Liquity USD (LUSD)

Overview

Liquity USD (LUSD) is a digital token designed to stay close to the value of one US dollar. It is created through Liquity V1, a borrowing protocol on Ethereum. A user deposits ether (ETH) as collateral and borrows LUSD against it. This gives the user a dollar-denominated token to use while their ETH remains locked in the protocol. Liquity V1 charges no ongoing interest on the loan, though it charges a one-time borrowing fee. (docs.liquity.org)

LUSD is backed by the ETH held in borrowers’ positions. Its design differs from a stablecoin backed by dollars in a bank account: holders can redeem LUSD through the protocol for a dollar-equivalent amount of ETH, subject to a redemption fee. Borrowing, repayment, liquidation, and redemption are carried out by smart contracts—programs that follow rules recorded on Ethereum. (docs.liquity.org)

History & Team

Launch and development

Liquity grew from work on a way to borrow against ETH without a continuing interest charge. The project announced a seed funding round led by Polychain Capital in September 2020. In March 2021, it announced a Series A round led by Pantera Capital. Other participants named in those announcements included 1kx, Lemniscap, Nima Capital, and Greenfield.one. These were investments in the project behind the protocol, rather than a distribution of LUSD to investors. Liquity V1 launched on Ethereum mainnet on April 5, 2021. (liquity.org)

Robert Lauko founded Liquity, and Rick Pardoe is a co-founder and lead engineer. Their work shaped the original protocol’s approach to automated borrowing and liquidation. The wider team later developed Liquity V2, which launched in May 2025. V2 issues a different stablecoin, BOLD. Liquity’s documentation describes V1 and LUSD as continuing alongside it. (liquity.org)

Technology & How It Works

Borrowing with a Trove

In Liquity V1, a borrowing position is called a Trove. It records two amounts: the ETH a user has deposited and the LUSD they owe. Opening a Trove creates a loan paid out in newly issued LUSD. A borrower can later add ETH, repay some debt, or close the position by repaying it in full. Loans have no set repayment date, provided the position meets the protocol’s collateral rules. (docs.liquity.org)

The collateral ratio compares the dollar value of a Trove’s ETH with its LUSD debt. Under normal operation, the minimum ratio is 110%. For example, a debt of 10,000 LUSD requires ETH valued at least $11,000 to remain above that threshold. Because the value of ETH changes, the ratio can change even when the borrower makes no transaction. Liquity also has a system-wide Recovery Mode: when the value of all collateral falls below 150% of total debt, stricter rules apply to Troves. (docs.liquity.org)

The Stability Pool and redemptions

The Stability Pool holds LUSD deposited by users. When a Trove is liquidated, the pool uses LUSD to cancel that Trove’s debt. The LUSD used this way is burned, and the liquidated ETH is assigned to pool depositors. If the pool cannot cover a liquidation in full, the protocol can distribute the remaining debt and collateral among other borrowers. This gives the system a planned way to handle positions whose collateral has fallen below its required level. (docs.liquity.org)

Redemption serves a different purpose. An LUSD holder can use the protocol to exchange LUSD for ETH valued at one dollar per LUSD, before the redemption fee. The ETH comes from Troves selected under the protocol’s rules, and the corresponding debt is reduced. This option gives traders a reason to buy and redeem LUSD when its market value falls below its intended peg. Liquity also adjusts borrowing fees as redemptions occur, helping limit new issuance when demand for redemption rises. (docs.liquity.org)

Liquity V1 uses an ETH-to-dollar price feed to measure collateral ratios and determine when liquidations are possible. Its core contracts are designed to operate without governance votes or an administrator changing their rules after deployment. Users reach those contracts through independently operated websites, often called frontends. (docs.liquity.org)

Tokenomics & Utility

LUSD has no preset maximum supply. Its supply responds to activity in Liquity V1: borrowing creates tokens, while repayment and liquidation remove tokens from circulation through burning. A redemption also reduces the LUSD debt recorded in the Troves it affects. This links the token’s economic model to ETH-backed borrowing rather than to a fixed release schedule. (docs.liquity.org)

Liquity V1 also has a second token, LQTY, with a separate role. LUSD is the unit borrowers receive and owe; LQTY is used for protocol incentives and participation in fee revenue. Stability Pool depositors receive ETH from liquidations and can receive LQTY rewards. LQTY holders can stake that token to receive a share of borrowing and redemption fees. LQTY has a capped supply, whereas the amount of LUSD changes with borrowing and debt repayment. (docs.liquity.org)

