LUSD as a Treasury Asset

Summary

Hey BitDAO community, Derrick from Liquity here. We wanted to start a discussion on why LUSD is an ideal fit for the BitDAO treasury and hopefully continue this into a proposal. For the sake of brevity, this post will be a condensed version of our main blog post here.

What is Liquity and LUSD?

Liquity is a decentralized borrowing protocol that allows users to draw interest-free loans against ETH as collateral (akin to MakerDAO). Loans are paid out in LUSD (USD-pegged stablecoin) and need to maintain a minimum collateral ratio of 110%.

Liquity recently launched on April 5th, 2021 and has attracted ~$2.4b TVL since then, ranking among the top 10 projects listed on DeFi Pulse. In addition, LUSD is also ranked among the top 10 stablecoins on DeFi Pulse and is the 2nd largest collateral-backed stablecoin behind DAI.

Decentralization and Censorship Resistance

When we set out to build Liquity, our goal was to ship the most capital efficient, fully decentralized borrowing protocol on Ethereum. Liquity’s contracts are completely immutable, there’s no governance, and the only collateral type is ETH. We don’t even run our own frontend. This makes LUSD one of the most censorship resistant stablecoins in all of DeFi.

LUSD’s censorship resistance is what makes it a prime candidate for any DAO’s balance sheet. It’s common for DAOs to hold their own tokens (e.g. BIT), but when it comes to having “cash” on the balance sheet, DAOs are usually hesitant due to associated risks such as centralization (e.g. entity freezing user’s balances) and governance (e.g. ongoing changes of a protocol).

When it comes to treasury management, DAOs should be comfortable with the assets they hold. Simplicity is key and LUSD provides simplicity on all fronts, making it easy for DAOs to analyze the benefits and risks of holding and using it.

Acquiring LUSD

So far, we’ve seen OlympusDAO, dxDAO, and Fei Protocol acquire LUSD for their treasury in multiple ways. For a more in-depth explanation, feel free to read here.

  • OlympusDAO: Acquired >$110m LUSD with their unique bonding mechanism. Although most DAO’s cannot replicate this on their own, this option is viable through Olympus Pro.
  • Fei Protocol: Acquired $100m LUSD through a Balancer Liquidity Bootstrapping Pool. Fei simply deposited 100m FEI into the LBP, set the starting and end weights, set the time frame, and let the LBP handle the rest. This allowed them to quickly acquire the 100m LUSD within a couple of weeks with low slippage.
  • dxDAO: Acquired ~$1m LUSD by simply purchasing it. LUSD has liquidity on Curve, Uniswap, Sushiswap, and Saddle. For smaller treasuries and allocations, acquiring LUSD through one of these venues via stablecoin swaps or token sales should be straightforward.

Keep in mind that these are not the only methods of acquiring LUSD, and we’re more than happy to brainstorm new ideas!

Earning Potential

Instead of having LUSD (or any stablecoin) on the balance sheet sit idle, it’s likely that most DAOs would prefer to earn yield on their LUSD in a safe and efficient way. Fortunately, Liquity has two yield-earning opportunities built into the protocol:

  • Stability Pool: Loans are secured by the Stability Pool, where users can deposit LUSD that may be used to instantly repay uncollateralized debt. In return, they receive ETH collateral when liquidations occur and continuous LQTY rewards.

  • LQTY Staking: As a DAO earns LQTY, they can turn around and stake it to earn the protocol revenue generated by Liquity — all of which is distributed to LQTY stakers. The plus side of LQTY staking is that rewards are paid out in LUSD and ETH, not more LQTY. Thus, LQTY staking allows a DAO to acquire more of the assets they likely already hold.

Next Steps

We’re more than happy to expand on Liquity’s mechanisms, why LUSD is a good candidate for BitDAO, ways to acquire LUSD, and answer any other questions left below. In the meantime, don’t hesitate to get involved in our community and browse our resources here.

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Hi Derrick!

My apologies for lacking presence here over the past month. Early December gets crazy with exams, and then late-December, well… still busy! Contrasting reasons of course, :sweat_smile: . Sorry that you haven’t received the engagement here that you deserve; I suspect that it was just odd-timing due to the holidays!

With that said- I’m hugely supportive of initiatives that aim to diversify BitDAO’s treasury. What is it exactly that Liquity would be seeking with a proposal? Strictly a token swap?

Out of curiosity, does Liquity ever engage in DAO Governance in those DAO’s that swap native tokens for LUSD?

Thanks for posting, Derrick! And again… so sorry that you’ve waited this long for a response.

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No worries! Holiday season definitely gets busy :slightly_smiling_face:

We wanted to start the discussion with this post before forming an official proposal since there are a few different options. But yes, a simple token swap could work! Our pool on Curve has ~$185m in liquidity, so it’s definitely a potential route for a swap from USDC/USDT → LUSD.

We usually try to stay away from directly governing anything since our protocol is governance-free. That said, we still do our best to give feedback and collaborate with DAOs when needed!

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Hi. What would happen if there is a massive selloff in the market where huge amounts of Eth are being liquidated. The liquity pool has had such experience?

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Yes, the protocol was live during the May 19th flash crash last year. We have a blog post here covering the details, but TLDR $93.5m was liquidated exactly as expected.

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Nice. Thank you. I like your proposal.

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I wonder if an entity receiving a token swap without actively taking part in the Governance structure effectively dilutes community voting share.

If Liquity receives a large portion of BIT from a token swap, and are then empowered to put proposals forth (potentially as beneficiaries of a proposal) this to me just seems like one more player in the game that can direct treasury funds while the community currently has a limited capacity to do so themselves.

The only way I can feel comfortable supporting further allocations of BIT from the treasury is when they can show that there are demonstrable mechanisms included in the proposal that serve to redistribute influence in the Governance structure back into the community.

A big reason why I’ve been able to get behind the other proposals that have been put forward lately is because they clearly result in the distribution of BIT back towards talent and community.

My apologies, but I fail to see how Liquity would be a net-benefit to the community as a whole. I don’t currently see the quantifiable material benefit outweighing the qualitative risk.

Right! I agree that a treasury swap (us acquiring BIT) wouldn’t be ideal for the reasons stated above and we were not intending for that with the proposal :grin:

Holding large amounts of centralized stablecoins in the treasury brings forth obvious risks. Diversifying into a purely ETH-backed, censorship resistant stablecoin like LUSD alleviates this potential risk, while providing an easy avenue to earn passive yield in LQTY over time and ETH from liquidations.

Here are the two potential options I think make sense for BitDAO:

  1. Token Swap (using a DEX) from USDC/USDT → LUSD

Given that LUSD is liquid enough on exchanges for a large swap, this should be able to work and is probably the most simple of the two.

  1. Olympus Pro Bonds

If the BitDAO wants to distribute BIT instead in order to obtain LUSD, this can be done through Olympus Pro. Anyone that wants to participate (including those already in the BitDAO community) in BitDAO’s governance will be able to easily acquire BIT by purchasing it with LUSD through Olympus Pro. This is a win-win IMO. BitDAO likely attracts new community members, awareness, and diversifies into a decentralized stablecoin at one go.

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Ahhh, okay! My apologies for the misunderstanding. This is interesting, I appreciate ya having the patience to clarify this for me.

I’m going to start a discussion about it with the Aembassy team in the BitDAO Discord. I’m not the best person to comment, but I find it interesting and I’m genuinely curious about what those with more industry-relevant information would think. Though I believe I may have already seen you in there, but feel free to tag me.

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No worries! I’ll ping you in the Discord