summary Many of the DeFi projects touted as decentralized and robust during the 2021 bull market have in fact proved to be the complete opposite as the bear market has taken its toll. Built on top of Ethereum, Liquity Protocol has been battle-tested since its debut in early 2021 and continues to move forward, weathering multiple periods of market volatility since its launch. See how the Liquity Protocol’s fundamental spirit of supporting interest-free loans makes it uniquely positioned to cater to a far-reaching market far beyond the existing DeFi user base.
How to set yourbusiness up for success – Get your free eBook
“Money is one thing that does not become cheap because of competition, because its appeal depends on whether it retains its’ intimacy ‘.” -FA Hayek, “The Denationalization of Money,” Third Edition, 1990, p. 13. 94 As 2022 approaches, the entire cryptocurrency market faces a harsh reality check. Many of the DeFi projects touted as decentralized and robust during the 2021 bull market have in fact proved to be the complete opposite as the bear market has taken its toll. Among other reasons, many DeFi protocols have been crippled by faulty economic design, incomplete smart contract development, and DAO shortcomings. All of this is especially true in the highly competitive Stablecoin space, where the failure of projects like Terra, once worth tens of billions of dollars, reinforces the need for more resilient stablecoin projects that are truly committed to first principles. In this blog post, I will focus on Liquity Protocol (LQTY-USD) and explain why I personally believe that its basic ethos of enabling interest-free lending makes it uniquely positioned to cater to a broad market user base far beyond the existing DeFi. Rise and shine In terms of stablecoin design innovation, Liquity Protocol is a pearl in a sea of counterfeits. Built on top of Ethereum (ETH-USD), it has been battle-tested since its debut in early 2021 and continues to move forward, withstanding multiple periods of market volatility since its launch. Since the protocol is immutable and ungovernable, it is impossible for anyone to interfere with it, and the Liquity team was designed that way from the start. Many DeFi users began a flight to safety during the cryptocurrency bear market of 2022, and by getting rid of pseudo-decentralized stablecoins and questionable centralized stablecoins, LUSD-USD has understandably thus maintained a flexible premium above its $1 anchored exchange rate. LUSD’s huge demand compared to the other stablecoins it trades reflects users’ growing confidence in the Liquity Protocol as a reliable DeFi infrastructure, as well as LUSD’s value proposition as a censure-resistant and transparent stablecoin fully supported on the ETH chain. “Liquity’s smart contracts will always be rooted in the consensus-recognized global position of the Ethereum machine…… In other words, Liquity has created a (good) infrastructure……” – Luca Prosperi, Liquity + Glimpse of (my) Future, Dirt Road blog, 10/13/22 Amid the uncertainty plaguing the entire cryptocurrency market, LUSD is experiencing a notable growth recovery, as the treasure trove of numbers representing active and unique LUSD borrowers moves forward and may soon recover its previous highs: Sand dune analysis This “rise and shine” used by Liquity Protocol is a well-deserved achievement for its founding team, who have continued to innovate and achieved incredible success with the recent launch of Chicken Bonds, Chicken Bonds are a new way to advance Protocol-Owned Liquidity in DeFi – starting with LUSD. The broad appeal of zero-interest loans When users borrow LUSD with their ETH, it is interest-free. Although there is a one-time borrowing charge when drawing LUSD from the treasure, typically about 0.5 percent, LUSD borrowers do not pay ongoing interest charges to the Liquity Protocol itself. This begs the question: Does LUSD have a chance of wider adoption in parts of the world where interest on loans is not generally accepted for cultural and/or religious reasons, such as the case in the predominantly Muslim parts of the Middle East and North Africa (MENA), and parts of Asia, for example? Let’s dig deeper. The Islamic finance sector operates largely under profit-and-loss sharing (PLS) arrangements, as interest on loans is generally prohibited under a common interpretation of Sharia law, which refers to the traditional overarching values of Muslims. As might be expected, opinions on the subject do vary, and contemporary Islamic thinkers such as the late Dr Mohammad Sharul have considered the issue more comprehensively in terms of the burden of borrowers and other factors mentioned in the Quran. For the purposes of this blog post, however, I’ll consider this topic from a normative perspective. “Thus, by responding to economic and social needs, fiscal transactions in a given society move between the extremes of a) paying taxes and charitable contributions b) providing interest-bearing loans, and if c) reaching the middle of the spectrum providing interest-free loans.” -Dr. Muhammad Shahrur, “The Qur ‘an, Morality and Critical Reason,” p. 12. 