What is Liquity (LQTY) Crypto Coin? Interest-Free Loans, ETH Collateral, and How It Works

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Most crypto loans charge interest. Every single one. Except Liquity. If you’ve heard of borrowing crypto without paying interest, you’re not imagining it. Liquity is the only major DeFi protocol that lets you borrow stablecoins against your ETH with zero interest. No monthly payments. No compounding fees. Just a one-time fee when you open the loan - and you can pay it back anytime, no penalties.

How Liquity Works: Borrow ETH, Get Stablecoins

Liquity lets you lock up your Ethereum (ETH) as collateral and borrow a stablecoin called LUSD (in Version 1) or BOLD (in Version 2). For every $100 you want to borrow, you need to lock up at least $110 worth of ETH. That’s called a 110% collateral ratio. Compare that to MakerDAO, which requires 150%, or Compound at 133%. Liquity’s lower threshold means you can borrow more with less ETH.

Once you open a position - called a Trove - you get your stablecoin instantly. You can use it to buy anything, pay bills, or even buy more crypto. The key? You don’t pay interest. Ever. Instead, Liquity charges a one-time borrowing fee when you create the loan. That fee changes based on system demand, but it’s usually between 0.5% and 5%. It’s paid in ETH, not in your stablecoin.

And if you need to pay back your loan? You can redeem your LUSD or BOLD for ETH at any time, at 1:1 value. No delays. No approvals. Just click, confirm, and your ETH is returned. This direct redemption feature is unique. Most protocols make you trade or swap, but Liquity lets you pull your collateral back cleanly.

The LQTY Token: Reward, Not Governance (At First)

LQTY is Liquity’s native token. There are exactly 100 million LQTY ever created. As of late 2025, about 97.9 million are in circulation. Unlike many DeFi tokens, LQTY didn’t start as a governance token. In Version 1, it had one job: reward users.

You earn LQTY in two ways:

Deposit LUSD or BOLD into the Stability Pool - this helps cover losses if someone’s loan gets liquidated. In return, you get a share of the liquidated ETH plus LQTY rewards.
Stake your LQTY - in Version 2, staking gives you a cut of borrowing and redemption fees paid in LUSD and ETH.

Before Version 2, staking LQTY didn’t give you voting power. That changed in 2024. Now, if you stake LQTY, you earn fees AND get a say in protocol upgrades. It’s a hybrid model: rewards first, governance later. This was a deliberate design to avoid early centralization. Liquity’s founders wanted the system to run on code, not votes - until it was stable enough to handle community input.

Version 1 vs Version 2: What Changed?

Liquity launched in April 2021 as Version 1. It was simple: lock ETH, get LUSD, no interest, no governance. It worked. But it had limits. No way to earn yield on idle ETH, no way to influence upgrades.

Version 2, launched in Q3 2024, fixed that. Here’s what’s different:

BOLD replaces LUSD - the new stablecoin is algorithmically pegged to $1, with better stability mechanisms.
Interest-bearing Troves - every second, your loan accrues interest in BOLD. But here’s the twist: 75% of that interest goes to the Stability Pool (to reward depositors), and 25% goes to Protocol Liquidity Incentives (to fund liquidity providers).
LQTY staking now earns fees - you can earn LUSD and ETH from borrowing and redemption fees, not just LQTY rewards.
Governance via staking - LQTY holders vote on upgrades using a time-weighted system. The longer you stake, the more voting power you get.

Version 2 didn’t scrap the old model. It layered on new features while keeping the core promise: interest-free borrowing. The protocol still runs on Ethereum, still requires ETH as collateral, and still allows instant redemption.

DeFi adventurers stake LQTY and deposit stablecoins, earning ETH rewards as cherry blossoms fall in a neon-lit dojo.

Why Liquity Is Different - And Risky

Liquity’s biggest advantage is its simplicity. No interest. Low collateral. Direct redemption. But that simplicity comes with trade-offs.

Pros:

Only major DeFi protocol with true zero-interest borrowing.
110% collateral ratio is the lowest in the space.
Instant redemption means you’re never locked in.
Stability Pool lets you earn passive income with minimal risk if you’re not leveraged.

