Liquity USD (LUSD)

Liquity USD (LUSD) is a decentralized, overcollateralized stablecoin issued by the Liquity protocol. It is designed to maintain a soft peg to the US dollar while operating without centralized governance or active monetary policy controls.

LUSD is generated when users deposit Ethereum (ETH) as collateral into smart contracts known as Trove positions. In return, they can borrow LUSD against their ETH holdings.

The Liquity system requires overcollateralization, meaning users must deposit more ETH value than the LUSD they mint. This mechanism helps maintain system solvency and price stability.

A defining feature of Liquity is its governance-minimized design. Unlike many DeFi protocols, Liquity operates without ongoing governance votes or adjustable parameters once deployed. Key protocol settings — such as collateral ratios and fee structures — are fixed at the smart contract level.

Stability is maintained through:

• Overcollateralized borrowing
• Liquidation mechanisms
• Stability Pools funded by LUSD holders
• Algorithmic redemption arbitrage

When Trove collateral falls below required thresholds, positions are liquidated, and collateral is redistributed to Stability Pool participants.

LUSD is widely used within DeFi for:

• Lending and borrowing markets
• Liquidity provision
• Stable trading pairs
• Collateral for other protocols

Because it is fully decentralized and censorship-resistant, LUSD appeals to users seeking stablecoins without custodial or regulatory dependencies.

In summary, LUSD is a governance-minimized, ETH-backed stablecoin designed to provide decentralized dollar stability through overcollateralized lending.