<figure class="wp-block-image size-large"><img width="325px" height="183px" srcSet="https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/10/27070620/a-tradfi-analogy-375x211.webp 375w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/10/27070620/a-tradfi-analogy-662x372.webp 662w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/10/27070620/a-tradfi-analogy-768x432.webp 768w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/10/27070620/a-tradfi-analogy.webp 688w" sizes="(max-width: 425px) 150px, 450px" src="https://ll-blog-dev.s3.ap-southeast-2.amazonaws.com/wp-content/uploads/2023/10/27070620/a-tradfi-analogy.webp" alt="a tradfi analogy" class="wp-image-4318"/></figure>



The <a href="https://www.thecoinzone.com/blockchain/explained-liquid-loans-defi-protocol-on-pulsechain" data-type="URL" data-id="https://www.thecoinzone.com/blockchain/explained-liquid-loans-defi-protocol-on-pulsechain" target="_blank" rel="noreferrer noopener">Liquid Loans protocol</a> is one of those systems that is both super basic and super complicated at the same time.



Maybe it’s a characteristic of beauty…



Anyways, here’s a simple analogy, using traditional finance, to help you understand how the protocol works. 



<h2 class="wp-block-heading tablecontent">The Scenario</h2>



Imagine you have $100,000 worth of physical gold.



You want to extract value from it, but you don’t want to sell it.



You don’t want to sell it because you believe in the investment long term, but you need <a href="https://www.thecoinzone.com/defi/defi-liquidity" target="_blank" rel="noreferrer noopener">liquidity</a>…NOW!



So you go to the “bank” and here’s how it works.



<h2 class="wp-block-heading tablecontent">Borrowing</h2>



<figure class="wp-block-image size-large"><img loading="lazy" width="325px" height="183px" srcSet="https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/10/27071743/liquid-loans-tradfi-analogy-375x211.webp 375w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/10/27071743/liquid-loans-tradfi-analogy-662x372.webp 662w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/10/27071743/liquid-loans-tradfi-analogy-768x432.webp 768w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/10/27071743/liquid-loans-tradfi-analogy.webp 688w" sizes="(max-width: 425px) 150px, 450px" src="https://ll-blog-dev.s3.ap-southeast-2.amazonaws.com/wp-content/uploads/2023/10/27071743/liquid-loans-tradfi-analogy.webp" alt="liquid loans tradfi analogy" class="wp-image-4323"/></figure>



You stepped through the ornate wooden doors into the hushed marble interior of the Gold Bank, a heavy satchel of gold bars clasped under one arm. 



Approaching the clerk&#x27;s window, you lift your cargo onto the polished counter.



&quot;I&#x27;d like to deposit this gold as collateral for USDG,&quot; you inform the clerk. She nodded crisply and inspected the gleaming bars.



&quot;Current market value for your gold looks to be $100,000. Now how much USDG were you looking to withdraw against your deposit?&quot; she inquires.



I knew USDG, or US Dollar Gold, was the banks’ certificate which trades at 1 US Dollar on the open market because it is fully-backed and redeemable by the gold reserves.



&quot;I&#x27;ll take the maximum allowed - 100,000 USDG please,&quot; I responded eagerly.



The clerk shook her head. Our policy only allows 100 USDG to be <a href="https://www.thecoinzone.com/liquidloans/you-cant-borrow-more-than-you-deposit/" data-wpil-monitor-id="1453">borrowed for every 110 dollars worth of gold deposited</a>. For your own protection, we recommend limiting borrows to just 50 USDG per 100 USD collateral.&quot;



You decide to heed the conservative advice and request 50,000 USDG against your  $100,000 gold deposit. 



The clerk nods approvingly and disappears to lock up my bullion in the vault.



Upon returning, she counts out 49,750 USDG notes and hands them over. 



You quickly realize she had deducted 250 USDG.



&quot;Sorry, there&#x27;s a one-time 0.5% borrowing fee, so your net borrow is 49,750,&quot; she explains. You nod, accepting the reasonable charge.



&quot;So when will I need to repay this loan and what interest rate do I owe?&quot; I asked.



The clerk laughed lightly. Oh you must be new to <a href="https://www.thecoinzone.com/liquidloans/dont-sell-your-pls/" data-wpil-monitor-id="1150">decentralized finance</a>! There is no repayment schedule - you can hold your USDG as long as you like. And we don&#x27;t charge interest here. The Gold Bank is owned by the community, not run for profit.&quot;



I was stunned by such generous terms. This decentralized bank offered credit with no repayment pressures or <a href="https://www.thecoinzone.com/defi/crypto-compound-interest/" data-wpil-monitor-id="1674">compounding interest</a>. 



As the clerk passed me a brochure, I realized I had much more to learn about this bank.



You begin reading the procure.



<h2 class="wp-block-heading tablecontent">The Stability Pool</h2>



Holders of USDG have the option to give us back the certificates they minted and become ‘Stability Providers’.