Cons:

Only accepts ETH as collateral. No BTC, no SOL, no stablecoins. If ETH crashes, your whole position is at risk.
No mobile app. You need a wallet like MetaMask or Ledger. Not beginner-friendly.
Low total value locked - $287 million as of Q3 2025. Compare that to Aave’s $12.3 billion. It’s a niche product.
110% collateral is dangerously low during extreme crashes. In May 2021, ETH dropped 37% in hours. Hundreds of Troves were liquidated. Users lost money.

DeFi analyst Robert Helm from Messari put it bluntly: “Liquity’s interest-free model is revolutionary, but its reliance on ETH alone creates a single point of failure.” If ETH goes down 40%, the whole system gets stressed. That’s why experts recommend keeping your collateral ratio above 150% during volatile times - even if the minimum is 110%.

Who Uses Liquity? Real Users, Real Results

Liquity doesn’t attract casual traders. Its users are experienced DeFi holders. According to their 2025 survey, 78% have been using DeFi for over two years. They know how to manage collateral ratios, monitor liquidation risks, and use tools like Defi Saver to automate alerts.

One Reddit user, u/EthereumHodler421, borrowed $50,000 in LUSD in early 2023. Over 18 months, he saved $2,340 in interest compared to using MakerDAO. That’s real money.

But it’s not all wins. Another user, u/DeFiLoser, lost $1,200 during a June 2023 ETH flash crash. His Trove got liquidated because he didn’t add more ETH in time. Liquity doesn’t send warnings. It doesn’t call you. It just executes. You’re responsible.

On CoinGecko, Liquity has a 3.8/5 rating. Positive reviews praise the interest-free model. Negative ones complain about complexity and lack of customer support. There’s no phone line. No live chat. Just Discord and a detailed wiki with 187 articles.

Hero battles a liquidation beast on a crumbling Ethereum cliff, wielding a LQTY sword as Arbitrum’s portal glows behind him.

Getting Started: What You Need to Know

If you want to try Liquity, here’s how:

Get an Ethereum wallet (MetaMask, Trust Wallet, Ledger).
Buy ETH and send it to your wallet.
Go to one of Liquity’s 12 official frontends (like liquity.org or liquity.finance).
Connect your wallet.
Deposit ETH as collateral.
Open a Trove and borrow LUSD or BOLD.

Gas fees on Ethereum can be high. That’s why Liquity added Arbitrum integration in Q2 2025. Now, you can use Arbitrum to cut gas fees by 87%. You still lock ETH on Ethereum, but the interface runs on Layer 2. It’s smoother, cheaper, and faster.

Don’t rush. Watch the first 10 minutes of Liquity’s YouTube tutorial. They have 14,500 subscribers and clear walkthroughs. Read their documentation. The learning curve is rated “medium” - not impossible, but not for beginners.

The Future: What’s Next for Liquity?

Liquity isn’t standing still. Their roadmap includes:

Optimism integration - Q2 2026. More Layer 2 options, lower fees.
Multi-collateral support - starting with wBTC in Q4 2026. This could be a game-changer. If they add Bitcoin, adoption could explode.
Decentralized oracle network - Q1 2027. Less reliance on centralized price feeds. More security.

But risks remain. Regulatory pressure on algorithmic stablecoins is growing. The U.S. SEC is watching. Liquity filed a safe harbor petition in January 2024 - still pending. If regulators classify LUSD/BOLD as securities or money transmission services, it could shut down access for Americans.

Also, new competitors are emerging. ZeroLend launched in Q1 2025 with zero-interest loans and multiple collateral types. If they gain traction, Liquity’s uniqueness could fade.

Still, Liquity’s model is hard to copy. No other protocol offers the same combination: interest-free, low collateral, instant redemption, and a stablecoin backed by ETH. It’s a niche, but a powerful one.

Is LQTY a Good Investment?

LQTY’s price hit $3.84 in March 2023. As of November 2025, it’s trading around $0.74 - down 80.7% from its peak. That’s not unusual for DeFi tokens. But here’s the catch: LQTY isn’t a speculative coin. It’s a utility token.