209 For example, let’s consider someone seeking a loan to buy a home. When applying for an Islamic mortgage, under the PLS arrangement, borrowers do not have to pay interest on the loan, while the bank will pre-purchase the property on their behalf. The bank could then mark the value of the home to a defined level, and the borrower would then pay the bank back in installments so that their share of ownership would increase over time until the home was fully theirs. Point of connection Although I am not in any sense an expert on Islamic finance, one can generally realise from reading the various works on the subject that providers of capital are not prohibited from making a profit, as long as they take a risk in attempting to do so. On the issue of risk, smart contract risk is the inherent characteristic of DeFi. Even with Liquity Protocol, despite the resilience it has shown so far, this reality remains in the background and users should be aware of it. In addition, Liquity Protocol and its borrowers share the risk of insufficient collateral assets, as recovery mode kicks in if the total collateral rate in the system falls below 150 per cent. Islamic financing is also typically asset-backed, with assets considered to have intrinsic value. In the case of the Liquity Protocol, LUSD can only borrow against ETH, the underlying asset and utility token of the Ethereum network, as collateral. A 2019 position paper by Amanie Global Islamic Finance Advisors commented on ETH and Ethereum from the perspective of their Shariah compliance, At the time Virgil Griffith of the Ethereum Foundation led exploratory research on the topic. “The right to make and enforce contracts is the foundation of freedom and is protected by Sharia law…… With the advent of blockchain technology today, the potential for [the] Ethereum network to develop smart contracts [s] and applications is endless. . It is important to analyze each smart contract or application on a case-by-case basis because there may be different permutations, and the prospect of real-world case applications using smart contracts [s] is huge.” – Amanie Advisors and Ethereum Foundation, White Paper on Sharia Law for the Ether, April 2019, pg. 30 and 31 With LUSD, users can use their ETH to borrow stablecoins for their own use; Therefore, the transaction does not have a counterparty as the financing party. Liquity Protocol itself issues LUSDs to borrowers under its unchangeable smart contract terms. Organizations can also help their clients facilitate this process; For example, asset managers such as Wave Financial are already doing this by helping users borrow LUSD against ETH to buy a home. While Liquity Protocol charges a borrowing fee, the fee appears to be no different from the upfront and closing fees charged, for example, when a borrower applies for a Sharia-compliant mortgage. And because the Liquity Protocol provides a built-in use case for LUSD through its stabilization pool, LUSD’s intrinsic utility in this regard enables it to be used by borrowers to maintain the ability of the agreement to liquidate underpledged treasure drops when ETH’s price falls. In a sense, all of this can be viewed as a mutually beneficial system similar to PLS dynamic based Islamic finance, because a reallocation of collateral and debt from the clearing Treasury to the open and remaining Treasury may be triggered if there is not enough LUSD in the stabilization. Moreover, for the liquidated treasure, while the respective borrowers will lose the ETH they provided as collateral, their LUSD debt is still forgiven by the Liquity Protocol, so they have no additional payment burden thereafter. As such, the onus is on borrowers to ensure that their treasure is fully collateralized according to their personal risk tolerance and Liquity’s terms, which the documentation of the agreement emphasizes in advance. conclusion While the value proposition of cryptocurrencies may be increasingly questioned as the bear market drags on and 2023 approaches, a global audience remains curious about the technology and its long-term potential. There has been an upward trend in cryptocurrency-related startups in the Muslim world, and the debate around what is and is not allowed in the context of cultural and religious norms is likely to persist with greater clarity as this emerging asset class provides the conditions over time and the adoption of regulations. In this debate, I personally believe that Liquity Protocol deserves more careful consideration as a decentralized and interest-free stablecoin application by Islamic financial institutions in the Middle East and North Africa, Asia, and beyond, especially as they explore how they can participate in DeFi on Ethereum, Enable users to more actively participate and innovate in the field. Platforms like DeFi Llama have recently created halal dashboards containing DeFi revenue opportunities that they assess as Sharia-compliant. This reflects a growing need for Islamic finance experts to apply their understanding of the subject to DeFi so that Muslim users can better navigate the space according to their personal beliefs. Followers of other religious traditions with similar beliefs may also find such guidance helpful. Given their commendable established track record, I look forward to seeing the contributions the team behind Liquity Protocol make to advancing stablecoin and other ideas in the coming years, and I hope their product will eventually cater to a wider audience of new users globally seeking to participate in the future of Ethereum DeFi. You are welcome to give your valuable suggestions in the comments section If you have any questions, please leave them in the comment section. Thank you for your likes and support.
