?

Redemption fees are based on the *baseRate* state variable in Liquid Loans, which is dynamically updated. The *baseRate* increases with each redemption, and decays according to time passed since the last fee event – i.e. the last redemption or issuance of USDL.

Upon each redemption: *baseRate* is decayed based on time passed since the last fee event – *baseRate* is incremented by an amount proportional to the fraction of the total USDL supply that was redeemed – the redemption fee is given by (*baseRate* + 0.5%) \* PLS drawn

### As a borrower, do I lose money if I'm redeemed against?

If your Vault is redeemed against, you do not incur a net loss. However, you will lose some of your PLS exposure. Your Vault's collateral ratio will also improve after a redemption.

### How can I avoid being redeemed against?

The best way to avoid being redeemed against is by maintaining a high collateral ratio relative to the rest of the Vault's in the system.

Consider using a Debt In Front (DIF) indicator to gauge the cumulative total value of USDL debt of all Vaults that have a lower collateral ratio than your Vault's individual collateral ratio position.

This value can be useful for determining a Vault's redemption risk, since the riskiest Vaults (Vaults with the lowest collateralization ratio in the protocol at the time of redemption) are first in line when a redemption takes place.

### Can the USDL stablecoin become unstable?

Yes. The outside market may trade the stablecoin for less than the one USD equivalent. However, the redemption function decreases the likelihood, because anyone can redeem 1 USDL for $1 USD of PLS value at any time.

### How does the protocol know how much USDL to mint from deposited PLS?

It looks at the price of PLS:USD and mints the required amount of USDL being requested, assuming the chosen parameters meet the minimum loan requirements defined within the protocol.


# LOAN Rewards

### What is LOAN?

LOAN is the secondary token issued by the Liquid Loans protocol. It captures the fee revenue that is generated by the system and incentivizes early adopters.

LOAN rewards will only accrue to Stability Providers,  i.e. users who deposit USDL to the Stability Pool and liquidity providers of the USDL:PLS pool.

*As technical rewards, they are based on a preprogrammed functionality of the protocol and not on a claim towards Liquid Loans frontend or any third party.*

### What is LOAN's max supply?

Total LOAN max supply is 5.5 trillion.

### Is LOAN a governance token?

No. LOAN is not a governance token, as there is no Liquid Loans governance.

### How can I earn LOAN?

LOAN is earned in two ways:

* Depositing USDL into the Stability Pool.
* Providing liquidity to the USDL:PLS pool.

### What can I do with LOAN?

LOAN holders can stake their tokens to earn the fees generated by loan issuance (borrowing fees) and PLS redemptions (redemption fees).

Learn more about [staking](/pulsechain/loan-staking).


# LOAN Staking

### How does staking work in Liquid Loans?

To start staking, all you need to do is deposit your LOAN token to the Liquid Loans staking contract. Once done you will start earning a pro rata share of the borrowing and redemption fees in USDL and PLS.

### How much will my staked LOAN earn?

Your LOAN stake will earn a share of the fees equal to your share of the total LOAN staked, at the instant the fee occurred.

### Is there a lock-up period?

No, you can withdraw your staked funds at any time.

### Can I stake USDL?

You can only stake LOAN tokens. USDL can be deposited into the [Stability Pool](/pulsechain/stability-pool-and-liquidations#what-is-the-stability-pool) for LOAN rewards.

### Can I stake PLS?

You can only stake LOAN tokens. PLS is used as collateral to secure your USDL loan.

### Are staked LOAN tokens used to backstop the system (like Maker) or for governance?

No, staked LOAN tokens are not used to backstop the Liquid Loans system, and are not used for governance as there is no Liquid Loans governance.


# Recovery Mode

### What is Recovery Mode?

Recovery Mode kicks in when the [Total Collateral Ratio (TCR)](#what-is-the-total-collateral-ratio) of the system falls below 150%.

During Recovery Mode, liquidation conditions are relaxed, and the system blocks borrower transactions that would further decrease the TCR.

New USDL may only be issued by adjusting existing Vaults in a way that improves their ICR, or by opening a new Vault with an ICR of >=150%.

In general, if an existing Vault's adjustment reduces its ICR, the transaction is only executed if the resulting TCR is above 150%.

![](/files/7U2HL9H9qSCYroLB55Wx)

### What is the Total Collateral Ratio?

The Total Collateral Ratio or TCR is the ratio of the Dollar value of the entire system collateral at the current PLS:USD price, to the entire system debt.

In other words, it's the sum of the collateral of all Vaults expressed in USD, divided by the debt of all Vaults expressed in USDL.

### What is the purpose of Recovery Mode?

The goal of Recovery Mode is to incentivize borrowers to behave in ways that promptly raise the TCR back above 150%, and to incentivize USDL holders to replenish the Stability Pool.

Economically, Recovery Mode is designed to encourage collateral top-ups and debt repayments, and also itself acts as a self-negating deterrent; the possibility of it occurring actually guides the system away from ever reaching it.

**Recovery Mode is not a desirable state for the system.**

### What are the fees during Recovery Mode?

While Recovery Mode has no impact on the redemption fee, the borrowing fee is set to 0% to maximally encourage borrowing (within the limits described above).

### How can I make my Vault safe in Recovery Mode?

By increasing your collateral ratio to 150% or greater, your Vault will be protected from liquidation. This can be done by adding collateral, repaying debt, or both.

