📺 AMA with Robert Lauko of Liquity

hey bankless nation welcome to another ask me anything this is your opportunity to ask questions of our guests and this guest is we're pretty excited about this is a new money experiment built on top of ethereum we're talking about liquidy today robert lauco is the co-founder he is our guest once again this is your opportunity to ask questions of robert about the project where it's going where it's headed anything burning in your mind david and i of course will get you started uh david new money experiments

on ethereum's one of our favorite things to talk about what's the tldr of liquidy why did we decide to bring them on for this ask me anything yeah the tldr and i actually use liquidity as an example in my uh coin coindesk talk on monday it's the tl dr is that d5 is in this inevitable highly competitive environment for capital efficiency uh and to me that's what liquidy represents is it's one of the newer projects that have come and debuted on ethereum and it's seen a ton of success in terms of uh just tvl like

tons of eth has been deposited into liquidity and the reasons billions right billions yeah uh-huh uh we'll get those numbers up in a sec um and the reason why is because it offers really competitive capital efficiency rates a hundred and ten percent collateralization ratio and zero percent interest rates right like uh like zero percent interest rates on a loan like there there is something that you pay so we'll we'll get into those details but like really competitive 110 collateralization radio zero percent interest rates like where can where else

in d5 can you get those loans uh and that's kind of the story and the through line of defy to me is capital efficiency capital efficiency capital efficiency and so that's my rationale for you know why liquid liquidity has seen such success and why there's been so much demand to get this ama with robert small disclaimer i have a small seed investment into liquidity and so i have that uh to to disclose i guess so perhaps some subconscious bias but just know that uh and i think without further

ado ryan should we just get into it we should i have one quick question for you as well not only is this a lending uh protocol of course this is a staple coin right yes yes oh very very important data yeah it's a it's a governance minimized uh stable coin so one of the the through lines that we will be asking robert is uh why governance minimization always a good question but also like to what degree governance minimization right like there's always a spectrum uh and so good to know stable coin crypto dollars new money experiments all really exciting things

guys we will be back with robert bring your questions in just a minute but before we bring robert on we want to thank the sponsors who made this episode possible ave is a borrowing and lending protocol on ethereum and just recently released ave version 2 which has a ton of cool new features that makes using ave even more powerful with ave you can leverage the full power of d5 money legos yield and composability all in one application on ave there are a ton of assets that

you can deposit in order to gain yield and all of those same assets can also be borrowed from the protocol if you have deposited collateral here you can see me getting a 200 usdc loan against my portfolio of a number of different defy tokens and eth i'll choose a variable interest rate because it's a lower rate than the stable interest rate option but i could choose the stable interest rate option if i wanted to lock that interest rate in permanently one of ave's v2 features is the ability to swap collateral without having to withdraw your assets trade them on unit swap and

then deposit them back into ave ave does all of this for you all in one seamless transaction so you don't have to repay loans in order to change the collateral you have backing them check out the power of ave at ave dot com that's aave.com balancer is defy's most powerful automated market maker typical amms just have two tokens inside of one liquidity pool which can lead to fractured liquidity across the many pairs in d-pi with balancer you can access the full power of multiple tokens inside of one single amm which unlocks an entirely new

playing field of possibility this makes balancer an awesome building block for so many different use cases balancer pools can make asset indexes but instead of paying fees to portfolio managers balancer lets you collect fees from traders who use your portfolio for liquidity additionally bouncer smart pools can be programmed to have properties that change according to pre-determined rules such as changing the swap fee based on market conditions or even liquidity bootstrapping pools which can help you launch and distribute your token with day one liquidity at bank list we used a liquidity bootstrapping pool to sell our bap t-shirts to much success balancer v2

brings powerful new features that makes your money work even harder for you in v2 idle tokens are capable of generating yield and defy without sacrificing liquidity in the pool to top things off balancer is reimbursing all gas costs with valve rewards meaning that all your gas costs are returned to your wallet with the balancer governance token balancer's mission is to become the primary source of liquidity in d5 by providing the most flexible and powerful platform for asset management and decentralized exchange dive into the balancer pools at pools.balancer.exchange

