Liquity Integrates Leading Oracle Network Chainlink on Mainnet to Secure Lending Operations
We are excited to announce that Liquity is now consuming the Chainlink ETH/USD Price Oracle on mainnet. This integration enables Liquity to fetch the most current ETH/USD price data as needed for core protocol functions such as opening Troves, triggering liquidations, or redeeming LUSD. Integrating the Chainlink ETH/USD decentralized data feed will ensure the safety and accuracy of prices referenced within Liquity, protecting users against downtime and various data manipulation attacks, such as those recently experienced in DeFi by flash loans.
How Liquity Provides Interest-Free Loans with Greater Capital Efficiency
Liquity is a decentralized borrowing protocol that allows users to draw interest-free loans against their ETH collateral, known as Troves. It improves upon similar protocols by implementing an algorithmic monetary policy and a novel, highly efficient liquidation mechanism — allowing for a 110% minimum collateralization ratio as opposed to much higher ratios in other lending protocols. This provides better capital efficiency for borrowers.
Such a low collateralization ratio (i.e., liquidation threshold) is not achievable in other protocols because the time it takes to liquidate positions could put their system at risk. If the value of the liquidated collateral drops too quickly, the debt may never get settled — under-collateralizing the entire system and putting user funds at risk.
Liquity solves this problem by handling liquidations as follows:
- Offset under-collateralized Troves using the Stability Pool funded by LUSD tokens
- Redistribute under-collateralized Troves to other borrowers if the Stability Pool is empty
Liquity first uses the LUSD tokens in its Stability Pool to absorb any under-collateralized debt. Any user may deposit LUSD tokens to the Stability Pool, allowing them to earn the collateral from liquidated Troves. When a liquidation occurs, the liquidated debt is canceled by burning an equal amount of LUSD from the Stability Pool, with the liquidated ETH then distributed to Stability Providers.
Suppose the liquidated debt is higher than the amount of LUSD in the Stability Pool. In that case, the system tries to cancel as much debt as possible with the tokens in the Stability Pool, then redistributes the remaining liquidated collateral and debt across all active Troves. The combination of these two mechanisms removes the need for inefficient and lengthy collateral auctions. Instead, Liquity can liquidate Troves when a collateralization ratio drops below 110% instantaneously.
While we’ve explored how Liquity improves the speed of liquidations, there’s one more necessary component to address: the importance of a fast and secure oracle network
Leveraging Chainlink for Reliable Price Data
The Chainlink ETH/USD Price Oracle
To make these liquidations possible, Liquity also needs an oracle mechanism for accessing reliable, real-time ETH/USD price data. Since the Liquity protocol itself is governance-free and immutable, we cannot rely on a single source of truth or single oracle for data delivery to obtain the ETH/USD price. If that single source or centralized oracle gets compromised, becomes unresponsive, or otherwise provides faulty information, it would put the entire protocol at great risk.
We selected Chainlink because it is the most time-tested decentralized oracle solution on mainnet, backed by high-quality data, secure node operators, and a robust reputation framework for proving the security and performance of its systems. In addition to that, Chainlink can be accessed using an immutable proxy interface, which is crucial for Liquity being an immutable protocol. These features are why Chainlink is the most widely used solution in the DeFi industry, already securing 10+ billion dollars in on-chain value for leading projects like Synthetix, Aave, and Nexus Mutual.
By leveraging Chainlink, Liquity’s ETH/USD reference price is secured by a decentralized network of independent, Sybil-resistant oracle nodes run by leading blockchain DevOps, ensuring high availability and tamperproofness in the delivery of data on-chain. These Chainlink nodes source data from numerous independent high-quality data aggregators like BraveNewCoin and Amberdata, meaning there are multiple data sources that each represent a volume-weighted price aggregated from all relevant centralized and decentralized exchanges. This sourcing method is key because it prevents outlier price data on single exchanges from corrupting the aggregated price referenced by Liquity during the creation of Troves, redemption of LUSD, and execution of liquidations. Thus, Liquity will consistently issue loans and redeem LUSD at fair market value, as well as keep the protocol fully-collateralized and solvent.
Liquity also benefits from Chainlink’s frequent price updates, which happen every time there is a 0.5% deviation in the ETH/USD price. In other words, borrowers can rest assured that the price is closely following real market rates, and won’t be in for surprises due to a lag in oracle updates.
All-in-all, Chainlink provides secure external data necessary to protect Liquity and its users in a trust-minimized and reliable way.
“Using Chainlink oracles to secure collateral, redemptions, and liquidations was a clear step in further securing the Liquity protocol and improving its capital efficiency,” said our Founder Robert Lauko.
“We’re able to rely on Chainlink to protect user funds against common price feed exploits like flash loan attacks, without spending valuable engineering resources maintaining complex oracle infrastructure. This allows us to focus on building production systems at a much faster pace.”
You can also check out our documentation at https://docs.liquity.org/.
Chainlink is the most widely used and secure way to power universally connected smart contracts. With Chainlink, developers can connect any blockchain with high-quality data sources from other blockchains as well as real-world data. Managed by a global, decentralized community of hundreds of thousands of people, Chainlink is introducing a fairer model for contracts. Its network currently secures billions of dollars in value for smart contracts across the decentralized finance (DeFi), insurance and gaming ecosystems, among others.
Chainlink is trusted by hundreds of organizations to deliver definitive truth via secure, reliable data feeds. To learn more, visit chain.link, subscribe to the Chainlink newsletter, and follow @chainlink on Twitter.