Threats like counterparty risk and censorship are widespread in the crypto landscape today.
These threats can take many forms, and are not always clearly presented. Some of the largest projects and protocols on the market right now are victim to centralization or fail to protect their users.
Here’s how Liquid Loans addresses these issues.
Broadly speaking, the decentralized finance (DeFi) movement is about giving power to individual users—rather than middlemen, governments, and corporations. Unfortunately, many platforms and digital assets are not as decentralized as they claim to be.
As a recent example, we can look at a massive stablecoin known as USDC.
Despite being one of the largest stablecoins by market cap in the crypto space, USDC is far from decentralized. As recently as last year, the company behind USDC, Circle, froze 75,000 USDC worth of user funds. These funds belonged to users who had engaged with Tornado Cash, a protocol which aims to anonymize crypto transactions.
In the world of traditional finance, this type of censorship is common. But it has no rightful place in the crypto movement.
After all, if companies and governments can freeze user funds at will, what is to stop them from carrying out these practices on a broader scale for their own self benefit. Moreover, when a company has the ability to seize your funds, is that money even yours to begin with?
In the context of crypto, counterparty risk is the threat of one party in a cryptocurrency transaction failing to deliver on their obligations.
Unlike censorship, this can readily occur in decentralized networks. Counterparty risk is prevalent in instances where platforms succeed at avoiding the centralized pressures of institutions like banks, but ultimately fail to safeguard their users.
For instance, if you store your digital assets on a custodial cryptocurrency exchange, there is always a risk of the exchange defaulting, stealing your funds, or falling victim to theft. In these instances, you could be left without a practical way to get your money back.
This exact scenario has played out countless times in the past, with the collapse of a massive cryptocurrency exchange known as FTX serving as a recent example.
In order for a user to avoid both censorship and counterparty risk at the same time, they need to find a project that delivers on two fundamental goals.
The first of these is decentralization. By being truly decentralized, a platform can ensure that users within its ecosystem are free from centralized pressures such as censorship.
For more on this topic, check out our recent article on the first principles of crypto and blockchain.
Second, the project must work to actively mitigate counterparty risk. This can be done in a variety ways, such as ensuring that there is significant collateral within the project, that the project itself is robust and has been transparently audited, and that it uses transparent code that avoids the need for blind “trust” within the ecosystem.
Here’s how Liquid Loans does it.
Within the Liquid Loans ecosystem, two native digital assets exist. The first of these is LOAN, a token which allows users to earn yield in a transparent and decentralized environment. The second of these is USDL, a medium of exchange that can also earn yield and can be redeemed for PulseChain (PLS) without any risk of censorship.
Importantly, Liquid Loans addresses the risk of censorship by being entirely decentralized. It is an entirely community-driven project, with no admin keys.
As such, Liquid Loans has no central issuer or owner. When you use Liquid Loans, you are simply interacting with smart contracts. These are pieces of code that execute exactly as advertised. As these smart contracts are transparent, users and auditors can easily ensure that they are operating as intended.
Here, it is the users themselves, rather than middlemen or project teams, who control the network.
In addition, Liquid Loans is immutable. This means that, once deployed, smart contracts and previous transactions on the Liquid Loans blockchain cannot be changed by anyone. This removes the risk of censorship and blacklisting. At the same time, it also mitigates counterparty risk by ensuring that users are never the victim of harmful or malicious network changes.
Another way in which Liquid Loans has addressed counterparty risk is by ensuring that USDL is directly redeemable. Within the Liquid Loans protocol, USDL can always be redeemed for PulseChain (PLS) at any time—regardless of external circumstances.
Finally, Liquid Loans is a protocol that is entirely self-custodial. Whereas many cryptocurrency exchanges and platforms introduce significant counterparty risk by holding onto users’ funds, Liquid Loans never stores your funds or your private keys.
Instead, you are free to stake through your own self-custodial wallet. You can generate yield on your USDL or LOAN without ever having to place your trust in anyone other than yourself.
When combined, these features ensure that Liquid Loans is a platform that is entirely decentralized and free from the risk of censorship. At the same time, Liquid Loans has mitigated the sources of counterparty risk that have long left users vulnerable when interacting with the DeFi landscape.
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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.
WaLLrus is the Global Head of Growth and Partnerships at Liquid Loans, and host of The Weigh In With Wallrus podcast series. He has been in the crypto space since 2015, and is widely recognized as a DeFi thought leader and strategist.
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