### Can I be liquidated if my collateral ratio is below 150% in Recovery Mode?

Yes, you can be liquidated below 150%. In order to help avoid liquidation in Normal Mode and Recovery Mode, it is recommended that users keep their collateral ratio above 150%.

| Condition                                 | Liquidation Behavior                                                                                                                                                                                                                                                                                                                                                                         |
| ----------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ICR <=100%                                | Redistribute all debt and collateral (minus PLS gas compensation) to active Vaults.                                                                                                                                                                                                                                                                                                          |
| 100% < ICR < MCR & SP USDL > Vault debt   | USDL in the Stability Pool equal to the Vault's debt is offset with the Vault's debt. The Vault's PLS collateral (minus PLS gas compensation) is shared between depositors.                                                                                                                                                                                                                  |
| 100% < ICR < MCR & SP USDL < Vault debt   | The total Stability Pool USDL is offset with an equal amount of debt from the Vault. A fraction of the Vault's collateral (equal to the ratio of its offset debt to its entire debt) is shared between depositors. The remaining debt and collateral (minus PLS gas compensation) is redistributed to active Vaults.                                                                         |
| MCR <= ICR < 150% & SP USDL >= Vault debt | The Stability Pool USDL is offset with an equal amount of debt from the Vault. A fraction of PLS collateral with dollar value equal to 1.1 \* debt is shared between depositors. Nothing is redistributed to other active Vaults. Since its ICR was > 1.1, the Vault has a collateral remainder, which is sent to the CollSurplusPool and is claimable by the borrower. The Vault is closed. |
| MCR <= ICR < 150% & SP USDL < Vault debt  | Do nothing.                                                                                                                                                                                                                                                                                                                                                                                  |
| ICR >= 150%                               | Do nothing.                                                                                                                                                                                                                                                                                                                                                                                  |

### How much of a Vault’s collateral can be liquidated in Recovery Mode?

In Recovery Mode, liquidation loss is capped at 110% of a Vault's collateral. Any remainder, i.e. the collateral above 110% (and below the TCR), can be reclaimed by the liquidated borrower using the standard web interface.

This means that a borrower will face the same liquidation “penalty” (10%) in Recovery Mode as in Normal Mode if their Vault gets liquidated.


# Audits

The Liquid Loans protocol on PulseChain is a fork of the Liquity protocol on Ethereum, and inherits all risks of that protocol.

The Liquid Loans development team has only made the necessary changes to Liquity's original set of smart contracts to ensure it operates successfully on PulseChain.

These changes may include pointing the code to oracles (such as Fetch Oracle) and decentralized exchanges (such as PulseX V2) on PulseChain.

Now that PulseChain mainnet has launched, 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 [read and download here](https://liquid.loans/audit).

<figure><img src="/files/Bypllm1uT7jzckjbPngt" alt="Liquid Loans Audit Report by Halborn.jpeg" width="375"><figcaption></figcaption></figure>

We also strongly recommend you review the following Liquity audits.

* Audit by [Trail of Bits](https://github.com/trailofbits/publications/blob/master/reviews/Liquity.pdf) January 2021
* Audit by [Coinspect](https://www.coinspect.com/liquity-audit/) March 2021


# Deployment

### Is there a LOAN lockup and token vesting period?

Some LOAN is reserved for team members and advisors, and is locked up for a minimum of one year after system deployment.

**In the first year after launch:**

* All team members and advisors are unable to access their locked up LOAN tokens
* The Liquid Loans admin address may transfer tokens only to verified lockup contracts with an unlock date at least one year after system deployment

Also, separate LOAN allocations are made at deployment to an EOA (externally owned account) that will hold an amount of LOAN for bug bounties / hackathons and to a LP reward contract.

Aside from these allocations, at this stage the only LOAN made freely available in this first year is the LOAN that is publicly issued to Stability Providers.

Note that the Liquid Loans admin address has no extra privileges and does not retain any control whatsoever over the Liquid Loans protocol once deployed.


# Contracts

Contracts | Liquid Loans Docs on PulseChain

## Contract Addresses

| **Mainnet**             | **Address**                                |
| ----------------------- | ------------------------------------------ |
| usdlToken               | 0x0dEEd1486bc52aA0d3E6f8849cEC5adD6598A162 |
| loanToken               | 0x9159f1D2a9f51998Fc9Ab03fbd8f265ab14A1b3B |
| activePool              | 0x3983f040916681085D7949F7ee78BfA12c5CB119 |
| borrowerOperations      | 0xa09bB56B39D652988C7E7d3665aA7EC7308BbF09 |
| collSurplusPool         | 0x88742a6Fd16A00Fc671fff371E4CC8ff58378596 |
| communityIssuance       | 0x421510521a1f9B0aDba3ba9EDbc5915206220895 |
| gasPool                 | 0xDeC755e596C43439D039e48bF145DFb4E45Fee3D |
| loanStaking             | 0x853F0CD4B0083eDf7cFf5Ad9A296f02Ffb71C995 |
| multiVaultGetter        | 0x6567928540abBBCD0EEf532a861612e9ac8F6D75 |
| vaultManager            | 0xD79bfb86fA06e8782b401bC0197d92563602D2Ab |
| defaultPool             | 0x717A736b34308d97EeFb5bd91539E0D3B9142dBE |
| lockupContractFactory   | 0x5652d2B6F84BC1A3Dd5c857b423a13DF80762dD1 |
| stabilityPool           | 0x7bFD406632483ad00c6EdF655E04De91A96f84bc |
| priceFeed               | 0xc65Abc8B9B4B3cEE03430f6fc3d8A4760221A113 |
| sortedVaults            | 0xE1246517c3eCa1e2a198fc927296d8ff87BaBD3c |
| Uniswappool             | 0x57139483191cD26474C6a26f83ECB89c242D0375 |
| PLSXpairWPLSUSDL        | 0xF3c951DFc50dd4C2fb81bd853D7893d00405aD6d |
| lockupContractorCreator | 0x61E7B219DA665e3fe21338aB95b0b1ceAaCb9b82 |
| teamLockContractA       | 0xAE58A6348D8c24548B97600a2efe4853F8Ab34b5 |
| teamLockContractB       | 0xA8B87142425A10966B45554331f8ad3871C8D59C |
| neverselling            | 0x6Db12389B2365f13B8B7a0863905e4Afd5d5A125 |
| hintHelpers             | 0x23b74467D4eC6b93ac934a743F95A599010F5b56 |


# Definitions

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As you read through this Knowledge Base, you may see a number of terms and abbreviations which may require further explanation.

