No … You can’t borrow more than you deposit.
The value of your PLS must exceed, and always exceed, the value of the USDL you minted.
Here’s why.
Overcollateralization for USDL
Liquid Loans is not just a lending protocol, it’s also a decentralized issuer of a true-defi stablecoin, USDL.
Therefore, USDL needs to be fully-backed, actually overly-backed, by collateral.
That’s why you can’t borrow more than you deposit, because if you did, USDL would be fractionally reserved.
If you know anything about fractional reserves, it’s basically why every bank fails.
Essentially, they don’t have enough capital in reserves to hand out when their depositors come to collect.
From bank failures during the Great Depression to ones like Silicon Valley Bank in 2022, they close their doors when there’s a bank run.
This also happened to Sam-Bankman Fried in 2022, and even happened to the “stablecoin”, UST.
The way to get around this is ABSOLUTELY GENIUS!
Have the funds available when everybody wants to withdraw.
The Liquid Loans protocol is designed such that every USDL is redeemable for 1 USD worth of PLS, and that is possible because you can’t borrow more than you deposit.
Liquid Loans is NOT A Leverage Trading Protocol
Although collateralizing a risk-on digital asset and borrowing value is technically considered leverage, Liquid Loans is not a leverage trading protocol.
Other traditional leverage platforms make their money by encouraging and enabling their users to take as HIGH OF LEVERAGE AS POSSIBLE.
By doing this, they multiply their advantage by increasing their odds of liquidating you for your entire principal.
In Liquid Loans, you can only take ~91% leverage, and liquidations only cause an immediate loss of 10%.
In other words, during liquidations, you lose your PLS, but you always keep the USDL you minted.
The Bottom Line
Liquid Loans was not designed for users to take 50X leverage on memecoins.
Liquid Loans was designed to allow PLS holders the ability to extract value from their long term holdings without needing to sell.
The result of this is an overcollateralized, truly-decentralized stablecoin backed by PLS and native to PulseChain.
Connor
Connor is a US-based digital marketer and writer. He has a diverse military and academic background, but developed a passion over the years for blockchain and DeFi because of their potential to provide censorship resistance and financial freedom. Connor is dedicated to educating and inspiring others in the space, and is an active member and investor in the Ethereum, Hex, and PulseChain communities.