How Liquity Plans to Break the Stablecoin Trilemma

In the presentation above, Rick Pardoe, co-founder, and lead engineer at Liquity, presented various research findings obtained while developing Bold, a system aiming to conquer the stablecoin trilemma.

Below is a glossary of key concepts mentioned during Rick’s talk, intended as a supplement to his video presentation.

WHAT IS LIQUITY?

Liquity is a fully immutable and decentralized borrowing protocol that allows users to draw 0% interest loans using Ether as collateral. The protocol was launched on April 5th, 2021, on the Ethereum network and has two native assets: a stablecoin, $LUSD, and $LQTY, a pure revenue-capture token.

FALLBACK ORACLES

A fallback oracle is an alternative to a primary oracle that is called upon to deliver price data if and when the primary oracle fails or becomes unreliable. Since oracle networks are susceptible to various manipulations and technical failures, fallback oracles are utilized to reduce the associated risks for the system that depends on them.

Once the primary oracle freezes, fails, or shows signs of manipulation, the fallback oracle takes over, provides accurate external data, and ensures that smart contracts keep executing. An example is Liquity protocol’s dual oracle design which leverages both Chainlink and Tellor’s oracle services.

FRONTRUNNING

Frontrunning is the act of exploiting how transactions are ordered on the blockchain to extract a profit, often at the expense of other users. One of the strategies for mitigating frontrunning is using a minimum delay between opening and closing positions to introduce price uncertainty for the attacker. This blog post goes into comprehensive detail about the history of frontrunning.

TRUST ASSUMPTIONS

Trust assumptions refer to some fundamental assumptions made by decentralized systems and their users to ensure the security and reliability of financial transactions. For example, there are two critical assumptions on the Bitcoin network: an assumption that an attacker cannot break the cryptography used in the network client software and another that they do not have the computational power necessary to compete with the entire existing network.

Although multiple data sources and algorithms are used to reduce points of failure, users still depend on some trust assumptions, like the accuracy of oracles or the correctness of smart contracts, to perform all transactions in the DeFi ecosystem.

PUSH-BASED AND PULL-BASED PRICE ORACLES

Push-based oracles are those that automatically update cryptocurrency prices on-chain, while pull-based oracles are oracles that need an active request to update cryptocurrency prices. The major difference between these kinds of oracles is that the latter only updates based on user request, while the former updates based on price fluctuations or other changes in the off-chain data source.

While push-based oracles are more common and offer simpler user interfaces, their prices are laggy compared to pull-based oracles.

TWAP (TIME-WEIGHTED AVERAGE PRICES)

TWAP is a pricing algorithm that reduces price volatility by calculating the average price of an asset over a chosen period, with the individual prices in that period each “weighted” by the length of time they stood for. . It is obtained by choosing a price point interval, summing the price points at those intervals and then dividing that sum by the number of time points.

For example, we have the price points; $20 for 1 minute, $22 for 7 minutes, $18 for 2 minutes. The TWAP of these figures would be calculated as follows
($20 x 1) + ($22 x 7) + (18 x 2) / (1+ 7+ 2) = $21

Whereas, not using the TWAP method, the unweighted average would be ($20 + $22 + $18) = $20, which is less than the weighted average.

This algorithm is efficient, simple to implement on-chain, and offers protection against flash loan attacks.

Learn more about Liquity Protocol here:

Liquity Website
Liquity Documentation
Liquity Twitter
Rick Pardoe Twitter

The Blockchain Oracle Summit is the world’s only technical summit that dives deep into the use cases, limitations, and impacts of oracles on the wider blockchain ecosystem. Leading speakers worldwide gathered in Paris to share their work and experience building and using Oracle solutions. Article by Michael Abiodun.