guys we are back with this bankless ask me anything we're here with robert lauco who's the founder of liquidy that is going to be the subject of today this new monetary experiment on a theorem on an ethereum called liquidity robert has a phd in law interesting background he's also previously a researcher at dfinity so he's seen other blockchains too i believe he started this project in 2019 as well so he's been in the d5 space for a while too robert it's great to have you on bank list how are you doing today

hi thank you so i'm really happy to be on this show and uh yeah grateful to have this occasion and yeah i'm feeling great today that's awesome okay so uh i'm gonna be kind of the almost the dumb cop here robert because i think david knows a lot more about liquidity than i do so i'm gonna be the guy asking that the really kind of dumb novice beginner type questions and of course in d5 guys i say dumb questions there are no dumb questions we're all on this exploration journey together uh so

well yes i'll try not to ask the really really dumb questions just the novice questions um so robert let's let's start here what really is uh liquidy so it sounds like it's a stable coin or maybe kind of a a crypto dollar but what is it at the 20 000 foot view so what liquidity really is all about is borrowing and it tries to make borrowing as attractive as possible to the borrower and it does that by

basically improving or by offering two things one of them being interest-free loans in a stablecoin that it can issue to the borrower itself and the other advantage is that the loans are only need to be collateralized at a hundred and ten percent collateral ratio so the loans they are collateralized with ether that's our collateral type and that's how the system basically secures the loans and then the whole system is completely decentralized immutable and it's based

on a network of decentralized front ends which is also kind of unique in the d5 space so robert would you say that borrowing is the main attraction because i notice you started there it's kind of a borrowing protocol or would you say the the staple coin output the crypto dollar output is the uh the the main attraction or these like kind of two sides of the same coin in your in your mind that's a great question so it all started with borrowing like we i really had this idea like one and a half or

even two years ago uh that gek what really makes boring most attractive and the two aspects that i just mentioned are among like the most important ones so it all started with borrowing but then i realized that in order to achieve those two goals um you need to be able to mint your own currency because otherwise you have capital costs i mean if you're like a matchmaker or you're like a pool based platform which takes money from lenders and gives it out to borrowers then you

would need to pay some interest to the lender so you cannot offer your loans for free or interest-free to the borrowers so i quickly realized that hey this is only possible if we mint our own token and normally people they want to get a loan denominated in something like in some currency that they are familiar with and in the currency in which they receive their salaries and that's for many people the us dollar and and so it made just sense to

create a borrowing platform with this kind of stablecoin in mind which is a us dollar pack stablecoin which allows us to um offer those two benefits so what what is the the main driver here then is it kind of in in terms of expansion and i guess success of liquidity is it um demand for lusd the coin itself or is it is it demand for uh the the unique borrowing opportunities

that liquidity provides i mean at the end of the day we need both because the system needs to reach some equilibrium so there needs to be demand for the loans but also demand for holding or investing or like using the lusd i just is the name of our stable coin so we have basically incentives for both uh in place so for for the borrowers it's like we already like mentioned them the fact that they are attractive but then on the other hand we also needed to

make sure that you can do something with your lusd that you borrow i mean either you sell it to other people who can do something with it or even you don't need to sell it if you decide to put it in something we call a stability pool which is our main mechanism to liquidate positions i can maybe delve into more into that like later but with those uh with this stability pool we already created something that drives demand for buying and holding lusd our stablecoin and on top of that

or in addition to that we also have a few pools in other systems like noun curve we had one on unisop now it's on curve where we give out rewards to the lps so let's go into that that uh stabilization mechanism robert because if we take a traditional model of like a central bank and they offer zero percent interest rates like there's gonna be a ton of currency issuance right like if you make money free for people people are going to print it right and and so

that's kind of the law of incentives right and so if so if if there's so much like easy access to you know zero percent interest rates with liquidity uh or excuse me liquidy uh where does the stabilization of l usd come from why doesn't it just drop down to like you know 0.9 cents point eight cents like where does the uh floor price for lusd come from i would say we have two uh different mechanisms that help us to achieve a stable currency

