Liquity LUSD Zero-Interest Minting Guide: Minimum Collateral Ratio 110% Practical Guide
Learn how to mint LUSD stablecoin using Liquity protocol, understanding zero-interest mechanism, minimum collateral ratio 110% risks, and practical operation process.
What is Liquity LUSD?
Liquity is a decentralized lending protocol that issues LUSD (Liquity USD) stablecoin. LUSD's biggest feature is zero interest, requiring only one-time fees without ongoing stability fees.
Key Features:
- ✅ Zero Interest: No need to pay annual stability fees
- ✅ Minimum Collateral Ratio 110%: High capital efficiency but also high risk
- ✅ One-time Fees: Pay one-time fees when minting (0.5-5%)
- ✅ Decentralized: Not dependent on a single entity
- ✅ No KYC Required: Just connect wallet to operate
Key Risks:
- ⚠️ High Risk: Minimum collateral ratio 110%, very high risk
- ⚠️ Liquidation Risk: Low collateral ratio easily triggers liquidation
- ⚠️ One-time Fees: Both minting and redemption require fees
- ⚠️ Not Recommended for Beginners: Requires rich DeFi experience
Target Audience
Suitable for:
- Users with rich DeFi experience
- Users who can bear high risks
- Users who need high capital efficiency
- Users who can closely monitor collateral ratios
- Users who understand liquidation mechanisms
Not suitable for:
- DeFi beginners
- Users with low risk tolerance
- Users who cannot closely monitor collateral ratios
- Users who want low-risk stablecoins
Protocol Mechanisms
Zero-Interest Mechanism
Difference from Traditional Protocols:
- MakerDAO: Need to pay annual stability fees (1-5%)
- Liquity: Zero interest, only pay one-time fees
Fee Structure:
- One-time Fees: Paid when minting (0.5-5%, market-determined)
- Redemption Fees: May pay when redeeming (0.5-5%, market-determined)
- Gas Fees: Required for each operation
Minimum Collateral Ratio 110%
Why It's High Risk:
- Collateral ratio is only 110%, buffer is very small
- Collateral price dropping 10% may trigger liquidation
- Risk is very high during market volatility
Risk Example:
- Collateral value: 11,000 USD
- LUSD debt: 10,000 LUSD
- Collateral ratio: 110% (just meeting minimum requirement)
- If ETH price drops 10%:
- Collateral value: 9,900 USD
- Collateral ratio: 99% (below 110%)
- May be liquidated
Liquidation Mechanism
Liquidation Conditions:
- Collateral ratio below 110%
- Protocol will automatically liquidate your collateral
Liquidation Consequences:
- Loss of part of collateral (usually 10%)
- Need to pay liquidation penalties
- May lose all collateral (if market fluctuates dramatically)
Pre-minting Preparation
1. Prepare Wallet
Recommended Wallets:
- MetaMask: Most commonly used browser wallet
- Ledger/Trezor: Hardware wallets, highest security
- WalletConnect: Supports multiple wallet connections
Network Requirements:
- Ethereum mainnet
- Ensure wallet has sufficient ETH to pay Gas fees
2. Prepare Collateral
Supported Collateral:
- ETH: Only supported collateral type
- Need sufficient ETH as collateral
Collateral Requirements:
- Ensure sufficient ETH
- Recommend collateral ratio above 150% (although minimum is 110%)
- Reserve Gas fees (ETH)
3. Understand Fee Structure
Fee Explanation:
- One-time Fees: Paid when minting (0.5-5%, market-determined)
- Redemption Fees: May pay when redeeming (0.5-5%, market-determined)
- Gas Fees: Ethereum network fees (required for each operation)
- Liquidation Penalties: If liquidated, need to pay penalties (usually 10%)
Fee Examples:
- Minting 10,000 LUSD, one-time fee 1%:
- One-time fee: 100 LUSD
- Gas fees: Approximately $10-50 (depends on network congestion)
- Total fees: Approximately 100 LUSD + Gas
Minting Process
Step 1: Access Liquity Frontend
- Open your browser and visit Liquity Frontend
- Click "Connect Wallet" in the top right corner
⚠️ Note: Please ensure you're accessing the official frontend to avoid phishing sites.
