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Liquity Uses Chainlink Price Feeds to Help Secure $2.7B TVL

“By integrating Chainlink, we accessed a highly secure and reliable price data feed that underpins the core of our immutable, interest-free borrowing protocol.”
Rick Pardoe

Co-Founder and Lead Engineer, Liquity

Key results

$2.7B
TVL secured
2 Days
to integrate Chainlink
100%
Oracle uptime

Liquity is a decentralized borrowing protocol that allows users to draw 0% interest loans against Ethereum used as collateral. Loans are paid out in LUSD, a USD-pegged stablecoin, and need to maintain a minimum collateral ratio of 110%.

The Liquity protocol is non-custodial, immutable, and governance-free.

Situation

The Liquity team built a non-custodial, immutable, and governance-free DeFi protocol enabling users to take out 0% interest loans using Ethereum as collateral.

Challenge

Liquity’s borrowing protocol required a reliable and real-time ETH/USD price feed to securely open troves, trigger liquidations, and calculate LUSD redemptions while maintaining a 110% collateral requirement.

Solution

Liquity integrated the Chainlink ETH/USD Price Feed, helping the protocol maintain core competitive advantages and secure functionality as it scaled in TVL, peaking at $4.6B Total Value Locked (TVL) within 8 months.

Use Chainlink Price Feeds in Your Decentralized Application

Situation

Liquity Aimed to Build an Immutable and 0%-Interest Ethereum Borrowing Protocol Backed by High-Quality Data

Blockchain-based borrowing platforms are a foundational building block for the emerging decentralized economy. As a financial primitive, lending gives users an option to earn additional yield on various assets, while borrowing unlocks liquidity for users who want to maintain exposure to the underlying collateral asset. In decentralized lending, borrowers and lenders are connected in a non-custodial and peer-to-peer manner through smart contracts, enabling new tools and upgraded features for both parties.

As a prominent player in the decentralized borrowing ecosystem, Liquity allows users to unlock liquidity against their ETH without giving up their exposure to ETH. Users simply post ETH as collateral and borrow a stablecoin (LUSD). Liquity’s core competitive advantages over other decentralized borrowing protocols come from 0%-interest-rate loans and a low collateralization requirement of 110%. Users only need to pay a small, one-time fee of 0.5% during the loan acquisition period, with no terms or set duration on the loan. While all small contracts have a certain level of immutability, the governance models underlying these blockchain protocols often allow for continuous upgrades. Liquity takes smart contract immutability a step farther by being completely governance-free, which means set-in-stone operations from day one that are automatically executed based on encoded rules—another key competitive advantage that lowers costs for end-users.

However, in order to maintain these core competitive advantages, the Liquity team realized they needed a tamper-proof source of ETH/USD price data with which they could quickly and reliably open, close, and settle loan positions even in volatile market conditions. Given its governance-free model and low collateralization ratio requirements, choosing the correct price data source for Liquity’s smart contract from the start was of the utmost importance. All aspects of Liquity’s decentralized borrowing model depend on secure price data that always reflect fair-market prices.

Challenge

Liquity Needed to Choose a Secure and Reliable Price Data Source

  • Liquity needed secure price data in order to automatically open, close, and liquidate loans while preserving its governance-free model.
  • Many existing oracle solutions are subject to centralized points of failure, while building its own infrastructure would require manpower, resources, and expertise the team didn’t have.
  • To maintain its competitive advantages, Liquity required a ready-made price oracle with 100% uptime and instant price updates during volatile market conditions.

To ensure solvency and secure the protocol while maintaining an edge over its competitors, Liquity required access to a tamper-proof, real-time ETH/USD price oracle. Price oracles are mission-critical for all of Liquity’s core functions, from triggering liquidations and opening troves to closing loan positions through LUSD redemptions. Without access to a fast, decentralized, and secure oracle network to power core borrowing operations, Liquity would have been exposed to common price feed exploits such as flash loan attacks, price manipulation of a single data source or exchange, and borrower insolvency due to unreliable price updates during volatile market conditions.

After surveying a multitude of existing price oracle solutions, the Liquity team found that most price oracles had single points of failure and therefore could not reliably secure Liquity’s low collateralization requirements or governance-free model. A fitting price oracle needed to be decentralized from end to end and reliable in every possible market situation. Because the Liquity protocol is completely immutable and governance-free, any external oracle solution needed to have a constant oracle address and interface with high guarantees of 100% uptime. Any oracle outage or problems with the price data delivery would be completely unchangeable on Liquity’s end—such is the nature of their protocol design.

Though it was possible to build their own oracle solution, the Liquity team was interested in a seamless plug-and-play solution from day one. A propriety oracle solution would take 100+ hours to build, expending valuable engineering resources both in the initial development and much more in constant maintenance. Rather, they needed ready-made infrastructure to plug into so they could focus on building their protocol. More specifically, they needed one that could stand the test of time, allowing them to continue offering users a competitive decentralized borrowing experience backed by secure, decentralized, and reliable price data year over year.

Solution

Liquity Integrates Chainlink Price Feeds for Tamper-Proof Borrowing Operations

Liquity selected Chainlink because it is the most time-tested decentralized oracle solution in the industry, backed by high-quality data, secure node operators, and a robust reputation framework for proving the security and performance of its systems. Accessed through an immutable proxy interface, Chainlink Price Feeds enabled Liquity to preserve its governance-free model while offering highly accurate and secure price data directly to Liquity’s smart contracts.

Chainlink’s ready-made price oracle infrastructure gave the Liquity team a clear path to accessing robust price feeds that didn’t involve centralized oracle services or natively built price oracles. Chainlink Price Feeds fulfilled all of Liquity’s high standards for a decentralized price oracle solution that would remain consistent at all times. Chainlink Price Feeds’ three layers of data aggregation offer high resistance against any form of price manipulation or exploitation. Furthermore, with a price deviation threshold of 0.5% for the ETH/USD Price Feed, small changes in the price can be reflected in real-time to securely liquidate undercollateralized positions and protect borrower funds, even with a 110% collateralization ratio.

For technical information regarding Liquity’s liquidation mechanism and other protocol functions, please see the Github repositories:

Business Outcomes

Liquity Reaches $2.7 Billion in Total Value Locked

The combination of Liquity’s protocol architecture and Chainlink’s tamper-proof price data set Liquity up for almost immediate success. Liquity launched in April 2021, and it took just 2 days to integrate Chainlink Price Feeds, which has maintained 100% uptime and saved the Liquity team 100+ hours in development time compared to building a proprietary oracle solution. Liquity has since rapidly scaled to serve thousands of users, acquiring $2.7B in TVL within 8 months with a peak of $4.6 billion.

With secure pricing infrastructure underlying their 110% collateral requirement and 0% interest loans, users were able to confidently make use of Liquity’s decentralized borrowing platform to earn additional yields and unlock their liquidity. As Liquity continues to scale, the Chainlink Network’s proven history of securely delivering over 1 billion price data points to smart contracts gives users confidence that the Liquity protocol will run exactly as expected at any point in time.

Liquity has seen continued growth in holders since integrating Chainlink price oracles.
Liquity has seen continued growth in holders since integrating Chainlink price oracles. Source: dune.xyz/queries/222661/417629
“By integrating Chainlink Price Feeds, Liquity is able to offer its users a premium, low-cost decentralized borrowing product that has security assurances for loan issuance, liquidations, and settlement.”

Kolten Bergeron
Head of Growth at Liquity

Watch this Chainlink Tech Talk to learn more about Liquity’s integration of Chainlink Price Feeds:

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