Once a top 10 stablecoin, Liquity’s LUSD won fans among “decentralisation maximalists” and deep-pocketed borrowers for its “immutability” — this is, control of the token is completely beyond its developers’ and users’ reach.

But that lack of control has also meant trouble in a fast-moving market.

Amid a steep and steady decline in demand for LUSD, Liquity executive Colin Platt said the company is about two months away from releasing its new stablecoin.

A key feature: “tokenomics” meant to help it balance “immutability” and the flexibility needed in the marketplace.

Protocol revenue

That includes a Curve-inspired system in which people who hold and stake Liquity’s affiliated governance token LQTY can vote on where to direct protocol revenue.

The aim is to reward liquidity providers on decentralised exchanges and blockchain-based lending pools.

“All the borrowing fees that are collected are immediately turned around and handed up to stimulate the coin,” Platt, Liquity’s head of product, told DL News.

“We pass everything through. That means that we’re not in the middle, acting as a middleman, accruing anything, holding a treasury.”

In a blog post, the company told decentralisation maximalists they had nothing to fear.

“To be clear: LQTY [voters] will have no power over the core protocol parameters,” it reads.

“Directing the portion of protocol revenues set aside for ecosystem growth is all that they will have the power to do.

It’s a small measure of control granted to people who use the second version of the Liquity protocol — which will run alongside the first, on Ethereum — and the new stablecoin, dubbed BOLD.

BOLD addresses two shortcomings that have contributed to LUSD’s steep decline over the past year, Platt said.

LUSD’s decline

Liquity is a borrowing protocol that lets users mint a dollar-pegged stablecoin, LUSD, against Ether collateral.

Unlike similar protocols, however, it eschews interest rates for a one-time 0.5% fee, no matter the size or duration of the LUSD loan.

BOLD will feature borrower-chosen interest rates rather than its predecessor’s one-time fee. It will also accept versions of staked Ether as collateral.

“When people talk to us, they kind of tend to come from two distinct categories,” Platt said.

The first are deep-pocketed users such as crypto-specific venture and hedge funds, as well as individuals who have made their fortune in crypto. The average LUSD loan is about $250,000, according to Platt.

Those large wallets “like to know what the risks are,” he said. “Governance risks and proxy contracts are risks they can very easily quantify, and that’s something where Liquity has stood out.”

‘We did lose market share to people who were trying to use other collateral.’

Colin Platt , Liquity

The other are “decentralisation maxis” — short for “maximalists” — who value financial assets beyond the reach of governments and even their own meddling software developers.

So-called centralised stablecoins, like Circle’s USDC, can be seized by their issuers, something they often go at governments’ behest when it appears the tokens were stolen or laundered.

“Decentralisation maxis” account for some 10% to 25% of Liquity’s users, Platt guessed.

He hopes BOLD will appeal to both sides of Liquity’s existing user base.

10 forks

In August 2023, there was just under $300 million LUSD in circulation. As of Tuesday, it was a quarter of that figure, with just over $69 million in circulation. Meanwhile, overall stablecoin supply has enjoyed steady growth, and is now approaching an all-time high.

Platt attributed the decline to a couple things, including growing interest in stablecoins backed by yield-bearing collateral, like the so-called liquid staking tokens issued by protocols Lido and Rocket Pool.

“We did lose market share to people who were trying to use [other] collateral,” he said.

In addition to new collateral, user-set interest rates, and giving LQTY holders a way to reward the investors who provide liquidity for BOLD on decentralised exchanges, the new stablecoin will be followed by at least 10 approved forks, or copies.

By letting select developers copy Liquity’s code for BOLD, the company hopes affiliated tokens can gain market share on the layer 2 blockchains that are processing a growing share of Ethereum-based transactions.

“Our brand very much is very diehard, core [Ethereum],” Max Fiege, Liquity’s head of growth, told DL News. “Even [liquid staking tokens] took three years for us to get on board with. And so, you know, these forks don’t really represent lost market share to us. There’s now something where there was previously nothing.”

Aleks Gilbert is DL News’ New York-based DeFi correspondent. You can reach him at aleks@dlnews.com.