Step 2: Connect Wallet
Select Wallet Type:
- MetaMask
- WalletConnect
- Ledger
- Other supported wallets
Confirm Connection:
- Confirm connection request in wallet
- Select Ethereum mainnet (if not automatically selected)
- Wait for successful connection
Step 3: Open Trove (Vault)
Click "Open Trove":
- On Liquity Frontend homepage
- Click "Open Trove" button
View Fee Information:
- Current one-time fee rate
- Estimated fees
- Minimum collateral ratio requirement (110%)
Step 4: Deposit Collateral
Enter Collateral Amount:
- Enter ETH amount to deposit
- View current ETH price
- View estimated collateral ratio
Set Collateral Ratio:
- Minimum Requirement: 110%
- Recommendation: 150%+ (reduce liquidation risk)
- View liquidation price
Confirm Collateral Ratio:
- Ensure collateral ratio is sufficiently high
- Understand risk alerts
- Confirm you understand liquidation risks
Step 5: Set Minting Amount
Enter LUSD Amount to Mint:
- Calculate based on collateral and collateral ratio
- View one-time fees
- View estimated LUSD to receive
View Fee Details:
- One-time fee amount
- Gas fee estimation
- Total fees
Step 6: Confirm Transaction
Review Transaction Details:
- ETH amount deposited
- LUSD amount to mint
- One-time fees
- Gas fee estimation
- Collateral ratio and liquidation price
Confirm Risk Alerts:
- Confirm you understand minimum collateral ratio 110% risks
- Confirm you understand liquidation mechanism
- Confirm you can closely monitor collateral ratio
Confirm Transaction in Wallet:
- Review transaction details
- Confirm Gas fees
- Confirm transaction in wallet
- Wait for on-chain confirmation (usually minutes)
Step 7: Receive LUSD
Wait for Transaction Confirmation:
- After transaction confirmation, LUSD will appear in your wallet
- Can view your Trove status in Liquity Frontend
Confirm Balance:
- Check LUSD balance in wallet
- Confirm balance is correct
Managing Trove
Monitor Collateral Ratio
Why It's Important:
- Minimum collateral ratio is only 110%, buffer is very small
- Collateral price dropping 10% may trigger liquidation
- Need close monitoring to avoid liquidation
How to Monitor:
View in Liquity Frontend:
- Log in to account
- View Trove status
- Check collateral ratio and liquidation price
Use Third-party Tools:
- DeFiPulse
- Zapper
- DeBank
- Other DeFi monitoring tools
Set Price Alerts:
- Use price alert tools
- Notify immediately when ETH price drops to dangerous levels
- Adjust collateral ratio promptly
Add Collateral
When to Add:
- ETH price drops causing collateral ratio to decrease
- Want to mint more LUSD
- Increase safety margin
How to Add:
- In Liquity Frontend
- Select "Adjust Trove"
- Select "Add Collateral"
- Enter ETH amount to add
- Confirm transaction
- Wait for on-chain confirmation
Fee Explanation
One-time Fees
What are One-time Fees:
- One-time fees paid when minting
- Fee rate determined by market (0.5-5%)
- No need to continuously pay stability fees
How to Calculate:
- One-time fee = Minting amount × Fee rate
- Example: 10,000 LUSD, fee rate 1%, one-time fee = 100 LUSD
How Fee Rate is Determined:
- Determined by market supply and demand
- When minting demand is high, fee rate may rise
- When minting demand is low, fee rate may drop
Gas Fees
Gas Fee Explanation:
- Gas fees required for each operation
- Varies based on network congestion
- Usually $10-50 per operation (normal conditions)
- May be $50-200+ during network congestion
How to Reduce Gas Fees:
- Choose times when network is less congested
- Use Gas optimization tools
- Batch operations to reduce transaction count
Risk Management
1. Liquidation Risk (High Risk)
Risk Types:
- Minimum collateral ratio is only 110%, buffer is very small
- ETH price dropping 10% may trigger liquidation
- Risk is very high during market volatility