We have chosen to list many of those at the start of this document for quick reference now, and so you can return to them later:

**TCR** = Total Collateral Ratio

**ICR** = Individual Collateral Ratio

**MCR** = Minimum Collateral Ratio

**SP** = Stability Pool

**DIF** = Debt In Front

**Individual collateralization ratio** (ICR): a Vault's ICR is the ratio of the dollar value of its entire collateral at the current PLS:USD price, to its entire debt.

**Total collateralization ratio** (TCR): the ratio of the dollar value of the entire system collateral at the current PLS:USD price, to the entire system debt.

**Vault**: a collateralized debt position, bound to a single PulseChain address. Also referred to as a “CDP” in similar protocols.

**USDL**: The stablecoin that may be issued from a user's collateralized debt position and freely transferred/traded to any PulseChain address. Intended to maintain parity with the US dollar, and can always be redeemed directly with the system. 1 USDL is always exchangeable for $1 USD value of PLS.

**Active Vault**: a PulseChain address owns an “active Vault” if there is a node in the SortedVaults list with ID equal to the address, and non-zero collateral is recorded on the Vault for that address.

**Closed Vault**: a Vault that was once active, but now has zero debt and zero collateral recorded on it, and there is no node in the SortedVaults list with ID equal to the owning address.

**Collateral**: any asset which a borrower must provide to take out a loan. PLS is the collateral used on Liquid Loans.

**Active collateral**: the amount of PLS collateral recorded in a Vault.

**Active debt**: the amount of USDL debt recorded in a Vault.

**Entire collateral**: the sum of a Vault’s active collateral plus its pending collateral rewards accumulated from distributions.

**Entire debt**: the sum of a Vault’s active debt plus its pending debt rewards accumulated from distributions.

**Nominal collateralization ratio** (nominal ICR, NICR): a Vault's nominal ICR is its entire collateral (in PLS) multiplied by 100e18 and divided by its entire debt.

**Total active collateral**: the sum of active collateral over all Vaults. Equal to the PLS in the ActivePool.

**Total active debt**: the sum of active debt over all Vaults. Equal to the USDL in the ActivePool.

**Total defaulted collateral**: the total PLS collateral in the DefaultPool

**Total defaulted debt**: the total USDL debt in the DefaultPool

**Entire system collateral**: the sum of the collateral in the ActivePool and DefaultPool

**Entire system debt**: the sum of the debt in the ActivePool and DefaultPool

**Critical collateralization ratio** (CCR): 150%. When the TCR is below the CCR, the system enters Recovery Mode.

**Borrower**: an externally-owned account or contract that locks collateral in a Vault and issues USDL tokens to their own address. They “borrow” USDL tokens against their PLS collateral.

**Depositor**: an externally owned account or contract that has assigned USDL tokens to the Stability Pool, in order to earn returns from liquidations, and receive LOAN token rewards.

**Redemption**: the act of swapping USDL tokens with the system, in return for an equivalent value of PLS. Any account with a USDL token balance may redeem them, whether or not they are a borrower.

When USDL is redeemed for PLS, the PLS is always withdrawn from the lowest collateral Vaults, in ascending order of their collateralization ratio. A redeemer can not selectively target Vaults with which to swap USDL for PLS.

**Repayment**: when a borrower sends USDL tokens to their own Vault, reducing their debt, and increasing their collateralization ratio.

**Retrieval**: when a borrower with an active Vault withdraws some or all of their PLS collateral from their own Vault, either reducing their collateralization ratio, or closing their Vault (if they have zero debt and withdraw all their PLS)

**Liquidation**: the act of force-closing an undercollateralized Vault and redistributing its collateral and debt. When the Stability Pool is sufficiently large, the liquidated debt is offset with the Stability Pool, and the PLS is distributed to depositors. If the liquidated debt can not be offset with the Pool, the system redistributes the liquidated collateral and debt directly to the active Vaults with >110% collateralization ratio.

Liquidation functionality is permissionless and publicly available – anyone may liquidate an undercollateralized Vault, or batch liquidate Vaults in ascending order of collateralization ratio.

**Collateral Surplus**: The difference between the dollar value of a Vault's PLS collateral, and the dollar value of its USDL debt. In a full liquidation, this is the net gain earned by the recipients of the liquidation.

**Offset**: cancellation of liquidated debt with USDL in the Stability Pool, and assignment of liquidated collateral to Stability Pool depositors, in proportion to their deposit.

**Redistribution**: assignment of liquidated debt and collateral directly to active Vaults, in proportion to their collateral.

**Pure offset**: when a Vault's debt is entirely canceled with USDL in the Stability Pool, and all of it's liquidated PLS collateral is assigned to Stability Providers.

**Mixed offset and redistribution**: When the Stability Pool USDL only covers a fraction of the liquidated Vault's debt. This fraction of debt is cancelled with USDL in the Stability Pool, and an equal fraction of the Vault's collateral is assigned to depositors. The remaining collateral and debt is redistributed directly to active Vaults.

**Gas compensation**: A refund, in USDL and PLS, automatically paid to the caller of a liquidation function, intended to at least cover the gas cost of the transaction. Designed to ensure that liquidators are not dissuaded by potentially high gas costs.

**Debt In Front** (DIF): Represents the cumulative total value of USDL debt of all Vaults that have a lower collateral ratio than a specific Vault's individual collateral ratio position.  This value can be useful for determining a Vault's redemption risk, since the riskiest Vaults (Vaults with the lowest collateralization ratio in the protocol at the time of redemption) are the ones that are redeemed first.


# General

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### 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](/pulsechain/borrowing#what-is-a-vault).

The minted stablecoins are economically geared towards maintaining a value of 1 USDL = $1 USD of PLS value, due to the following properties:

1. **The system is designed to always be over-collateralized**.

   The dollar value of the locked PLS exceeds the dollar value of the issued stablecoins.
2. **The stablecoins are fully redeemable**.