A borrower pays a one-time fee when drawing LUSD. A holder may also pay a fee when redeeming it for ETH. These fees are part of how V1 manages issuance and redemptions without charging interest that grows over the life of a loan. (docs.liquity.org)

Ecosystem & Use Cases

Uses inside and outside Liquity

Borrowing is LUSD’s central use. A person who holds ETH can create LUSD and then hold, transfer, or exchange the tokens without selling the ETH in their Trove. The same tokens can be used to repay the debt later. LUSD holders can also deposit tokens into the Stability Pool or redeem them for ETH through V1. (docs.liquity.org)

As a token on Ethereum, LUSD can move between compatible wallets and applications. It has also been made available on networks including Arbitrum, Optimism, and Base; Liquity’s technical documentation lists a separate LUSD token address for each. The borrowing rules described here belong to Liquity V1 on Ethereum, even when LUSD is held or used on another network. (docs.liquity.org)

LUSD remains part of an ecosystem that now includes BOLD. Liquity V2 lets users borrow BOLD against ETH and selected ETH staking tokens, with borrowing costs set through a different interest-rate system. That distinction matters when comparing the two stablecoins: LUSD belongs to V1’s ETH-only, one-time-fee model. (liquity.org)

Advantages & Challenges

LUSD gives ETH holders access to a dollar-denominated token while keeping their ETH in a borrowing position. Its lack of ongoing loan interest makes the debt amount easier to understand over time. The 110% minimum collateral ratio allows relatively high borrowing against deposited ETH, and redemption gives holders a direct protocol route back to ETH. Independent frontends also offer more than one way to interact with V1’s contracts. (docs.liquity.org)

The same design brings trade-offs. A falling ETH value lowers a Trove’s collateral ratio and can lead to liquidation. Stability Pool deposits change form as liquidations use LUSD and assign ETH to depositors. LUSD’s value on an exchange can move away from one dollar, even though redemption is designed to encourage a return toward that level. Finally, V1’s fixed, governance-free rules cannot be revised to add collateral types or change its borrowing model; the team built V2 as a separate system instead. (docs.liquity.org)

Where to Buy & Wallets

LUSD is available through decentralized exchanges such as Uniswap. It can also be obtained directly by depositing ETH into a Liquity V1 Trove and borrowing it. Using V1 requires a compatible wallet and ETH for both collateral and Ethereum transaction fees. (docs.liquity.org)

MetaMask can hold LUSD on Ethereum. If the token does not appear automatically, it can be added using its Ethereum contract address: 0x5f98805A4E8be255a32880FDeC7F6728C6568bA0. LUSD on another supported network has a different contract address, so the wallet must be set to the network on which the tokens are held. (docs.liquity.org)

Regulatory & Compliance

Stablecoin rules generally address the people and businesses that issue, offer, or provide services involving tokens. In the European Union, the Markets in Crypto-Assets regulation, known as MiCA, sets categories for stable-value crypto assets and requirements tied to activities such as public offers and trading admission. In the United States, the GENIUS Act, enacted on July 18, 2025, establishes a framework for payment stablecoins and calls for a study of other stablecoin designs. How those frameworks apply to particular LUSD-related activities depends on the activity and the relevant legal classification. (esma.europa.eu)

Islamic finance generally avoids paying or receiving interest. Liquity V1’s loans have no ongoing interest charge, which makes that feature relevant to a Shariah assessment. Such an assessment also turns on how the one-time borrowing fee is treated and how LUSD is used after it is received. Holding the token, borrowing it, and placing it in another financial application can therefore raise different questions under Islamic finance principles. (bankofengland.co.uk)

Future Outlook

LUSD’s continuing role is tied to demand for Liquity V1’s approach: ETH-only collateral, no ongoing borrowing interest, and redemption for ETH. The launch of BOLD added another choice within the Liquity ecosystem rather than changing V1’s contracts. Future uses of LUSD can develop through wallets, exchanges, and other applications that integrate the existing token, while the underlying V1 rules remain fixed. (docs.liquity.org)

Summary

Liquity USD is an ETH-backed stablecoin created through borrowing on Liquity V1. Its defining features are interest-free loans with a one-time fee, a Stability Pool that absorbs liquidations, and redemption for ETH at a dollar-based value. Together, these mechanisms make LUSD a distinct way to use a dollar-denominated token within Ethereum’s decentralized finance ecosystem. (docs.liquity.org)