EXPLAINED: Liquid Loans DeFi Lending Protocol on PulseChain

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By Connor
Estimated reading: 6mins

How often do you visit your local bank branch these days? 

Probably not very often. And when you do, what are you going for?

The reality is that we hardly ever need to go to a physical bank anymore because we can take care of almost all our financial tasks online.

We can pay our bills, send money to friends, take out loans, transfer between our accounts – without having to worry about the banks’ (often very restrictive) opening hours.

As DeFi rises in popularity, more and more alternatives to banking appear, giving users the opportunity to become their own bank and shrug off the middlemen and counterparties making their lives work. 

The Liquid Loans protocol is one such DeFi innovation. 

What is Liquid Loans?

Liquid Loans is a truly-decentralized lending protocol built specifically PulseChain

Once launched, the protocol is:

  • A finished product with no admin keys
  • Immutable (cannot be changed after launch)
  • Non-custodial (just you, your wallet address, and the code)
  • Governance free (no governance via DAO or internal team)
  • Interest-free (yes, 0% interest)
  • Owned by the community of users

It is the above features which is why some people in the community consider Liquid Loans to be ‘True-DeFi’.

Liquid Loans generates two tokens: $LOAN and $USDL

  • LOAN Token: The yield-bearing token of the protocol which, when staked, collects the revenue from the redemption and borrowing fees.
  • $USDL: A truly-decentralized stable asset, fully-back by excess collateral in the form of $PLS. It has no admin keys, denying the possibility of censorship. 

Why was Liquid Loans Created?

$LOAN and $USDL

The Liquid Loans protocol was developed to allow owners of $PLS a method of extracting value from their holdings without the need to ever sell.

As a by-product of value extraction, a truly decentralized stable asset which is native to PulseChain comes into existence. 

This stable asset makes it possible to have decentralized and permissionless digital payments as well as an opportunity to de-risk without leaving the blockchain or incurring counterparty risk

Liquid Loans was built by the community and for the community with the best interests of the PulseChain ecosystem in mind. 

How Does Liquid Loans Work?

Fundamentally, Liquid Loans works as a distributed network of PLS holders who decide to lock up their coins in “vaults” and mint USDL.

The system-state of Liquid Loans is designed to always stay overcollateralized which protects it from death spirals and insolvency like other stablecoins of the past.

The system-state stays overcollateralized, ensuring the value of USDL, because of the liquidation mechanism.

How Does Liquid Loans Work: Liquidations

Liquidations happen when an individual vault falls below 110% collateral ratio.

For example, say a user opened a vault with $15,000 worth of PLS and mint $10,000 USDL. 

If the price of $PLS dropped so that the value of their vault was $10,999 (and the user did not repay their debt), then their vault would be up for liquidation.

If a liquidation is triggered, the $PLS in the vault will distribute out to the Stability Pool as payment for the responsibility of paying the debt of the undercollateralized vault. 

Without liquidations, the system-state would have less total value locked in $PLS than total value in $USDL in circulation. 

This under collateralization would result in USDL being at severe risk of depegging from a dollar. 

How Does Liquid Loans Work: Stability Pool

The Stability Pool is a smart contract full of USDL which is deposited by community members who want to support the health and growth of the system.

It is responsible for paying the debt owed to vaults with collateral under 110%.

As a reward for paying back the debts, the Stability receives a greater value in PLS versus the USDL they are losing. 

For example, if the stability pool has to pay back a debt of 10,000 USDL for a vault with $10,999 worth of $PLS, they receive $999 dollars worth of value more than that which they are losing.

The result of this is significant returns for users who deposit USDL in the stability pool.

Stability providers also earn rewards from a pool of LOAN tokens which decreases over time, much like the Bitcoin halving

How Does Liquid Loans Work: Redemptions

Another function which helps ensure overcollateralization as well as price stability for USDL is the redemption function.

Any user at any time can obtain $USDL and redeem it for $PLS. 

The redeemers' $USDL goes to the lowest collateralized vault in the system and takes $1 worth of $PLS per USDL from that vault.

The redemption function provides a hard peg mechanism for $USDL. 

If USDL falls below $1, crypto arbitrageurs can buy $USDL off the market (pushing the price up) and turn a profit by redeeming.  

How Does Liquid Loans Work: LOAN Staking Pool

Holders of the LOAN token can deposit it in the staking pool in order to earn the fees of the protocol. 

Both the redemption function and the borrowing function cost users a 0.5-5% fee to execute. 

The fees are distributed to the loan staking pool in proportion to the users share in the pool. 

It is the LOAN stakers who “own the bank” however they don’t have any power to change the rules of the protocol.

Use Cases and Benefits for Liquid Loans

Liquid Loans has many use cases and benefits beyond what meets the eye.

  1. Extract Value without Losing Price Exposure. By performing the borrow function, users can extract value in the form of USDL without having to lose any upward price action
  2. A Truly-Decentralized Stable Asset. USDL, being generated by an immutable, governance-free, and censorship-free protocol, offers attractive ways to de-risk, earn yield, and transact without having to leave PulseChain.
  3. Risk-On Yield. The LOAN Staking Pool offers the ability to earn yield in a risk-on asset, $PLS, while holding a risk-on principal, $LOAN.
  4. Risk-Off Yield. The Stability Pool offers a way to earn yield on a stable asset in a market downturn. In addition, the stability pool yield typically increases in a bear market due to increased liquidations.
  5. Reduced Sell Pressure for PulseChain. With Liquid Loans, $PLS can earn trustless yield and extract value without having to market sell. 

The Bottom Line

Liquid Loans is the PulseChain community bank.

By owning LOAN token and staking it, you fundamentally own the bank.

In addition, when you collateralize PLS, you mint a truly-decentralized, overcollateralized stablecoin called USDL which PulseChain NEEDS.

Liquid Loans has no admin keys, no interest, is immutable and governance-free, and is created by and for the community of PulseChain.

For these reasons, the protocol is “True-DeFi’ and embodies the key ethos of the cryptocurrency movement.

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Disclaimer:Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.

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Connor

Connor is a US-based digital marketer and writer. He has a diverse military and academic background, but developed a passion over the years for blockchain and DeFi because of their potential to provide censorship resistance and financial freedom. Connor is dedicated to educating and inspiring others in the space, and is an active member and investor in the Ethereum, Hex, and PulseChain communities.

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