   Users can always swap USDL for PLS (minus fees), directly within the system.
3. **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](/pulsechain/borrowing#what-do-you-mean-by-collateral) 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](/pulsechain/redemptions-and-price-stability) 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](/pulsechain/borrowing#what-is-the-minimum-collateral-ratio-mcr-and-the-recommended-collateral-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](/pulsechain/stability-pool-and-liquidations#what-are-liquidations).

### What are USDL, LOAN and PLS?

The Liquid Loans protocol has two native tokens.

![](/files/vXfabRM7sZUmN1zcEkDF)

**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](/pulsechain/stability-pool-and-liquidations#what-is-the-stability-pool) in the protocol. The LOAN you receive for providing this service can be [staked](/pulsechain/loan-staking) 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.

![](/files/K2NJzMFhECbD8IqsWanI)

**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](/pulsechain/borrowing#what-is-the-minimum-collateral-ratio-mcr-and-the-recommended-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](/pulsechain/audits).

### What are the main use cases of Liquid Loans?

1. **Borrow** USDL against PLS by opening a ‘​Vault’
2. **Earn** LOAN token by providing USDL to the Stability Pool in exchange for rewards
3. **Stake** LOAN to earn the fee revenue paid for borrowing or redeeming USDL
4. **Redeem** 1 USDL for $1 USD worth of PLS at any time&#x20;
5. **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](/pulsechain/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:

![](/files/1zxE2PyHyeJwOJrYcMWs)

### 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](/pulsechain/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](/pulsechain/stability-pool-and-liquidations#what-are-liquidations). You will still keep your borrowed USDL, but your Vault will be closed and your collateral will be used to compensate [Stability Pool](/pulsechain/stability-pool-and-liquidations#what-is-the-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](https://liquidloans.io/protocol-disclaimer)).


# Ecosystem

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### Explained (in 4-minutes)

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{% embed url="<https://youtu.be/9cpa1v8AC68>" %}

Here is an overview the Liquid Loans ecosystem and how its operations function together.

<figure><img src="/files/d3CpHIYwitKj60EjBFdb" alt=""><figcaption></figcaption></figure>

Here is a flow chart of the Liquid Loans ecosystem and how its operations function together.

![(click to open the graphic and zoom in)](/files/sN3FIeOdnTXrmovn1Neq)

Here is a snapshot of how you might use the protocol, plus the benefits and associated fees.

![(click to open the graphic and zoom in)](/files/EPAe1L65GUJS3BZOzb09)


# Borrowing

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### Why would I use Liquid Loans for borrowing?

The protocol offers interest-free loans and is more capital efficient than other borrowing systems (i.e. less collateral is needed for the same loan).

Instead of selling PLS to have liquid funds, you can use the protocol to lock up your PLS, borrow against the collateral to withdraw USDL, and then repay your loan at a future date.

### What do you mean by collateral?

Collateral is any asset which a borrower must provide to take out a loan. PLS is the collateral used on Liquid Loans.

This collateral ensures any loans issued in USDL by the protocol is fully redeemable against the PLS used as the collateral. This ensures the protocol’s stability and solvency.

### Is PLS (PulseChain coin) the only collateral accepted?

Yes, PLS is the only collateral type accepted by the protocol.

### How can the protocol offer interest-free borrowing?

The protocol charges one-time borrowing and redemption fees that algorithmically adjust based on the amount being redeemed and last redemption time.

For example, if more redemptions are happening than usual (which means USDL is likely trading at less than 1 USD), the borrowing fee would increase, discouraging borrowing.

Other systems (e.g. MakerDAO) require variable interest rates to make borrowing more or less favorable, but do so implicitly since borrowers would not feel the impact upfront. Given that this also needs to be managed via governance, the protocol instead opts for a fully decentralized and direct feedback mechanism via one-off fees. This completely avoids third party intervention and counter-party risk.

### How can I borrow with Liquid Loans?

To borrow you must open a Vault and deposit a certain amount of collateral (PLS) into it. You can then draw USDL up to a collateral ratio of 110%.

**The minimum amount that can be drawn is 2,000 USDL.**

### What is a Vault?

A Vault is where you take out and maintain your loan. Each Vault is linked to a PLS wallet address and each address can have just one Vault. If you are familiar with Collateralized Debt Positions (CDPs) from other platforms, Vaults are similar in concept.

Vaults maintain two balances: one is an asset (PLS) acting as collateral, and the other is a debt denominated in USDL. You can change the amount of each by adding collateral or repaying debt. As you make these balance changes, your Vault’s collateral ratio changes accordingly.

You can close your Vault at any time by fully paying off your debt.

### Do I have to pay fees as a borrower?

Every time you draw USDL from your Vault, a one-off borrowing fee is charged on the drawn amount and added to your debt.

Note that the borrowing fee is variable and determined algorithmically, and has a minimum value of 0.5% under normal operation. The fee is 0% during [Recovery Mode](/pulsechain/recovery-mode).

A 200 USDL [Liquidation Reserve](#what-is-the-liquidation-reserve) will be applied as well, but returned to you upon repayment of debt.

### How is the borrowing fee calculated?

The borrowing fee is added to the debt of the Vault. The fee rate is confined to a range between 0.5% and 5%, and is multiplied by the amount of liquidity drawn by the borrower.

For example: The borrowing fee stands at 0.5% and the borrower draws 4,000 USDL from his open Vault. The borrower will obtain 3,781 USDL after the Liquidation Reserve and issuance fee are deducted. The borrowing fee is calculated on the borrowed amount less the Liquidation Reserve.

### When do I need to pay my loan back?

Loans issued by the protocol do not have a repayment schedule. You can leave your Vault open and repay your debt any time, as long as you maintain a collateral ratio of at least 110%.

### What is the collateral ratio?

This is the ratio between the US Dollar value of the collateral in your Vault and its debt in USDL.

The collateral ratio of your Vault will fluctuate over time as the price of PLS changes. You can influence the ratio by adjusting your Vault’s collateral and/or debt, i.e. adding more PLS collateral or paying off some of your debt.

