LUSD

Overview

What LUSD is

LUSD is the stablecoin of Liquity V1, a borrowing protocol that lets users draw interest-free loans against Ether. Liquity Protocol describes it as a "USD pegged stablecoin" that "can be redeemed against the underlying collateral at face value". Every LUSD was minted as debt against ETH locked in a Trove, at a minimum collateral ratio of 110%. A Trove needs at least 2,000 LUSD of debt, and a further 200 LUSD is set aside as a liquidation reserve for whoever sends the liquidation transaction. Borrowers pay no interest, only a one-off borrowing fee set algorithmically between 0.5% and 5%.

Who controls it

Nobody. The system has no admin key and no human governance, and parameters were fixed at contract deployment. Liquity's core team runs no front end, so the protocol is reached through third-party interfaces. Liquity V2 issues a separate dollar-pegged token, BOLD, backed by WETH, wstETH and rETH.

Sources: Liquity Docs V1, General FAQ, Liquity Docs V1, Borrowing FAQ, Liquity homepage, V1 and V2 overview, Liquity V1 product page

Backing and reserves

What backs it

Collateral is Ether, held on chain. The Liquity developer README puts active Trove collateral in the ActivePool contract, and the collateral of liquidated Troves awaiting redistribution in the DefaultPool. No custodian holds it. No bank account sits behind it.

What is not published

There is no reserve attestation, no auditor's opinion on reserves and no monthly report. There is also no off-chain reserve to attest to. Backing is readable from contract balances. Solvency depends on the ETH price and on liquidations clearing, not on a custodian's balance sheet.

What was audited

Liquity's resources page lists four security audits, all from 2021. Trail of Bits reviewed all core system contracts except the PriceFeed in January 2021, then returned twice in March 2021 for the lockup, Unipool LP staking, DSProxy and bundled-actions contracts. Coinspect reviewed the core contracts and the LQTY lockup contracts in March 2021. The page lists nothing later.

Sources: Liquity V1 developer README, flow of Ether and contract architecture, Liquity Docs V1, Technical Resources and audit list

Peg behaviour

The two bands

Redemption sets the floor. Anyone can exchange LUSD for ETH at face value, "as if 1 LUSD is exactly worth $1", so LUSD trading below a dollar is profitable to redeem. The 110% minimum collateral ratio sets the ceiling: a borrower can mint LUSD against ETH and sell it once LUSD trades above the implied cost.

What redemption costs

The fee is baseRate plus 0.5%, applied to the ETH drawn. baseRate rises with every redemption and decays to zero with a 12 hour half life. Redemptions hit the lowest-collateralised Troves first. Liquity states that a redeemed borrower does not incur a net loss, but loses some ETH exposure.

DIA reads LUSD at $1.0020.

Sources: Liquity Docs V1, Redemptions and LUSD Price Stability

Where it is used

The Stability Pool is the main sink for LUSD inside the protocol. Depositors put LUSD in. When a Trove falls below the minimum collateral ratio, the pool burns LUSD equal to that Trove's debt and absorbs its collateral. Liquity calls the pool "the first line of defense in maintaining system solvency". Depositors keep the liquidated collateral and earn LQTY early adopter rewards.

Liquidation compensation is 200 LUSD plus 0.5% of the Trove's collateral, paid to the transaction sender. The liquidated borrower keeps the LUSD they borrowed and loses roughly 10% of value overall. If the Stability Pool empties, the protocol redistributes under-collateralised Troves to other borrowers.

Sources: Liquity Docs V1, Stability Pool and Liquidations, Liquity V1 developer README, liquidation and redistribution

Risks

Oracle dependency

The PriceFeed contract reads ETH prices from Chainlink as primary and Tellor as fallback. MAX_PRICE_DIFFERENCE_BETWEEN_ORACLES is set to 5e16, a 5% gap, and TIMEOUT is 14400 seconds. If both oracles become untrusted the contract falls back to lastGoodPrice and keeps returning it until one recovers. A frozen price prices liquidations and redemptions wrong.

The Tellor incident

Liquity received a bug report on 17/09/2022. The deployment had no dispute period, so it would consume Tellor's most recent submission instantly. On the ETHW fork after the merge, someone staked TRB, reported a fake ETHW price and minted trillions of LUSD. Liquity states no user funds were at risk beforehand because it was using Chainlink. The fix came from Tellor, not from Liquity: Tellor now returns the latest price submitted at least 15 minutes earlier, shipped in Tellor360 and audited by Coinspect. Immutable code with no admin key leaves Liquity no patch path of its own. The January 2021 Trail of Bits audit excluded the PriceFeed.

Recovery Mode

If the system's Total Collateral Ratio falls below 150%, Troves under 150% become liquidatable and the borrowing fee drops to 0%. New LUSD can then only be issued by improving an existing collateral ratio or opening a Trove at 150% or above.

Sources: Liquity V1 PriceFeed.sol contract source, Liquity blog, Tellor Issue and Fix, Liquity Docs V1, Recovery Mode, Liquity Docs V1, Technical Resources and audit list

What this map tracks

What the map reads

The Global Stablecoin Map tracks LUSD from its ERC-20 contract on Ethereum, 0x5f98805A4E8be255a32880FDeC7F6728C6568bA0. That read returns 27.7 million LUSD outstanding, about $27.8 million at a price of $1.0020, held by roughly 9,000 addresses. LUSD is recorded as a crypto-backed stablecoin with global reach.

What that figure leaves out

The registry lists LUSD on Ethereum and Arbitrum. The supply read comes from the Ethereum contract alone, so any bridged Arbitrum float sits outside it. The map does not read Trove-level positions, the system's Total Collateral Ratio, or the Stability Pool balance. Liquity documents those in its TroveManager, ActivePool and StabilityPool contracts.

Sources: Liquity Docs V1, Technical Resources and deployed contract list, Liquity V1 developer README, contract architecture

Common questions