A central entity attempting to “do” what the Liquid Loans protocol does.
This means that people within the company would have the responsibility to:
It would be an absolute NIGHTMARE.
But here’s what it would look like (Sarcasm Warning).
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:
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.
You’re also now assuming that they aren’t going to rehypothecate the PLS and lose it on a risky investment.
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.
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!
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.
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.
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.
I am sure we could all come up with many more examples of how this could go extremely wrong, here are several:
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.
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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