Mitigation Strategies:
- Maintain sufficient collateral ratio (recommend 150%+)
- Closely monitor collateral ratio
- Set price alerts
- Add collateral promptly
2. One-time Fee Risk
Risk Types:
- Fee rate determined by market, may be high (up to 5%)
- Both minting and redemption require fees
- Fees may affect returns
Mitigation Strategies:
- Mint when fee rate is low
- Understand fee mechanism
- Calculate total costs
3. Smart Contract Risk
Risk Types:
- Code vulnerabilities
- Protocol upgrade risks
- Governance attacks
Mitigation Strategies:
- Choose audited protocols
- Understand protocol's security record
- Don't invest more than you can afford to lose
- Follow protocol announcements and updates
Best Practices
High Risk Warning
- Minimum collateral ratio 110%, very high risk
- Not recommended for beginners
- Requires rich DeFi experience
Maintain Sufficient Collateral Ratio
- Although minimum is 110%, recommend maintaining 150%+
- Conservative users recommend 200%+
- Don't approach minimum collateral ratio
Close Monitoring
- Check collateral ratio at least once daily
- Use monitoring tools to set alerts
- Monitor market developments
- Set price alerts
Understand Fee Mechanism
- Understand one-time fees and redemption fees
- Operate when fee rates are low
- Calculate total costs
Security First
- Use hardware wallets (e.g., Ledger, Trezor)
- Protect seed phrases and private keys
- Verify website and contract addresses
- Beware of phishing sites and scams
Frequently Asked Questions
Q: Is Liquity really zero interest?
A: Yes, Liquity doesn't require paying annual stability fees, but you need to pay one-time fees (when minting) and possible redemption fees. For long-term holding, this is usually more cost-effective than continuously paying stability fees.
Q: Is minimum collateral ratio 110% safe?
A: Minimum collateral ratio 110% is very high risk with a very small buffer. ETH price dropping 10% may trigger liquidation. Recommend maintaining collateral ratio above 150% to ensure safety.
Q: What are the one-time fees?
A: One-time fees are market-determined, usually between 0.5-5%. When minting demand is high, fee rate may rise; when minting demand is low, fee rate may drop.
Q: What happens if liquidated?
A: Protocol will auction your collateral to repay LUSD debt. You may lose part of collateral as liquidation penalty (usually 10%). This is why avoiding liquidation is important.
Q: Can I redeem collateral anytime?
A: Yes, as long as collateral ratio is sufficient, you can repay LUSD and redeem collateral at any time. However, note redemption fees and Gas fees.
Q: Which collaterals are supported?
A: Liquity currently only supports ETH as collateral. This is a protocol design choice that simplifies mechanism and improves security.
Security Tips
- Use Official Channels: Always access the protocol through Liquity Frontend
- Check Contract Address: Confirm you're interacting with official contracts
- High Risk Warning: Minimum collateral ratio 110%, very high risk, not recommended for beginners
- Test Small Amounts: When using for the first time, recommend testing with small amounts
- Protect Private Keys: Never share your private keys or seed phrases
- Follow Official Announcements: Stay updated on protocol updates and risk alerts
- Close Monitoring: Check collateral ratio at least once daily, set price alerts
Related Resources
Protocol Frontend
Liquity Official Documentation
Community Resources
Other Resources
⚠️ Important Note: Liquity minimum collateral ratio 110%, very high risk, not recommended for beginners. Please ensure you fully understand the risks and can closely monitor collateral ratio.
Ready to start minting LUSD? Visit Liquity Frontend to start your minting journey!