For example: Let’s say the current price of PLS is $0.01 and you decide to deposit 3,000,000 PLS. If you borrow 10,000 USDL, then the collateral ratio for your Vault would be 300%.

![](/files/l3wKXiY450GrTIA1y5lH)

If you instead took out 25,000 USDL that would put your ratio at 120%.

### What is the minimum collateral ratio (MCR) and the "recommended" collateral ratio?

The minimum collateral ratio (or MCR for short) is the lowest ratio of debt to collateral that will not trigger a liquidation under normal operations (aka Normal Mode).

This is a protocol parameter that is set to 110%, so if your Vault has a debt of 10,000 USDL, you would need at least $11,000 worth of PLS value deposited as collateral to avoid being liquidated.

To avoid liquidation during [Recovery Mode](/pulsechain/recovery-mode), it is **recommended to keep the ratio comfortably above 150%** (e.g. 200% or, better yet, 500+%).

### What happens if my Vault is liquidated?

You lose your collateral as your debt is paid off through [liquidation](/pulsechain/stability-pool-and-liquidations#what-are-liquidations) via the Stability Pool (borrower redistribution in rare circumstances), i.e. you will no longer be able to retrieve your collateral by repaying your debt. A liquidation thus results in a net loss of 9.09% (= 100% \* 10 / 110) of your collateral’s Dollar value.

### What is the Liquidation Reserve?

When you open a Vault and draw a loan, 200 USDL is set aside as a way to compensate gas costs for the transaction sender in the event your Vault is liquidated.

The Liquidation Reserve is fully refundable if your Vault is not liquidated, and is credited to you while you close your Vault by repaying your debt.

The Liquidation Reserve counts as debt and is taken into account for the calculation of a Vault's collateral ratio, slightly increasing the actual collateral requirements.

### Do I lose the 200 USDL if my Vault is liquidated?

Yes, if your Vault is liquidated you will lose the 200 USDL gas reserve. This is higher than gas fees on PulseChain because the contract will run forever and gas fees may increase over time, as we’ve seen with Ethereum. This reserve is compensation to those spending the time executing the liquidation transactions.

### What happens if my Vault is redeemed against?

When USDL is redeemed, the PLS provided to the redeemer is allocated from the Vault(s) with the lowest collateral ratio (even if it is above 110%). If, at the time of redemption, you have the Vault with the lowest ratio, you will give up some of your collateral, but your debt will be reduced accordingly.

The USD value by which your PLS collateral is reduced corresponds to the nominal USDL amount by which your Vault’s debt is decreased. You can think of redemptions as if somebody else is repaying your debt and retrieving an equivalent amount of your collateral.

As a positive side effect, redemptions improve the collateral ratio of the affected Vaults, making them less risky.

Redemptions that do not reduce your debt to 0 are called ‘partial redemptions’, while redemptions that fully pay off a Vault’s debt are called ‘full redemptions’. In such a case, your Vault is closed, and you can claim your collateral surplus and the Liquidation Reserve at any time.

Let’s say you own a Vault with 2,000,000 PLS collateralized and a debt of 3,200 USDL. The current price of PLS is $0.002. This puts your collateral ratio (CR) at 125% (= 100% \* (2,000,000 \* .002) / 3,200).

Let’s imagine this is the lowest CR in the Liquid Loans system and look at two examples of a partial redemption and a full redemption:

**Example of a partial redemption**

* Somebody redeems 1,200 USDL for 600,000 PLS and thus repays 1,200 USDL of your debt, reducing it from 3,200 USDL to 2,000 USDL. In return, 600,000 PLS, worth $1,200, is transferred from your Vault to the redeemer. Your collateral goes down from 2,000,000 to 1,400,000 PLS, while your collateral ratio goes up from 125% to 140% (= 100% \* (1,400,000 \* .002) / 2,000).

**Example of a full redemption**

* Somebody redeems 6,000 USDL for 3,000,000 PLS. Given that the redeemed amount is larger than your debt minus 200 USDL (set aside as a Liquidation Reserve), your debt of 3,200 USDL is entirely cleared and your collateral gets reduced by $3,000 of PLS, leaving you with a collateral of 500,000 PLS (= 4,000 - 3,000 / .002).

### How can you offer a collateral ratio as low as 110%?

By making liquidation instantaneous and more efficient, the protocol needs less collateral to provide the same guarantee level as similar protocols that rely on lengthy auction mechanisms to sell off collateral in liquidations.

### Why did the collateral and debt of my Vault increase without my intervention?

If Vaults are liquidated and the Stability Pool is empty (or gets emptied due to the liquidation), every borrower will receive a portion of the liquidated collateral and debt as part of a redistribution process.

### Are there notifications to inform the user about collateralization levels prior to borrowing?

Yes. Information will be displayed on what the minimum collateralization level is, and how to effectively reduce the risk of liquidation.

The system also displays the Total Collateral Level at any point in time.

**As long as your&#x20;*****individual collateral level remains above 150% your collateral is safe*****&#x20;from liquidation, even during recovery mode.**

### How are Vaults sorted and ordered?

Liquid Loans relies on a particular data structure: a sorted, doubly-linked list of Vaults that remains ordered by individual collateralization ratio (ICR), i.e. the amount of collateral in USD value of PLS divided by the amount of debt in USDL.


# Stability Pool & Liquidations

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### What is the Stability Pool?

The Stability Pool is the first line of defense in maintaining system solvency. It achieves that by acting as the source of liquidity to repay debt from [liquidated](#what-are-liquidations) Vaults, ensuring that the total USDL supply always remains backed.

When any [Vault](/pulsechain/borrowing#what-is-a-vault) is liquidated, an amount of USDL corresponding to the remaining debt of the Vault is burned from the Stability Pool’s balance to repay its debt. In exchange, the entire collateral from the Vault is transferred to the Stability Pool.

The Stability Pool is funded by users transferring USDL into it (called Stability Providers). Over time, Stability Providers lose a pro-rata share of their USDL deposits, while gaining a pro-rata share of the liquidated collateral.

