Liquity (LQTY): Rewards & Fee-Sharing Token of a Governance-Free Protocol

What if you could borrow against crypto without ongoing interest and earn rewards without giving up control? That’s the promise of Liquity, a decentralized borrowing protocol designed to be governance-free. At the heart of this system is LQTY, a revenue-sharing token that aligns incentives across the platform. Stakers earn a share of fees, while Liquity’s smart contracts maintain stability through autonomous mechanisms—no DAO votes required.

Whether you’re a DeFi power user, yield seeker, or protocol explorer, understanding how LQTY works in Liquity V1 and the upgraded V2 is key to maximizing opportunities. In this guide, we’ll break down LQTY’s fee-sharing model, staking mechanics, V2 enhancements, and strategies to capture rewards safely. Let’s dive into the world of Liquity LQTY, where rewards flow freely and governance takes a back seat.

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What Is Liquity LQTY?

Liquity is a decentralized borrowing protocol that allows users to take out interest-free loans against their Ether (ETH) collateral. Instead of paying ongoing interest, borrowers lock ETH and receive LUSD, a USD-pegged stablecoin, by maintaining a minimum collateral ratio. Built on Ethereum, Liquity offers an alternative to traditional DeFi lending by combining full decentralization, cost efficiency, and a unique dual-token model.

At the heart of this ecosystem is LQTY, the protocol’s secondary token. While LUSD functions as the stablecoin for loans, LQTY serves as the reward and revenue-sharing asset, giving users a way to participate in Liquity’s economic activity without adding governance risk.

Liquity: Decentralized, Interest-Free Borrowing

Unlike conventional lending protocols, Liquity eliminates interest payments. Users open “Troves” by depositing ETH and minting LUSD, which they can use for trading, staking, or DeFi applications. Borrowers pay only a one-time borrowing fee and a small redemption fee when LUSD is exchanged back for ETH.

Key benefits of Liquity’s design include:

• Zero Ongoing Interest: Borrowers are not burdened by variable rates.
• Censorship Resistance: The protocol is immutable and fully decentralized—no admin keys or centralized control.
• Efficient Capital Use: High collateral ratios and automated liquidation mechanisms ensure stability and security.

This structure makes Liquity an appealing option for users seeking predictable, trustless borrowing.

LQTY: The Secondary Token

The LQTY token captures protocol fee revenue generated from borrowing and redemption activities. Holders can stake LQTY to earn a share of these fees, primarily collected in ETH and LUSD, turning protocol growth into a source of passive income.

Unlike LUSD, which maintains a stable value, LQTY is a market-driven token whose value reflects user demand for staking rewards and exposure to Liquity’s fee revenue.

Fixed Supply, Token Distribution, and Emission Schedule

LQTY has a fixed maximum supply of 100 million tokens, ensuring predictable scarcity. The initial distribution was allocated to the community through mechanisms such as staking rewards, stability pool incentives, and liquidity mining programs, with smaller portions set aside for the team and ecosystem development.

New tokens enter circulation through a transparent emission schedule that gradually tapers over time. This predictable release model supports long-term stability while rewarding early adopters who help bootstrap network activity.

No Governance Power – By Design

One of Liquity’s most distinctive features is the absence of governance. While LQTY holders can stake tokens to earn a share of protocol fees, they have no voting rights over protocol parameters or upgrades. Liquity’s smart contracts are fully immutable, meaning key settings like collateral ratios and redemption mechanisms cannot be altered.

This approach prioritizes security and neutrality, ensuring that Liquity remains resistant to political or insider influence. LQTY’s role is purely economic, allowing users to benefit from network growth without compromising decentralization.

Liquity’s dual-token model separates stability (LUSD) from economic participation (LQTY). By staking LQTY, users can share in the protocol’s revenue while enjoying the confidence that the system’s rules are fixed and transparent. In a DeFi landscape often dominated by governance tokens, Liquity offers a rare combination of interest-free borrowing, immutable smart contracts, and a reward token that is free from governance risk.

Liquity V1 — How LQTY Rewards Work

Liquity V1 introduced a dual-token system that powers a decentralized, interest-free borrowing protocol. While borrowers use LUSD, a USD-pegged stablecoin, to access liquidity against their ETH collateral, the secondary token LQTY provides economic incentives for users who help maintain protocol stability. Through staking, the Stability Pool, and protocol fee-sharing, Liquity rewards participants for securing the system and ensuring liquidations run smoothly.

Stability Pool Mechanics and Liquidation System

The Stability Pool is the backbone of Liquity’s liquidation process. Borrowers must maintain a minimum collateral ratio to keep their positions safe. When a Trove (loan position) falls below the required ratio, it can be liquidated to protect the protocol. The Stability Pool acts as the first line of defense by automatically repaying the undercollateralized debt using deposited LUSD. In return, Stability Pool depositors receive an equivalent amount of ETH from the liquidated collateral, often at a discount, creating a built-in profit opportunity.

