If you’ve spent some time in the DeFi world, you’ve probably heard about ‘liquidity pools’. If not, here’s a quick explainer – and before we go any further, no you can’t swim in them (sorry).
A ‘liquidity pool’ is formed when two crypto assets are paired together, in equal dollar value amounts, and offered up to an automated market maker (e.g. Uniswap). If people then come along and wish to trade between the assets in that pool, then the liquidity in that pool – in other words, the assets that were placed into the pool – is used to facilitate the trade.
A ‘stability pool’, however, is a bit different. Read on to learn all about how the Stability Pool works in Liquid Loans, and why it’s a vital part of the system.
Unlike a liquidity pool, the Stability Pool in the Liquid Loans protocol is one-sided, meaning only one asset – namely USDL stablecoin – can be placed into it. So what’s the benefit of doing that?
Well, as a Stability Provider, you are supporting the health of the system, and for doing so you’re rewarded in the protocol’s native token, LOAN. Plus, you also receive Pulse (PLS) when liquidations happen. This is because, by depositing your USDL into the Stability Pool, you’re essentially agreeing to buy PLS (at a discount) from Vaults being liquidated.
When a liquidation occurs, USDL is taken from the Stability Pool and used to pay off the undercollateralized loan, and the collateral in the Vault (i.e. the PLS) is distributed proportionally amongst the Stability Providers. For example, if you own 10% of the Stability Pool, then you receive 10% of the PLS from liquidations, whenever they occur.
Even though liquidations happen at a collateral ratio above 100% most of the time, in the unlikely event of a flash crash or an oracle failure, it is theoretically possible that a Vault could get liquidated below 100% collateralization. This would result in Stability Providers experiencing a loss since the collateral gain would be smaller than the reduction of their USDL deposit.
Note: In developing Liquid Loans, the team placed a great deal of importance on ensuring that the oracles used by the protocol are of the highest quality. Liquid Loans has no less than three oracles in place – Chainlink, Tellor, and a built-in custom oracle – and these oracles are relied on in that preferential order.
Put simply, the system is designed to reward Stability Providers, not harm them. For Stability Providers to make a loss, a dramatic “black swan” flash crash would have to happen, or all three oracles would have to fail simultaneously, which is extremely unlikely.
At time of writing, the all-time Stability Providing APR in the Liquity protocol (from which Liquid Loans has been forked) is 25.5%.
No, but you can deposit it there, and you can stake your LOAN token in the Staking Pool!
From a user’s point of view, there’s not much difference between depositing your USDL into the Stability Pool and staking your LOAN in the Staking Pool – you simply click a button, and there’s no time lock like with HEX, for example – but it’s important that the correct terminology is used so that the two functions don’t get confused.
When you stake LOAN in the Staking Pool, you receive daily rewards in the form of USDL stablecoin from the system’s borrowing fees, and PLS from the system’s redemption fees.
At time of writing, the all-time Staking Pool APR in the Liquity protocol (from which Liquid Loans has been forked) is 159.4%.
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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.