However, because Vaults are likely to be liquidated at just below 110% collateral ratios, it is expected that Stability Providers will receive a greater dollar-value of collateral relative to the debt they pay off.

### Why should I deposit USDL to the Stability Pool?

Stability Providers will make Vault liquidation gains in PLS and receive rewards in the form of LOAN tokens. Staked LOAN tokens can earn a portion of revenue from the system.

### What are liquidations?

To ensure that the entire stablecoin supply remains fully backed by collateral, Vaults that fall under the minimum collateral ratio of 110% are subject to being closed (liquidated).

The debt of the Vault is canceled and absorbed by the Stability Pool, and its collateral distributed among Stability Providers.

The owner of the Vault still keeps the full amount of USDL borrowed but loses \~10% value overall, hence it is critical to always keep the ratio above 110% – ideally above 150%.

### What’s the Liquidation Logic?

The precise behavior of liquidations depends on the ICR of the Vault being liquidated and global system conditions: the total collateralization ratio (TCR) of the system, the size of the Stability Pool, etc.

### Who can liquidate Vaults?

Anyone can liquidate a Vault as soon as it drops below the Minimum Collateral Ratio of 110%. The initiator receives a gas compensation (200 USDL + 0.5% of the Vault's collateral) as reward for this service.

### How am I compensated for liquidating a Vault?

The liquidation of Vaults is connected with certain gas costs which the initiator has to cover. The cost per Vault was reduced by implementing batch liquidations of up to 160 - 185 Vaults but with the aim of ensuring that liquidations remain profitable.

In times of high gas prices, the protocol offers a gas compensation given by the following formula:

* **gas compensation = 200 USDL + 0.5% of Vault's collateral (PLS)**

The 200 USDL is funded by a [Liquidation Reserve](/pulsechain/borrowing#what-is-the-liquidation-reserve) while the variable 0.5% part (in PLS) comes from the liquidated collateral, slightly reducing the liquidation gain for Stability Providers.

### How do I benefit as a Stability Provider from liquidations?

As liquidations happen just below a collateral ratio of 110%, you will most likely experience a net gain whenever a Vault is liquidated.

Let’s say there is a total of 1,000,000 USDL in the Stability Pool and your deposit is 100,000 USDL.

Now, a Vault with a debt of 200,000 USDL and collateral of 400,000,000 PLS is liquidated at an PLS price of $0.000545, and thus at a collateral ratio of 109% (= 100% \* (400,000,000 \* .000545) / 200,000).

Given that your pool share is 10%, your deposit will go down by 10% of the liquidated debt (20,000 USDL), i.e. from 100,000 to 80,000 USDL. In return, you will gain 10% of the liquidated collateral, i.e. 40,000,000 PLS, which is currently worth $21,800. Your net gain from the liquidation is $1,800.

Note that depositors can immediately withdraw the collateral received from liquidations and sell it to reduce their exposure to PLS, if the USD value of PLS is expected to decrease (for an exception please read ‘[Can I withdraw my deposit whenever I want?](#can-i-withdraw-my-deposit-whenever-i-want)’ below.

### Will I be rewarded for being an early adopter?

Yes. To do this, you first need to open a Vault, borrow USDL, or purchase from the open market, and deposit it into the Stability Pool or DEX farming opportunity (while available).

After making your deposit, you will start accumulating a reward (in LOAN) proportional to the size of your deposit on a continuous basis. The reward is calculated according to the rewards schedule, which will be the highest for early adopters of the system.

You can withdraw your pending rewards to your PulseChain address at any point in time.

### Can I withdraw my deposit whenever I want?

As a general rule, you can withdraw the deposit made to the Stability Pool at any time. There is no minimum lockup duration.

However, withdrawals are temporarily suspended whenever there are liquidatable Vaults with a collateral ratio below 110% that have not been liquidated yet.

### What oracle are you using to determine the price of PLS?

At deployment, the protocol aims to use Fetch Oracle’s PLS:USD price feed, falling back to the PulseX V2 PLS:USD oracle under the following (extreme) conditions:

–– Fetch Oracle price has not been updated for more than 4 hours,

–– Fetch Oracle response call reverts and returns an invalid price or an invalid timestamp,

–– The price change between two consecutive Fetch Oracle price updates is >50%.

### Can I lose money by depositing funds to the Stability Pool?

While liquidations will occur at a collateral ratio well above 100% most of the time, it is theoretically possible that a Vault gets liquidated below 100% in a flash crash or due to an oracle failure. In such a case, you may experience a loss since the collateral gain will be smaller than the reduction of your deposit.

If USDL is trading above $1 worth of PLS value, liquidations may become unprofitable for Stability Providers even at collateral ratios higher than 100%. However, this loss is hypothetical since USDL is expected to return to the peg, so the “loss” only materializes if you had withdrawn your deposit and sold the USDL at a price above $1 worth of PLS value.

PLS price is not compared to USDL but rather USD value via oracle price feeds. Borrower’s loans are subject to the same standards as all others and would have to increase PLS collateral as price moves down if they are in jeopardy of liquidation.

### What happens if the Stability Pool is empty when liquidations occur?

If the Stability Pool is empty, the system uses a secondary liquidation mechanism called redistribution. In such a case, the system redistributes the debt and collateral from liquidated Vaults to all other existing Vaults. The redistribution of debt and collateral is done in proportion to the recipient Vault's collateral amount.

Here's an example from the [whitepaper](https://www.liquidloans.io/whitepaper):

![](/files/GIFIh83GbmIt3woAXleS)


# Redemptions & Price Stability

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### How does USDL closely follow the price of USD?

The ability to redeem USDL for PLS at face value (i.e. 1 USDL for $1 value worth of PLS) and the minimum collateral ratio of 110% create a price floor and price ceiling (respectively) through arbitrage opportunities. These are called "hard peg mechanisms" since they are based on direct processes.

USDL also benefits from less direct mechanisms for USD parity, which are called "soft peg mechanisms". One of these mechanisms is parity as a Schelling point (cooperation without communication). Since Liquid Loans treats USDL as being equal to the USD value of an asset, parity between the two is an ‘implied’ equilibrium state of the protocol.