and one of them is just this like soft pack mechanism that is already present in other systems like maker dial where borrowers have an incentive to borrow whenever the token is overpriced or overvalued and they haven't like a stronger incentive to repay whenever it's undervalued but we wanted to have something which is stronger than that so what we added is a redemption facility so or redemption opportunity for every lusd holder and

that basically means that you have this kind of right to exchange your tokens at face value for ether so you get like for 100 lusd you would get back a hundred dollars worth of ether from the system and that of course uh offers an arbitrage cycle or possibility whenever the price trades significantly below one dollar because you can just buy the usd on the market for less than one dollar and exchange it through this redemption uh for something that's more than one

dollar and then sell it and make a profit so that's just one side like this before you go on to the next one i want to try i want to just drill that home a little bit because i think the reasons why you are able to do this and why lsd is able to be stabilized this way and correct me if i'm wrong is l usd david lsd [Laughter] pardon me pardon me um only one letter off um uh and so the reason why liquidy is able

to stabilize l usd is because it has extra strong commitments to ether the asset as the only collateral right and so because uh because the liquidy is governance minimized and it only has one collateral type which is ether which has very strong competitive risk parameters you are able to offer this redemption rate regardless of what the secondary market price of lusd is is that correct um i would say i mean it makes it much

easier to offer this redemption because we only need one we only need to care about like one collateral type i mean in a multi-asset or multi-collateral system it would be much more difficult and harder to achieve the same redemption facility i mean ether has this nice property of being decentralized and being like the base currency of the ethereum networks of course it also adds to the stability of the system as a whole right so okay cool all right so let's go into the

the secondary mechanism uh about how l usd is is stabilized yes i mentioned that we have this redemption which kicks in when when the price drops below one dollar and probably our system could have done just with this mechanism so the secondary mechanisms like a nice to have in some way like not necessity but we'd also wanted to minimize redemptions as far as we could because redemptions they

affect the bores because basically what the system does when somebody redeems lusd for ether then it would take the ether from the borrower with the riskiest position by riskiest i mean with the lowest collateral ratio so redemption from the boris perspective means premature repayment which may not be like to the interest of the borrower so that's why we wanted to minimize this friction for the lowest collateralized borrowers by introducing a fee and it's basically a double fee because

we have a base rate that determines two fees that determines a borrowing fee and a redemption fee now as the name already says the redemption fee is a fee on the redeemed amount and it's a percentage and the borrowing fee is a one-off fee like a fee that you paid up front but only once when you borrow and it's also determined as a percentage of the borrowed amount and both of fees they are they are basically the same or except for some like minor exceptions but normally they they move in tandem and

the way the system determines the fees is that it would measure like the amounts or the volumes of redemptions that happen during a time period and it would adapt the fee like whenever somebody redeems uh the fee would go up and if no redemptions happen over some time period then the fee would decay slowly and again reach the minimum and the minimum here is 0.5 percent for both fees like there is this minimum uh cost of a loan which is 0.5 percent so robert

walk me through really quickly let's say i want to borrow a thousand dollars right lusd what what what fees am i paying how and how much are they right now so right now i guess it's 0.53 or 5 4 so it's almost the minimum so you would basically then pay a 5.40 um like you don't get this amount it's still part of your debt like basically when you borrow a thousand lsd against let's say two ether

yes exactly you could get 995 but your debt would be a thousand that's what happens okay and you pay that upfront you don't actually pay it but it's just par it's rolled into the loan up front and that is the only fee there's no interest fee that's the only fee and also i want to clarify here because that gets often confused that the redemption is really is not about repaying your loan like when the borrower repays their own position we call them troves like when the borrower repays the trove there is

no additional fee on that like repayment is for free i mean the only thing is that this kind of borrowing fee was added to the initial debt so there's no redemption fee just to clarify the only fee you're paying is when you take out the loan initially and that fee will fluctuate but that is the only p p uh fee you're paying and and you don't actually pay that it just kind of comes out of the it's rolled into the loan up front that's it right so we don't like we wouldn't use the term redemption for like this

process of repaying and retrieving your collateral i guess it's better to like use the term maybe retrieval or repayment for that because we are using redemption very specifically for this broader type of redemption which is let's say also um a thing in in terra for example or in in centralized or centrally backed stable coins like usdc where any holder of usdc can exchange usdc for u.s dollars