Stability Providers benefit in two ways from their service:



<ol>
<li>They profit from the difference between the USDG they pay and the gold they receive</li>



<li>They earn BANK certificates, which entitle them to earn the fees from borrowing USDG and redeeming USDG for gold.</li>
</ol>



Stability Providers perform the service of repaying the debt of vaults with less than 110% collateral ratio (i.e. 110 USD worth of gold/100 USDG borrowed)



For example, if the price of gold falls 10%, then vaults at 115% collateral ratio would drop under the minimum required collateral levels.



To ensure that USDG is fully-backed by gold at all times, these vaults need to be liquidated from the system.



This is where the <a href="https://www.thecoinzone.com/liquidloans/stability-pool" data-type="URL" data-id="https://www.thecoinzone.com/liquidloans/stability-pool" target="_blank" rel="noreferrer noopener">Stability Pool</a> comes into play. The USDG in this pool pays back the debt of the liquidated vault.



<h2 class="wp-block-heading tablecontent">The Staking Pool </h2>



The BANK certificates, such as the ones you earn from the Stability Pool, can be staked in the <a href="https://www.thecoinzone.com/pulsechain/the-loan-staking-pool" target="_blank" rel="noreferrer noopener">Staking Pool</a> to earn the borrowing and redemption fees of the protocol. 



Therefore, whoever owns the BANK certificates, technically owns the bank.



The BANK Certificates can also be sold on the free market, much like shares in a company.



<h2 class="wp-block-heading tablecontent">Redemptions</h2>



<a href="https://www.thecoinzone.com/defi/crypto-redemptions" data-type="URL" data-id="https://www.thecoinzone.com/defi/crypto-redemptions" target="_blank" rel="noreferrer noopener">Redemptions</a> ensure that USDG trades at 1 USD on the open market.



Anytime the price of USDG falls below 1 USD, traders are incentivized to buy that cheap USDG off market and redeem it.



For example, if the price of USDG falls to 98 cents, traders can buy it up and redeem it for 1 USD worth of Gold at the bank. 



The Stability Pool and Liquidations ensures that there is always enough gold backing every USDG in circulation, so redemptions will never be unavailable.



<h2 class="wp-block-heading tablecontent">How Liquid Loans is BETTER than This Analogy</h2>



<a href="https://www.thecoinzone.com/defi/defi-yield-protocol/" data-wpil-monitor-id="262">Liquid Loans</a> offers a SUPERIOR service than the one detailed above.



First, there is NO central party which holds your gold. 



Rather, it is a smart contract on <a href="https://www.thecoinzone.com/pulsechain/pulsechain-official-guide" data-type="URL" data-id="https://www.thecoinzone.com/pulsechain/pulsechain-official-guide" target="_blank" rel="noreferrer noopener">PulseChain</a> which locks your PLS and mints your <a href="https://www.thecoinzone.com/liquidloans/usdl-crypto" data-type="URL" data-id="https://www.thecoinzone.com/liquidloans/usdl-crypto" target="_blank" rel="noreferrer noopener">USDL</a>. 



The code is extremely secure, having multiple audits. It is also immutable, which means it can never be changed to harm the users.



Secondly, the PLS held in reserves will ALWAYS exceed the <a href="https://www.thecoinzone.com/liquidloans/usdl-is-actually-a-store-of-value-but-only-if-you-mint-it-yourself/" data-wpil-monitor-id="1276">USDL minted</a>. 



This means that it is completely impervious to bankruns that have become characteristic of both centralized crypto projects and traditional, brick and mortar banking.



When PLS is locked in the vaults, it cannot and will not be diverted to other risky investments and lost (see Sam Bankman-Fried).



Third, every action within the <a href="https://www.thecoinzone.com/defi/protocol-owned-liquidity/" data-wpil-monitor-id="722">Liquid Loans protocol</a> is digital. All you need is a wifi connection and a self-custody wallet.



You don’t need to bring your asset to a physical location and the USDL, PLS and <a rel="noreferrer noopener" href="https://www.thecoinzone.com/pulsechain/loan-token-ultimate-guide" data-type="URL" data-id="https://www.thecoinzone.com/pulsechain/loan-token-ultimate-guide" target="_blank">LOAN tokens</a> can be brought across borders with just your seed phrase.

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Here's What Happens to LL Users When Prices Rise (Actual Numbers)

A TradFi Analogy for Liquid Loans (Easy to Understand)

If <a href="https://www.thecoinzone.com/liquidloans/why-real-estate-investors-understand-ll/" data-wpil-monitor-id="802">Liquid Loans</a> is tough to conceptualize, then this super simple analogy is perfect for you!

A TradFi Analogy for <a href="https://www.thecoinzone.com/liquidloans/dont-dump-on-yourself-cash-out-with-liquid-loans/" data-wpil-monitor-id="1000">Liquid Loans</a> (Easy to Understand)