Another of these mechanisms is the borrowing fee on new debts. As redemptions increase (implying USDL is below $1 value worth of PLS), so too does the *baseRate* — making borrowing less attractive, which keeps new USDL from hitting the market and driving the price below $1 value worth of PLS.

### What is the USDL token redemption?

Any USDL holder (whether or not they have an active Vault) may redeem their PLS directly with the system. Their USDL is exchanged for PLS, at face value: redeeming x USDL tokens returns $x worth of PLS value (minus a redemption fee).

When USDL is redeemed for PLS, the system cancels the USDL debt from Vaults, and the PLS is drawn from their collateral.

In order to fulfil the redemption request, Vaults are redeemed from, in an ascending order of their collateralization ratio.

A redemption sequence of n steps will fully redeem from up to n-1 Vaults, and, and partially redeem from up to 1 Vault, which is always the last Vault in the redemption sequence.

Redemptions are blocked when TCR < 110% (there is no need to restrict ICR < TCR). At that TCR, redemptions would likely be unprofitable, as USDL is probably trading above $1 of PLS value if the system has crashed that badly, but it could be a way for an attacker with a lot of USDL to lower the TCR even further.

Note that redemptions are disabled during the first 14 days of operation immediately following deployment of the protocol to protect the monetary system in its infancy.

* **Partial redemption**

Most redemption transactions will include a partial redemption, since the amount redeemed is unlikely to perfectly match the total debt of a series of Vaults.

The partially redeemed Vault is re-inserted into the sorted list of Vaults and remains active, but with reduced collateral and debt.

* **Full redemption**

A Vault is defined as “fully redeemed from” when the redemption has caused its debt to be fully absorbed. Then, its Liquidation Reserve is cancelled (and returned to the borrower) and the debt is zeroed.

Before closing, we must handle the Vault’s collateral surplus; that is, the excess PLS collateral remaining after redemption, due to its initial over-collateralization.

This collateral surplus is sent to a collateral surplus pool, and the borrower can reclaim it later. The Vault is then fully closed.

### How do redemptions create a price floor?

Economically, the redemption mechanism creates a hard price floor for USDL, ensuring that the market price stays at or near to $1 USD value of PLS.

### Is a redemption the same as paying back my debt?

No, redemptions are a completely separate mechanism. All one has to do to pay back their debt is adjust their Vault's debt and collateral.

### How is the redemption fee calculated?

Under normal operation, the redemption fee is given by the formula (*baseRate* + 0.5%) \* PLS drawn.

### How is the *baseRate* calculated?

Redemption fees are based on the *baseRate* state variable in Liquid Loans, which is dynamically updated. The *baseRate* increases with each redemption, and decays according to time passed since the last fee event – i.e. the last redemption or issuance of USDL.

Upon each redemption: *baseRate* is decayed based on time passed since the last fee event – *baseRate* is incremented by an amount proportional to the fraction of the total USDL supply that was redeemed – the redemption fee is given by (*baseRate* + 0.5%) \* PLS drawn

### As a borrower, do I lose money if I'm redeemed against?

If your Vault is redeemed against, you do not incur a net loss. However, you will lose some of your PLS exposure. Your Vault's collateral ratio will also improve after a redemption.

### How can I avoid being redeemed against?

The best way to avoid being redeemed against is by maintaining a high collateral ratio relative to the rest of the Vault's in the system.

Consider using a Debt In Front (DIF) indicator to gauge the cumulative total value of USDL debt of all Vaults that have a lower collateral ratio than your Vault's individual collateral ratio position.

This value can be useful for determining a Vault's redemption risk, since the riskiest Vaults (Vaults with the lowest collateralization ratio in the protocol at the time of redemption) are first in line when a redemption takes place.

### Can the USDL stablecoin become unstable?

Yes. The outside market may trade the stablecoin for less than the one USD equivalent. However, the redemption function decreases the likelihood, because anyone can redeem 1 USDL for $1 USD of PLS value at any time.

### How does the protocol know how much USDL to mint from deposited PLS?

It looks at the price of PLS:USD and mints the required amount of USDL being requested, assuming the chosen parameters meet the minimum loan requirements defined within the protocol.


# LOAN Rewards

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### What is LOAN?

LOAN is the secondary token issued by the Liquid Loans protocol. It captures the fee revenue that is generated by the system and incentivizes early adopters.

LOAN rewards will only accrue to Stability Providers,  i.e. users who deposit USDL to the Stability Pool and liquidity providers of the USDL:PLS pool.

*As technical rewards, they are based on a preprogrammed functionality of the protocol and not on a claim towards Liquid Loans frontend or any third party.*

### What is LOAN's max supply?

Total LOAN max supply is 5.5 trillion.

### Is LOAN a governance token?

No. LOAN is not a governance token, as there is no Liquid Loans governance.

### How can I earn LOAN?

LOAN is earned in two ways:

* Depositing USDL into the Stability Pool.
* Providing liquidity to the USDL:PLS pool.

### What can I do with LOAN?

LOAN holders can stake their tokens to earn the fees generated by loan issuance (borrowing fees) and PLS redemptions (redemption fees).

Learn more about [staking](/pulsechain/loan-staking).


# LOAN Staking

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### How does staking work in Liquid Loans?

To start staking, all you need to do is deposit your LOAN token to the Liquid Loans staking contract. Once done you will start earning a pro rata share of the borrowing and redemption fees in USDL and PLS.

### How much will my staked LOAN earn?

Your LOAN stake will earn a share of the fees equal to your share of the total LOAN staked, at the instant the fee occurred.

### Is there a lock-up period?

No, you can withdraw your staked funds at any time.

### Can I stake USDL?

You can only stake LOAN tokens. USDL can be deposited into the [Stability Pool](/pulsechain/stability-pool-and-liquidations#what-is-the-stability-pool) for LOAN rewards.

