Hey Bankless community, Derrick from Liquity here. As DAO treasury management is becoming a topic for BanklessDAO heading into 2022, we wanted to start a discussion beforehand on why LUSD is an ideal fit for the treasury. For the sake of brevity, this post will be a condensed version of our main blog post here.
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 ~$2.8b 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.
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. BANK), 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.
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 — which BanklessDAO is already using for BANK-ETH Sushiswap LP tokens and can be repeated for LUSD.
- 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!
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.
Since Liquity frontends are only run by third-parties, this opens up the possibility of e.g. BanklessDAO creating their own and being compensated with a share of their Stability Pool depositors’ LQTY rewards. A sweet addition to the earning opportunities mentioned above.
Luckily, this is already in the works by BanklessDAO contributors! We’ve been aware of the frontend project, Bankless Loans, for a while now. Ultimately, we think there could be a ton of synergy between the launch of Bankless Loans, the DAO acquiring LUSD, and more.
Again, we’re more than happy to expand on Liquity’s mechanisms, why LUSD is a good candidate for BanklessDAO, ways to acquire LUSD, and answer any other questions left below. In the meantime, don’t hesitate to get involved in our community!