Liquity Token Rallies 75% As Fees Spike

DeFi Traders Have Been Borrowing LUSD and Swapping For DAI To Capture Yield Differential

Liquity, a decentralized lending protocol, has seen its utility token, LQTY, surge by over 75% in the past 30 days despite a sluggish market, which can be largely attributed to an arbitrage opportunity stemming from MakerDAO's DAI Savings Rate (DSR).

MakerDAO offers a 5% APR on DAI deposits. Traders have been taking advantage of this by minting Liquity's LUSD stablecoin against ETH by paying a one-time borrowing fee of 0.5% and subsequently selling LUSD for DAI, which is then deposited into the DSR module.

As traders sell LUSD, pushing it below its $1 peg, arbitrage bots step in to purchase the discounted LUSD and use it to redeem $1 worth of ETH from the Liquity protocol. This maintains LUSD's dollar peg.

Over the past month, more than $625,000 has been distributed to LQTY stakers, who receive all the borrowing and redemption fees generated by the protocol, a Liquity spokesperson told The Defiant.

In its upcoming V2 iteration, Liquity aims to scale up in a bid to solve the stablecoin trilemma – combining stability, capital efficiency, and decentralization.

The team plans to introduce two new features – principal protection and a secondary market. Principal protection allows users to hedge their risk during market volatility by paying a premium for opening hedging positions, which can be sold for the principal amount.

The secondary market enables users to buy and sell their hedging positions, reducing the risk of a bank run on the system. If a position remains unsold within a specified timeframe, the protocol utilizes the collected premium to subsidize and attract potential buyers.

Liquity V2 is expected to launch in Q2 2024.