Victor Ugochukwu · Dec 14, 2020 . 5min read
Yield Farming without Governance, DeFi project Liquity plans to go another route
Governance won't be present in Liquity, however it will distribute a Growth Token to encourage liquidity mining.
By Victor Ugochukwu · Aug 26, 2020 . 6min read
There is the possibility of yield farming without governance, and this is precisely what a new DeFi project called Liquity intends to do as it makes plans to launch next year.
In a Coindesk report, Liquity, a stablecoin startup hints on an idea of allowing lending against a low volatility token much like Maker protocol but in its system, there will be no need for governance as everything in the DeFi’s smart contract will be algorithmically controlled.
In essence, users will be able to borrow LQTY, a stablecoin against ETH and also able to stake it for interest. Maker protocol set parameters like Liquidation Ratio, Debt Ceiling, Liquidation Penalty, and Stability Fee through improvement proposals otherwise called governance.
However in Liquity, Robert Lauko speaking to Coindesk said:
“All of the system parameters are automatically controlled by the algorithms,”
Yield farming without governance will still be present in Liquity
Why change a winning formula one may ask? Liquity has said it even though governance won’t be present in its system; they will be using governance tokens as we see in the usual DeFi protocols. However, to attract people into its system and encourage liquidity mining, it will be distributing a Growth Token (GT).
And like normal systems, it will be distributed on a First Come First Served basis. However, it is yet to decide to entirely on the kind of behaviours it will incentivize. At the moment it is still holding a series of meetings to accept suggestions from those who will eventually become early adopters. But actions depositing into the stability pool, borrowing LQTY and contributing it to decentralized exchanges may be attractive to incentivize.
In the spirit of yield farming, GT holders will continually earn interest/revenue generated from Liquity fees. It wants to attract the kind of spontaneous interest the YAM protocol got. But it won’t be allowing its system crash because of a bug detected during governance rebase. Hence, extracting away governance from its system.
How Liquity works
Like most DeFi lending markets, Liquity users can stake their ETH in a “trove” and have LQTY a stablecoin minted. Liquity DeFi project offers an attractive 110% collateralization ratio to lenders. However, this can rise to 150% if the average collateralization ratio across the protocol falls below the minimum threshold.
Its lower collateralization hinges on its system of integrating liquidations right into its smart contract. Hence, users have an incentive to stake LQTY to its stability pool. Subsequently, Liquity will then use this pool of tokens to liquidate troves that have fallen below the minimum collateralization and share it among pool stakers.
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