This design ensures that liquidations happen swiftly and without the need for centralized intervention, keeping LUSD stable and overcollateralized at all times.

Earning LQTY Through Stability Pool Deposits

Depositing LUSD into the Stability Pool not only helps maintain system health but also allows users to earn LQTY rewards. Liquity distributes new LQTY tokens to Stability Pool depositors as an incentive for providing this critical liquidity. The more LUSD a user deposits and the longer it remains in the pool, the greater their share of LQTY rewards.

Front-end operators—platforms that provide user interfaces to access Liquity—can also set their own kickback rates and earn a portion of the LQTY rewards generated by their users. This creates a competitive ecosystem where both depositors and front-end providers are incentivized to attract and maintain liquidity.

Protocol Fee-Sharing for LQTY Stakers

Beyond Stability Pool rewards, LQTY holders can stake their tokens to share in the protocol’s revenue. Liquity collects fees in ETH and LUSD from borrowing and redemption activities. These fees are distributed proportionally to LQTY stakers, creating a direct link between protocol usage and staking income. By staking LQTY, users gain exposure to a sustainable revenue stream while helping secure the network’s economic foundation.

Emission Details, Halving Schedule, and Reward Sustainability

LQTY has a fixed maximum supply of 100 million tokens, with emissions designed to taper over time. New tokens are distributed through Stability Pool rewards and other incentive programs according to a predetermined emission curve. Liquity follows a halving schedule, where the rate of LQTY issuance decreases periodically, reducing inflation and encouraging long-term participation.

This gradual reduction in rewards creates a natural scarcity effect, ensuring that early participants are rewarded for bootstrapping the system while maintaining sustainable incentives for future users.

Liquity’s reward model carefully balances user incentives with protocol stability. By combining liquidation-driven ETH gains, LQTY emissions, and fee-sharing for stakers, the system encourages active participation across all layers of the ecosystem. Whether depositing LUSD into the Stability Pool or staking LQTY for ETH and LUSD rewards, users play a vital role in securing the protocol and sustaining its decentralized, interest-free borrowing model.

Liquity V2 — New Features and LQTY’s Evolving Role

Liquity V2 represents a major upgrade to the original protocol, adding new flexibility, user control, and incentive mechanics around its secondary token LQTY. The introduction of the new stablecoin BOLD, multi-collateral support, user-set interest rates, and Protocol Incentivized Liquidity (PIL) are all central to V2’s design. Here’s how Liquity V2 changes the game and what LQTY holders should expect from its evolving role.

Introduction of Multi-Collateral Borrowing and the BOLD Stablecoin

One of the most important enhancements in Liquity V2 is multi-collateral support. Previously, in V1, only ETH was accepted as collateral. Now, V2 allows not just ETH but also leading liquid staking tokens (LSTs) like wrapped staked ETH (wstETH) and Rocket Pool ETH (rETH). Each collateral type forms its own borrowing market with its own risk parameters and interest rates.

Alongside this, V2 introduces BOLD, a new USD-pegged stablecoin. BOLD is over-collateralized and backed only by ETH and the approved LSTs, with the contracts being immutable. Key features of BOLD include:

• Full backing by decentralized crypto collateral, no real-world or off-chain assets.
• Direct redeemability: users can redeem BOLD for protocol collateral.
• Designed peg stability improved via demand and incentive mechanisms.

User-Set Interest Rates & Improved Capital Efficiency

Another major shift in V2 is that borrowers can now set their own interest rates. Rather than paying a fixed or protocol-controlled borrowing fee (as in V1), borrowers choose a rate they are willing to pay, which may be adjusted over time. This gives users control, and market forces help determine efficient rates.

Capital efficiency also improves: Liquity V2 offers high Loan-to-Value (LTV) ratios (up to ~91% on ETH) and allows mechanisms like “one-click multiply / looped exposure, letting users borrow BOLD and use it to buy more collateral in a leveraged way while managing risk.

V2 also removes some older friction: no upfront fee for borrowing, shorter-term loans become more attractive, and there is no more Recovery Mode (a protocol state in V1 that could trigger more restrictive collateralization requirements).

Continued Fee-Sharing to LQTY Stakers under V2 Architecture

LQTY’s role evolves under V2 to remain central to rewards and alignment. Stakers of LQTY receive “dual reward” opportunities: not only do they continue to earn from the legacy V1 rewards (ETH + LUSD revenue streams), but in V2, they also gain voting power over new incentive mechanisms and access to revenues tied to BOLD borrowing and usage.

LQTY stakers can direct Protocol Incentivized Liquidity (PIL) — a mechanism that allocates 25% of V2 revenue to subsidize BOLD liquidity and support external initiatives that grow the ecosystem. The rest (75%) flows to the Stability Pool and related yield sources. Voting to direct PIL is done via staked LQTY; the longer you stake, the more weight your voting power has (with time-weighting).

