You can’t just collateralize every token.
Liquid Loans chose to collateralize PLS because it is the native token of PulseChain and will have the most liquidity.
Continue on to learn why thick liquidity pools for PLS help USDL.
Imagine there are 1,000,000 PLS tokens in circulation and there is one liquidity pool set up for 1 PLS to 1 USDC. This sets PLS at a price of $1.
Therefore, in theory, you could take 999,999 PLS and collateralize them for 909,090 USDL.
However, there is a problem here. The collateral backing USDL is highly illiquid and cannot be exchanged for much.
If you redeem all of the USDL for PLS and try to sell it on the market, you will only be able to extract 1 USDC for 909,090 USDL.
“Illiquid Collateral is Bad Collateral” - WaLLrus
Also, consider this example.
If you were to lend a friend 500,000 USD, would you want them to collateralize a Pokemon card worth 550,000 USD or 550,000 USD worth of gold.
If you were wise, you would prefer gold because almost everybody around the world recognizes gold as valuable.
Whereas with the Pokemon card, you have to go and work hard to find a buyer and you might be unsucesssful.
Thick PLS liquidity pools (i.e. PLS/PLSX, PLS/USDC,USDT,DAI,CST, USDL, etc) support the health of USDL for two reasons:
The less value in a liquidity pool, the easier it is to move the price with a single order and vice versa. Therefore, if there is more value in the PLS pairs, the price will move less. This will support the overall collateral health of the Liquid Loans protocol and USDL.
The fundamental reason why USDL has value is because it is redeemable for $1 worth of PLS. But, if PLS itself is not redeemable for $1 worth of another asset, then neither is USDL. For example, if I can redeem 1 USDL for $1 worth of PLS, then I need to be able to swap $1 worth of PLS for $1 worth of PLSX or eUSDC.
You can’t collateralize every asset because they simply don’t have enough liquidity.
If you want to create the most robust stablecoin on a blockchain, then you have to choose the collateral that has the most LP pairs across the chain.
In the case of PulseChain, this asset is PLS, the native coin to the chain.
During the first 42 days after the launch of Liquid Loans, there will be an LP Rewards program.
In this program, holders of PLS and USDL will have the opportunity to provide LP on PulseX v2.
As a reward, they can take their LP tokens to the Liquid Loans dApp and stake them to earn LOAN token emissions.
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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.