Thank F*ck Liquid Loans is Not a TradFi Project!!

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By Connor
Estimated reading: 5mins
not a tradfi project

Imagine this.

A central entity attempting to “do” what the Liquid Loans protocol does.

This means that people within the company would have the responsibility to:

  • Receive PLS
  • Create and issue USDL
  • Set Collateral Ratios
  • Manage the Stability Pool and Liquidations
  • Create and Issue LOAN 
  • Manage the LOAN Staking Pool Yield
  • Manage Redemptions

It would be an absolute NIGHTMARE.

But here’s what it would look like (Sarcasm Warning).

BlueRock Lending

The new centralized exchange, BlueRock (BR), has just entered the business of collateralizing user funds to generate a stablecoin. Here are the actions they must take to run their system:

  1. Receive PLS from Users as Collateral

The first action they must take is to receive PLS from users.

So right off the bat, you are giving up your keys, and hoping that one day you get your coins back, if BR is nice enough to do so.

Liquid Loans is not a tradfi project

You’re also now assuming that they aren’t going to rehypothecate the PLS and lose it on a risky investment. 

  1. Issue USDL

Now SBF has to generate a new PRC20 on PulseChain and issue it out to users. 

This USDL will certainly not have admin keys, and the ability to blacklist and freeze if you vote for the wrong political candidate, why would it???

In addition, issuance of this token will rely on a person to make sure they send the correct amounts to the correct wallet addresses, if they even send it out at all.

  1. Set Collateral Ratios

To ensure that USDL is fully-backed, the BR team needs to track the price of PLS to the second and make sure it’s up-to-date. 

Otherwise, you could be unfairly liquidated. 

Now, of course they wouldn’t rely on a centralized oracle service, like ChainLink that they have commercial arrangements with.

Or even better, they pull the price of PLS from their own internal order books! That they control!

  1. Stability Pool

Here’s where it gets really fun.

You’ll give your USDL back to BR, in order to absorb the undercollateralized vaults.

BR certainly would not hypothecate that USDL, they’ll use it responsibly, to liquidate the vaults!

And the excess PLS will be timely and accurately distributed to the people who deposit into the Stability Pool.

It’s easy, they’ll keep track of every address and each pool share, and distribute that PLS everytime there is a liquidation gain.

They won’t keep it for themselves, and they won’t make any mistakes.

  1. LOAN Staking Pool

BR will also be responsible for generating another independent PRC20, the LOAN Token. 

This token will entitle you to the fees when a user borrows USDL and redeems USDL for PLS.

Don’t worry, they’ll timely and accurately deliver those rewards to you without skimming off the top.

They also won’t rehypothecate those tokens either, they’ll be waiting for you whenever you want to withdraw them.

Liquid Loans is not a tradfi project
This also won’t happen.
  1. Redemptions.

Because BR is so good at ensuring overcollateralization of USDL with PLS, you will always be able to redeem your tokens at face value.

You simply have to send your USDL to their wallets and they’ll send you back the equivalent value of PLS.

They won’t be fractionally reserved because they haven’t rehypothecated the PLS, and they haven’t been mishandling the Stability Pool and liquidations.

Ways in Which BlueRock Lending Could Go Terribly Wrong

I am sure we could all come up with many more examples of how this could go extremely wrong, here are several:

  1. Rehypothecation. This is the practice of taking collateral that an entity does not own and using it to help finance other assets. In this case, BR takes the PLS you deposited and sends it to another cousin firm to speculate on vaporware. This would undermine the backing of USDL and decrease the likelihood of automatic redemptions and retrieval of collateral.
  2. Scam Wicks. BR wants your money. Therefore, they may purposefully wick the price of PLS from their order books down 50% for a split second in order to liquidate many positions. 
  3. Admin Keys for USDL. Since they created USDL, they reserve an admin key that allows them to freeze certain tokens that are “associated with terrorism”.
  4. Admin Keys for LOAN. Since they created LOAN, they reserve admin keys to freeze tokens that said the wrong thing on social media.
  5. Undercollateralization. The system of automatic liquidations using the Stability Pool in Liquid Loans is complicated and continuous. Without automated code to carry out these actions, it is very easy for USDL to lose its backing. Without overcollateralization, USDL would not be much of a stablecoin at all.

The Bottom Line

Aren’t we all glad Liquid Loans is a true-DeFi product?

Liquid Loans has no middleman or counterparty responsible for the operations of the protocol.

The code acts automatically in conjunction with the Stability Pool to liquidate undercollateralized vaults to maintain the integrity of USDL.

If you want to redeem USDL for PLS, you can always do so…instantly.

If you want to repay your debt and retrieve your PLS, you can do so…instantly.

The collateral ratios of the vaults are set by Fetch Oracle, not by a person, so you don;t have to worry about incompetent or malicious scam wicks.

DeFi is amazing, and Liquid Loans is one such iteration of a protocol that could not work in the TradFi space! 

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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 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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