If you’re holding it to earn fees or rewards, the value comes from usage. More people borrowing? More fees paid. More staking? More rewards. The token’s price may drop, but the income stream can still be strong.

Analysts at Arcane Research give Liquity an 85% chance of surviving until 2030. Bernstein warns it could die if it doesn’t add more collateral types within 18 months. So the question isn’t “Will LQTY go up?” It’s “Will Liquity survive long enough for you to benefit?”

If you’re comfortable with ETH volatility, understand liquidation risks, and want to avoid interest payments - Liquity is still the only game in town. LQTY isn’t a get-rich-quick token. But for users who want freedom from interest, it’s still unmatched.

What is the main purpose of the LQTY token?

The LQTY token serves two main purposes: it rewards users who deposit stablecoins into the Stability Pool or stake LQTY, and since Version 2 (2024), it grants voting power in protocol governance. Unlike many DeFi tokens, LQTY was not designed for speculation - it’s meant to incentivize participation and secure the system.

Can I use other crypto besides ETH as collateral in Liquity?

Currently, Liquity only accepts Ethereum (ETH) as collateral. This is a key limitation compared to other protocols like MakerDAO, which supports over a dozen assets. However, Liquity’s roadmap includes adding wBTC as a second collateral type in Q4 2026. Until then, ETH is the only option.

Is Liquity really interest-free?

Yes - but with a caveat. Liquity charges no recurring interest on loans. Instead, you pay a one-time borrowing fee (0.5%-5%) when you open your Trove. Version 2 introduced interest accrual on loans, but that interest is automatically redistributed to Stability Pool depositors and liquidity providers - not kept by the protocol. So borrowers still pay no direct interest.

What happens if my ETH price drops and my loan gets liquidated?

If your collateral ratio falls below 110%, your Trove is automatically liquidated. You lose your entire collateral, but your debt is cleared. The liquidated ETH is sold to repay the loan, and the surplus (if any) goes to the Stability Pool. You keep nothing. That’s why users are advised to maintain a buffer above 110% - ideally 150% - to avoid liquidation during volatility.

Do I need a wallet to use Liquity?

Yes. Liquity is a non-custodial protocol. You must use a self-custody Ethereum wallet like MetaMask, Trust Wallet, or a hardware wallet (Ledger, Trezor). You cannot sign up with an email or use a centralized exchange account. You control your own keys - and your own risk.

Is Liquity safe from hacks or exploits?

Liquity’s code has been audited multiple times and has never been hacked. Its smart contracts are immutable and run without human intervention. However, no system is immune to market risk. The biggest threat isn’t a hack - it’s a sudden ETH price crash that triggers mass liquidations. The protocol’s 110% collateral ratio makes it vulnerable during extreme volatility, which is why experts call it a high-risk, high-reward system.

Can I use Liquity on mobile?

There is no official Liquity mobile app. You must use a desktop browser with a wallet extension like MetaMask. Some third-party tools (like Defi Saver) offer mobile interfaces to monitor your Trove, but the actual borrowing and redemption must be done through a web frontend. Mobile access is a known limitation.

How does Liquity make money if it doesn’t charge interest?

Liquity earns revenue through one-time borrowing fees (paid in ETH when you open a loan) and redemption fees (paid in ETH when you pay back your loan). These fees are distributed to LQTY stakers and Stability Pool depositors. The protocol itself doesn’t keep profits - it’s designed to be self-sustaining through user fees, not treasury reserves.

What is the Stability Pool and why should I use it?

The Stability Pool is a reserve of LUSD or BOLD that absorbs losses when other users get liquidated. If you deposit stablecoins into it, you earn two things: a share of the liquidated ETH (from the defaulted loan) and LQTY rewards. It’s a low-risk way to earn passive income - as long as you don’t over-leverage your own Trove. Many users treat it like a savings account in DeFi.

Is Liquity available in the U.S.?

Liquity does not explicitly block U.S. users, but its legal status is uncertain. The protocol filed a safe harbor petition with the SEC in January 2024 to clarify its regulatory standing. Until that’s resolved, U.S. users may face restrictions on certain frontends or have limited access. Always check your local regulations before using any DeFi protocol.