Protocol Incentivized Liquidity (PIL): Directing Revenue to Ecosystem Growth

PIL is one of the most significant additions in V2. Its goal is to ensure that BOLD has sufficient liquidity in secondary markets and that community projects receive incentives. Here’s how PIL works under V2:

• Revenue from borrowers (interest paid in BOLD) is split: 75% goes to Stability Pools (for yield to depositors, liquidation gains, etc.), while 25% is allocated to PIL.
• PIL uses weekly epoch-based voting by LQTY stakers: voters can propose or support initiatives (e.g., liquidity pools on DEXes, integrations, external incentives) where part of the revenue will be directed.
• Voting power is time-weighted; there is no mandatory lock-up, but longer staking gives more “boost” to voting power.

PIL ensures that revenue is not just passively collected but actively used to deepen ecosystem utility, strengthen liquidity, and promote BOLD usage.

Liquity V2 builds on the foundation of Liquity V1 with meaningful upgrades: multi-collateral support, BOLD stablecoin, user-set interest rates, improved capital efficiency, and the addition of PIL. Meanwhile, LQTY’s role expands: it remains the token for reward capturing, but gains new powers for guiding revenue deployment without introducing general governance over core protocol parameters (which remain immutable). This reflects Liquity’s continued design philosophy: strong decentralization, user control, and sustainable yield-driven mechanics.

Staking LQTY for Fees and Incentives

Liquity’s secondary token LQTY is more than a reward asset—it allows holders to share in protocol revenue while helping guide the growth of the Liquity V2 ecosystem. By staking LQTY, users earn ETH and LUSD fees collected from borrowers and participate in the Protocol Incentivized Liquidity (PIL) system, which directs a portion of revenue to ecosystem incentives. Here’s how to get started, maximize rewards, and manage risks.

Step-by-Step Guide to Staking LQTY

1. Acquire LQTY
   LQTY is available on major centralized exchanges like Binance, Coinbase, and KuCoin, as well as decentralized exchanges such as Uniswap and Curve. Ensure you purchase the ERC-20 version on the Ethereum mainnet.
2. Connect a Wallet
   Visit the official Liquity staking interface and connect a Web3 wallet such as MetaMask, Ledger, or WalletConnect-enabled options. Make sure your wallet holds both LQTY and a small amount of ETH to pay for gas.
3. Stake LQTY
   Enter the amount of LQTY to stake and confirm the transaction. Staking is non-custodial—your tokens remain in a smart contract that you control.
4. Start Earning Rewards
   Once staked, you automatically earn a share of the ETH and LUSD fees generated by borrowing and redemption activity across Liquity V1 and V2. Rewards accrue continuously and can be claimed at any time without affecting your staked balance.

Boosting Rewards & Compounding Strategies

Staking rewards scale with both the amount staked and the time in the pool. The protocol distributes ETH and LUSD proportionally based on each staker’s share of total LQTY staked.

• Compounding: You can periodically claim LUSD and use it to buy more LQTY, then stake again to grow your share.
• Long-term staking: Remaining staked during high borrowing activity or market volatility can capture spikes in ETH and LUSD fees.
• Epoch-based boosts in V2: Liquity V2 introduces time-weighted voting power for PIL allocation. While there is no mandatory lock-up, staking longer increases your influence in directing incentives.

Risks of Unstaking and Smart Contract Considerations

LQTY staking is designed to be simple and secure, but users should remain aware of key risks:

• Smart contract risk: Although the protocol’s contracts have been audited and are immutable, on-chain interactions always carry some level of risk.
• Reward timing: Unstaking stops further accrual of ETH and LUSD fees immediately. If you exit just before a period of heavy activity, you could miss significant rewards.
• Gas costs: Claiming rewards and restaking incurs Ethereum gas fees, which may affect compounding frequency.

Influencing PIL Allocation Without Governance

Unlike many DeFi tokens, LQTY does not confer governance power over core protocol parameters. Liquity’s monetary policy and borrowing mechanics remain immutable. Instead, staking provides a unique, targeted influence: Protocol Incentivized Liquidity (PIL) voting.

Each week, 25% of Liquity V2 revenue flows into PIL. Stakers vote on how these funds are allocated—such as incentivizing BOLD liquidity pools or rewarding ecosystem integrations. Voting power is time-weighted, giving long-term stakers more influence while keeping the protocol free from governance attacks.

Staking LQTY combines the best of two worlds: passive ETH and LUSD yield from protocol activity and active influence through PIL allocations, all without compromising Liquity’s immutable, governance-free design. By carefully managing compounding strategies and staking duration, LQTY holders can maximize rewards while supporting the growth of the BOLD and Liquity V2 ecosystem.

Liquity LQTY proves that rewards and decentralized borrowing don’t require endless votes or complicated governance. By staking LQTY, users earn a share of protocol fees and help fuel Liquity’s growth, all while enjoying the simplicity of an autonomous system. Whether you’re seeking steady ETH and LUSD rewards or exploring V2’s new opportunities, LQTY offers a unique blend of yield and security in DeFi. Ready to participate? Visit Liquity.org,