# Why Ketju rejected Liquity v1 (LUSD)

- URL: https://riadefi.com/rejections/liquity-v1/
- Exposure: stable lending
- Memo version: v1
- Reviewed: 2026-08-16
- Next review: 2026-11-16

## The memo

REJECTED on a size-floor standing fact, while retaining Liquity V1 as a research benchmark, not an allocable sleeve. The sovereignty case remains exceptional: Ethereum-only ETH collateral, immutable core contracts, no admin key, no governance parameter changes, and permissionless redemption of LUSD for $1 of ETH before fees. The record is stronger and more nuanced than “zero issues.” Liquity processed 310 Trove liquidations when ETH fell from about $3,400 to $1,800 on 2021-05-19, with the Stability Pool absorbing the debt. In 2022 the team disclosed that its immutable fallback-oracle integration consumed Tellor prices without a dispute delay; it was never exploited on Ethereum mainnet, was exploited on the ETHW fork, and could be repaired only through a custom change in Tellor because Liquity itself was unupgradeable. Immutability removed administrator seizure risk and also removed the normal patch path. The investability failure is decisive. CoinGecko reported only 27.74M LUSD outstanding, a $1.001 price, and about $10.5k of trailing 24-hour volume on 2026-08-14; DefiLlama still showed $211.1M of collateral TVL, but collateral is not holder exit liquidity. The V1 bug bounty was discontinued after V2 launched. A $25M minimum-liquidity rule cannot be satisfied by a token whose entire supply is only modestly larger. Direct redemption provides a hard economic floor, not institutional market capacity: fees rise with the fraction of supply redeemed, execution returns volatile ETH, and a large client order would be material to the system. Sovereignty is necessary for the lesson and insufficient for the allocation.

## What would reopen the file

- LUSD supply falling below $20M (unusable at any client size)
- Sustained LUSD trading above $1.10 or below $0.97

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Published by Ketju Research (https://ketjuresearch.com). Educational analysis only; not legal, tax, compliance, or investment advice.
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