and that's the difference so you're saying use the term redemption when somebody is um exchanging uh lusd for eth right that's the term you use and then retrieval when you're paying off a loan essentially yeah or repayment and then retrieval of your collateral that's cool and so the instead of having the you know the interest rates paid over timed in uh you know l usd denominated terms you have you guys offer zero percent but you've taken that that fee and put it

somewhere else which is a fee on the principal upon deposit right uh and so that you know this isn't completely magic there is a fee somewhere inst but instead of on the actual loan it's on on the actual deposit uh and this is just one of the one of the the principles that we speak of on bank list like if you can build it someone will build it right and so somebody has built this uh you know credit facility where instead of charging you interest rates over time it just charges you as a deposit and you said that there is like a you know a

mechanism that uh i perhaps reminded reminds me of the rye system with control theory where uh there's this there are inputs and outputs and the fee will go up or down based on those inputs and outputs but specifically not governance it's more of a of a you know more autonomous more robotic uh system and so that that control theory of uh how the the fee raises and lowers in an algorithmic fashion and also only

have ether at only having ether as collateral it's like some of the probably the two biggest reasons why we consider uh lusd a governance minimize stablecoin anything you want to add to that and did i get that right yeah that's a great summary it's really governance maybe you cannot say it's governance free because it's still reliant on an oracle which has its own governance but except for the oracle there is no single parameter or anything that we like as a company or the team or whoever like a governance body could change or

adapt so and the aura calls chain link right now that's true we have a fallback a call by the way so if chaining fails and that's also part of our like philosophy we have a number of rules that are all algorithmically um determined like basically they they would like detect if there is an issue with chain link and then they would fall back or the system would then use stellar and then back when jenny comes back so that this i just want to wrap my head around the the borrowing piece um

again so one thing that used to drive drive me a little bit crazy about maker from a borrower's perspective is you go and you borrow on maker right and then one month you're happy because the rates are two percent and then something happens in crypto the next month right your rates are suddenly double digit you know i've seen seen rates i don't know if this was 2018 or 2019 it's all a blur to me no robert but like 20 plus percent on on a loan that you kind of took out

when rates were like one or two percent um this can't happen with liquidity because you're paying up front and it correct me if i'm wrong but you can choose i'm not going to use the word redemption you could choose to retrieve the loan pay off the loan at any point in time but you don't have to worry about that variability in interest rate is that correct right that's exactly one of the selling

points that this one-off fee makes the loans not only cheaper if you have a long-term perspective but also much more predictable because you just and that's just it you kind of have to have a long-term perspective because you are paying this fixed percent up front so like you're not going to want to take this loan for a couple of days and then then retrieve it and you can't go in and out of loans all the time like with with ave and compound and maker you can go in and out raise your loan lower your loan like you can kind of high touch loans uh

to me an lusd loan through via liquidity is more of a low touch long term time horizon uh perspective kind of loan exactly yeah there's this trade-off that uh yeah i mean for very short-term loans it like the fee can be significant but i guess already after one month like with the current maker fees if you compare it it would become attractive very cool all right so you talked in there robert a little bit about uh lusd and its redemption

mechanism as well we've had some turbulence lately in crypto right some like pretty historic even uh drops lately um so can you talk a little bit about how lusd as a stable coin has or maybe crypto dollar david i don't know what term you'd use for this crypto dollar crypto dollar lusd as a collateral-backed eth-backed crypto dollar how it's performed i don't know if the best place to pull this up is on coin gecko but but

that's where i'm seeing some some prices and it looks like this is the 30 day it looks like it held up fairly well um you know maybe during some of these days on wednesday again black wednesday is that what we're calling it i don't know dark gray wednesday it wasn't great um we had some variants uh can you talk a little bit about that was this kind of to your expectations from a band of about you know 98 cents to stretching to a dollar and two cents like kind of a four cent band on uh the crypto dollar

or like what's your take how did it hold up during this recent market turbulence maybe one note on that so we we just noticed that this chart may not be like may not reflect the real price because it had apparently has some issues with the curve um pool so i mean we the our largest uh lsd pools are currently on curve and from what we can see there i mean we just created our own chart uh it it had it i mean it was a bit more