### Can I stake PLS?

You can only stake LOAN tokens. PLS is used as collateral to secure your USDL loan.

### Are staked LOAN tokens used to backstop the system (like Maker) or for governance?

No, staked LOAN tokens are not used to backstop the Liquid Loans system, and are not used for governance as there is no Liquid Loans governance.


# Recovery Mode

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### What is Recovery Mode?

Recovery Mode kicks in when the [Total Collateral Ratio (TCR)](#what-is-the-total-collateral-ratio) of the system falls below 150%.

During Recovery Mode, liquidation conditions are relaxed, and the system blocks borrower transactions that would further decrease the TCR.

New USDL may only be issued by adjusting existing Vaults in a way that improves their ICR, or by opening a new Vault with an ICR of >=150%.

In general, if an existing Vault's adjustment reduces its ICR, the transaction is only executed if the resulting TCR is above 150%.

![](/files/7U2HL9H9qSCYroLB55Wx)

### What is the Total Collateral Ratio?

The Total Collateral Ratio or TCR is the ratio of the Dollar value of the entire system collateral at the current PLS:USD price, to the entire system debt.

In other words, it's the sum of the collateral of all Vaults expressed in USD, divided by the debt of all Vaults expressed in USDL.

### What is the purpose of Recovery Mode?

The goal of Recovery Mode is to incentivize borrowers to behave in ways that promptly raise the TCR back above 150%, and to incentivize USDL holders to replenish the Stability Pool.

Economically, Recovery Mode is designed to encourage collateral top-ups and debt repayments, and also itself acts as a self-negating deterrent; the possibility of it occurring actually guides the system away from ever reaching it.

**Recovery Mode is not a desirable state for the system.**

### What are the fees during Recovery Mode?

While Recovery Mode has no impact on the redemption fee, the borrowing fee is set to 0% to maximally encourage borrowing (within the limits described above).

### How can I make my Vault safe in Recovery Mode?

By increasing your collateral ratio to 150% or greater, your Vault will be protected from liquidation. This can be done by adding collateral, repaying debt, or both.

### Can I be liquidated if my collateral ratio is below 150% in Recovery Mode?

Yes, you can be liquidated below 150%. In order to help avoid liquidation in Normal Mode and Recovery Mode, it is recommended that users keep their collateral ratio above 150%.

| Condition                                 | Liquidation Behavior                                                                                                                                                                                                                                                                                                                                                                         |
| ----------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ICR <=100%                                | Redistribute all debt and collateral (minus PLS gas compensation) to active Vaults.                                                                                                                                                                                                                                                                                                          |
| 100% < ICR < MCR & SP USDL > Vault debt   | USDL in the Stability Pool equal to the Vault's debt is offset with the Vault's debt. The Vault's PLS collateral (minus PLS gas compensation) is shared between depositors.                                                                                                                                                                                                                  |
| 100% < ICR < MCR & SP USDL < Vault debt   | The total Stability Pool USDL is offset with an equal amount of debt from the Vault. A fraction of the Vault's collateral (equal to the ratio of its offset debt to its entire debt) is shared between depositors. The remaining debt and collateral (minus PLS gas compensation) is redistributed to active Vaults.                                                                         |
| MCR <= ICR < 150% & SP USDL >= Vault debt | The Stability Pool USDL is offset with an equal amount of debt from the Vault. A fraction of PLS collateral with dollar value equal to 1.1 \* debt is shared between depositors. Nothing is redistributed to other active Vaults. Since its ICR was > 1.1, the Vault has a collateral remainder, which is sent to the CollSurplusPool and is claimable by the borrower. The Vault is closed. |
| MCR <= ICR < 150% & SP USDL < Vault debt  | Do nothing.                                                                                                                                                                                                                                                                                                                                                                                  |
| ICR >= 150%                               | Do nothing.                                                                                                                                                                                                                                                                                                                                                                                  |

### How much of a Vault’s collateral can be liquidated in Recovery Mode?

In Recovery Mode, liquidation loss is capped at 110% of a Vault's collateral. Any remainder, i.e. the collateral above 110% (and below the TCR), can be reclaimed by the liquidated borrower using the standard web interface.

This means that a borrower will face the same liquidation “penalty” (10%) in Recovery Mode as in Normal Mode if their Vault gets liquidated.


# Audits

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The Liquid Loans protocol on PulseChain is a fork of the Liquity protocol on Ethereum, and inherits all risks of that protocol.

The Liquid Loans development team has only made the necessary changes to Liquity's original set of smart contracts to ensure it operates successfully on PulseChain.

These changes may include pointing the code to oracles (such as Fetch Oracle) and decentralized exchanges (such as PulseX V2) on PulseChain.

Now that PulseChain mainnet has launched, 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 [read and download here](https://liquid.loans/audit).

<figure><img src="/files/Bypllm1uT7jzckjbPngt" alt="Liquid Loans Audit Report by Halborn.jpeg" width="375"><figcaption></figcaption></figure>

We also strongly recommend you review the following Liquity audits.

* Audit by [Trail of Bits](https://github.com/trailofbits/publications/blob/master/reviews/Liquity.pdf) January 2021
* Audit by [Coinspect](https://www.coinspect.com/liquity-audit/) March 2021


# Deployment

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### Is there a LOAN lockup and token vesting period?

Some LOAN is reserved for team members and advisors, and is locked up for a minimum of one year after system deployment.

**In the first year after launch:**

* All team members and advisors are unable to access their locked up LOAN tokens
* The Liquid Loans admin address may transfer tokens only to verified lockup contracts with an unlock date at least one year after system deployment

Also, separate LOAN allocations are made at deployment to an EOA (externally owned account) that will hold an amount of LOAN for bug bounties / hackathons and to a LP reward contract.

Aside from these allocations, at this stage the only LOAN made freely available in this first year is the LOAN that is publicly issued to Stability Providers.

Note that the Liquid Loans admin address has no extra privileges and does not retain any control whatsoever over the Liquid Loans protocol once deployed.


# Contracts

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