Hey folks, if you’ve been following me for awhile, you’ll know that I’m extremely bullish on $LQTY and the entire ecosystem. My last $LQTY article from February 6th was written at a time when $LQTY was sitting around $0.68, and if you’ve been hodling since then, you, like me, would be enjoying a nice 4x on your bags:
The run up in price has confirmed my ongoing thesis that Liquity is resilient in both bull bear markets and this past few days testifies to how each of Liquity’s levers worked together to create profitable returns. Last weekend was one of the quickest turnarounds that I have witnessed in 72 hours, from some saying that the crypto-sky was falling, to now where people are saying the the bull market is within sights. What I’ll break down in this article is how each side, bull and bear, generated profits for $LQTY holders — both through issuance and redemption fees, and why I continue to be so bullish on the Liquity protocol.
Let’s dive in shall we?
$LUSD Depegs (again)
Last weekend with the collapse of Silicon Valley Bank, we saw some cataclysmic FUD in terms of stablecoins, where all the major players (with the exception of $USDT) depeg from $1:
As you can see from the tweet above, this included $LUSD, Liquity’s native $ETH-collateralized stablecoin going down to $0.95. Many of these stablecoin depegs such as $DAI and $FRAX were warranted because of their significant exposure to $USDC, but if you knew some of the minting tokenomics behind $LUSD this was NOT due to $LUSD’s exposure to $USDC (because there is none), but instead because of massive $LUSD redemptions taking place for $ETH:
In the world of Liquity, redemptions are when $LUSD is redeemed for their underlying $ETH collateral. The depeg event that occurred last weekend profitable on two fronts — first from the stablecoin arbitragers who are wanting to buy $LUSD on the cheap, and also for $LQTY holders who are generating fees from the redemptions themselves:
As you can see from the graphic above, from just one day alone, almost 100 $ETH was generated for LQTY stakers from these redemption fees. In other words, when cataclysmic FUD exists and people are wanting to go to $ETH, the protocol benefits each time when one of those interchanges takes place.
This was only one side of the coin, the other which we’ll get into next proved to be just as profitable…
Opening Troves
In the world of Liquity, a trove is a position opened up when a user puts up their $ETH as collateral, receiving a lesser amount of equivalent $LUSD in return (thus overcollateralization).
With people signaling the start of the potential bull-market, people who saw $ETH’s crazy run-up and are now wanting to leverage up their positions, causing a huge run-up in newly created troves:
With each of these troves that were opened, more $LUSD was issued meaning that more fees were generated (again) for $LQTY holders:
Once again, as you can see from the graphic above, from one day alone, roughly $300k dollars worth of $LUSD were generated from issuance fees alone.
OK, so $LQTY stakers generated some massive returns over the last few days, what about $LUSD stakers? Let’s get into that…
The $ETH crash that didn’t happen
If we take another look at Liquity on Dune Analytics, you’ll notice that the APR for the $LUSD Stability Pool is dwarfed by the return from staking $LQTY:
The reason for this parity is that the price of $ETH didn’t fall enough to trigger many liquidations — in fact, it only triggered one:
Yes this might be not-so-good for $LUSD Stability Pool holders, but I would argue that this is better for the crypto-market as a whole — a signal that potentially signals the beginnings of a bull market. Regardless, even if we saw another market crash, $LUSD Stability Pool holders would be making out like bandits.
Whether we’re in a bull or bear market, Liquity has truly shown that it has all the mechanisms in place to be profitable off both — a feat that many other protocols don’t manage nearly as well.
Perhaps the only downside that I can see personally in using Liquity is that they haven’t migrated their protocol off of Ethereum mainnet. In other words, mind your expensive gas fees during peak transaction times if you’re trying to claim/redeem/unwind any positions.
Interested in learning more about Liquity? Read my deep-dive analysis that I wrote last month on $LQTY.
And as always, thanks for taking the time to read this and be sure to follow me on twitter (https://twitter.com/CryptosWith) to get all my latest updates. Also, looking for a gift for your Crypto-loving/hating friend? Give them a REKT journal to cheer them up!
Disclaimer: And as a final reminder, this is not financial advice and this is for educational and entertainment purposes only. Please as always, do your own research and find what investments are best for you. Cheers everyone!