volatile around like may 20th or when this happened but uh the deviation was a bit lower i guess it wasn't more than three cents um at least on curve um so yeah but i mean there was uh the very few uh spikes in both directions um which i mean it's hard to say why that happened so we like what we can say i mean what we would expect is that whenever there is a sharp ether price drop then people would

want to repay their loans or some people would want to top up their collateral but others don't have the means so the only thing that they can do is either partially or fully repay the loans to um to prevent liquidation i mean they don't want to be liquidated because then they lose even more so um and if people are trying to close their loans so to say that would have an impact on the lsd price so normally or in theory that should rather drive the price up and down

and that's what happened with die and usdc uh a year ago or so like a bit more than a year ago in this black swan event and there were like there are also some like academic papers on on that very topic but now in in our situation it was a bit different um so around that day and also the the following days the price it was hovering maybe around 99 98 99 cents and the reason for that i guess i mean it's hard to tell is that uh

um i mean we have this stability pool so in our system people many borrowers have their own tokens in the stability pool and if they don't they can or when if there is somebody in the pool he may have an incentive to take out the lsd from the pool and uh put it like or sell it somewhere in the market because this pool gets less attractive as the lusd drops below one dollar so this kind of stability pool can also act as a stabilizer in some way

so it would basically give more liquidity to the market so that borrowers have more liquidity available to buy in order to repair the loan so that may be one reason why why we didn't have this kind of sun spike upwards and also another reason is maybe that i mean elias is quite a new prod or liquid is quite a new project and lsd is not acting as a safe happen maybe as usdc will when people are like just selling their ether for for for and

uh like whatever stable currency yeah i guess i was going to say like it it seemed to perform relatively well in not quite a black swan but a grey squad swan type event 60 percent ether lost we would call that a black swan if uh the cove crash hadn't already happened yeah or definitely if we were in mainstream finance that would be like like like incredible volatility um unprecedented volatility but like i guess i it seems to me lusd held up fairly well in these

types of conditions so it's nice to i mean you guys are lusc is like what uh a month or so in launch in april and uh you have one of these 60 drawdowns in month two um not too bad yeah yeah so we are really happy with this outcome and it was like an early stress test of our system and i guess this will also give some users or some prospective users uh like confidence in the system so that they know oh the system has already

survived something which is almost a black swan event so uh yeah they should trust it even more than before robert uh you mentioned that the coin gecko uh price for l usc might not be the best place to to view the price where would where do you go when you want to see the general value of lusd on the secondary markets is there a resource that we can point our listeners to um so we just created a new doom um page for the curve price

i'm not sure if i can share it maybe i could do that um put a link in the chat and we'll i'll um i'll i'll show it on my screen in just a minute and i'll put it in the youtube comments right i think i have it right ready cool um so it uh this may change a little bit still robert okay let me just show that really quick so this is dune man dune does everything don't they

uh it's just still loading let me share it as soon as it loads here cool i hope my dev created this will forgive me for showing off his like early work like kind of in progress so you see like the middle um chart uh it is we have to that the x's are a bit like off but uh you can see that there was this uh like under price um event but if you hover over it it should show i guess the price

it was like three cents off the usdc wow wow that's crazy because like you know three three cents is far off the peg but like we have to put things into perspective ether dropped 60 percent three price three percent or three yep three percent off the dollar for a you know call it 24 not even 24 hours relatively is like really good that is what stability looks like well last time so just what's interesting i think about liquidity in

this protocol is like um last time we had such an event 60 drawdown was actually black thursday in march and i remember looking at uh maker that day and just like crossing my fingers like come on die come on pull through but like uh price is spiked to a dollar eight cents dollar nine cents a dollar ten cents on some exchanges and what's interesting about that is the remedy part of the remedy following black thursday for maker was what are we gonna do we have to add a whole bunch of

uh centralized collateralized bank crypto dollars uh i'm using the term accurately now david not stable coins crypto dollars so usdc and now we have a point where you know the the compilation of of die has changed over time and it's gone up and down but now i think it's something like a third of dai is backed by usdc and as advocates like the show is called bankless right like the show is called bankless guys