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# System prepended metadata

title: Liquity Research

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# Liquity Research 

The following document is learnings from the Gauntlet research done on the liquity protocol.
The opinions below are Jintao commentary with respect to eBTC.
Full report is available [here](https://liquity-report.gauntlet.network/).

## Key Takeaways

- **Liquity offers leverage solely for Ether but not for LUSD. Therefore, it only amplifies the supply side, but not the demand side when LUSD is overpriced. This process may help to push the price back to parity.**
    - eBTC dual market may not be in our interests with respect to peg stability
    - Maker does not allow DAI as collateral, secondary non associated markets may be more appropriate
- **We expect the LQTY token reward can mitigate the risk of staking incentive instability during the bootstrap phase.**
    - Stability pool is the primary source of protection for supporting liquidations as a buffer
    - If there is not a sufficient or alternative option for the stability pool what happens post bootstrap phase?
    - Is the remaining incentives Badger controls with the given emission schedules enough to sustain a bootstrapping phase without impairing runway or future emission?
- **LUSD price stability is likely affected by gas prices and average trove size. If average trove sizes are small, there might not be enough incentive for users to redeem their LUSD when gas prices are high to give the desired level of price stability.**
    - Currently the model imposes no minimum trove size, only requiring a gas compensation deposit and origination fee
    - Considerations should be taken from MakerDAO model of trove minimums to ensure liquidation incentives are not an issue
    - What the size on those minimums are is up for questioning

## Redemption Analysis

View [Gauntlet Simulation Results](https://liquity-report.gauntlet.network/redemption)

What Matters:

- Borrower Attentiveness
- Redemption Fee
- Gas Prices

An important logical observation from the study: 

> Moreover, the simulation result suggests that the collateral asset (ETH) volatility doesn't have a strong effect on redemptions.

As the collateral volatility only impacts liquidations and collateral ratios one can assume redemption activity does not have explicit correlation to volatility.

Rather, the volatility of the asset borrowed itself has impact on redemption behavior.

**Note**: We tried to create realistic assumptions for Liquity user behavior, but the actual behavior may deviate from our assumptions. We can further improve our model by using the actual user behavior data after launch.

Therefore, the Gauntlet data is "as good as" a simulation making our own rational assumptions, or observing the data on chain now that launch of Liquity protocol has already occurred. 