In the rapidly evolving world of decentralized finance (DeFi), two lending protocols have emerged as frontrunners: Liquity and MakerDAO. Both enable users to borrow stablecoins using crypto collateral, but they take fundamentally different approaches in design, governance, and risk management. This article dives deep into their core differences—governance models, collateral frameworks, stability mechanisms, and cost structures—to help you understand which protocol aligns better with your financial strategy in 2025.
Governance: Human Control vs Code-Only Systems
One of the most significant philosophical divides between MakerDAO and Liquity lies in their approach to governance.
MakerDAO: Community-Driven Decision Making
MakerDAO operates under a traditional decentralized governance model powered by its native token, MKR. Holders vote on critical parameters such as stability fees, debt ceilings, and collateral types. This system encourages community participation through forums, working groups, and on-chain voting.
However, this model comes with trade-offs. Governance overhead has increased over time, leading to low voter turnout and concentration of power among large token holders—often referred to as "whales." As a result, many argue that despite its decentralized ideals, decision-making is increasingly centralized in practice.
Liquity: No Governance, Pure Code
Liquity flips the script by eliminating human governance entirely. All system parameters—including collateral type (ETH only), minimum collateral ratio (110%), and borrowing fees—are hardcoded or algorithmically controlled. No voting, no proposals, no governance delays.
This “set-and-forget” architecture enhances predictability and trustlessness. Users don’t need to worry about sudden policy changes or political battles within the protocol. The system runs autonomously, reducing risks associated with mismanagement or governance attacks.
👉 Discover how code-driven protocols are reshaping DeFi lending in 2025.
Collateral Strategy: Single vs Multi-Asset Models
Another major distinction lies in the types of collateral each protocol accepts.
MakerDAO: Diverse but Risky Collateral Basket
MakerDAO supports a wide range of collateral assets, including ETH, WBTC, various ERC-20 tokens, and even Uniswap LP tokens. This flexibility allows broader access but introduces complexity and risk.
As of 2025, DAI’s backing includes:
- ~34% ETH
- ~52.5% from centralized assets like USDC and WBTC
This heavy reliance on USDC, a centralized stablecoin, poses a systemic risk. If USDC were to depeg or face regulatory issues, DAI’s stability could be compromised—undermining its claim to decentralization.
Liquity: ETH-Only for Maximum Decentralization
Liquity takes a minimalist approach by accepting only ETH as collateral. This decision reinforces decentralization and minimizes exposure to external risks.
Why ETH? Because it's:
- The most decentralized asset on Ethereum
- Highly liquid and widely held
- Resistant to censorship and third-party control
By focusing solely on ETH, Liquity avoids the slippery slope of adding riskier or centralized assets. This makes LUSD, its dollar-pegged stablecoin, inherently more decentralized than multi-collateral alternatives.
Stability Mechanisms: PSM vs Redemption
Both protocols use economic incentives to maintain their stablecoins’ pegs to $1—but they do so in opposite ways.
MakerDAO: Peg Stability Module (PSM)
The PSM allows users to swap USDC for DAI at a 1:1 rate, helping keep DAI’s price anchored during volatility. While effective for short-term stability, this mechanism increases reliance on centralized stablecoins, creating long-term fragility.
When DAI trades below $1, arbitrageurs buy it cheaply and exchange it for USDC via PSM, profiting from the difference and reducing DAI supply—thus restoring the peg.
But this solution trades decentralization for stability—a growing concern in the DeFi community.
Liquity: Redemption Mechanism
Liquity uses a unique redemption system: users can exchange LUSD directly for ETH at face value (1 LUSD = $1 worth of ETH) from the riskiest active loan (called a Trove).
When LUSD dips below $1, arbitrageurs redeem it for undervalued ETH, earn a profit, and burn the LUSD—tightening supply and restoring the peg.
Crucially:
- No centralized assets involved
- Redemptions improve overall system health by removing weak loans
- LUSD can always be converted back into underlying collateral
This makes Liquity’s model not just stable, but self-strengthening over time.
👉 See how redemption mechanics outperform traditional pegging systems.
Borrowing Costs: Interest vs One-Time Fee
Cost efficiency is a key factor when choosing a lending protocol.
MakerDAO: Variable Stability Fees
Maker charges ongoing stability fees—effectively interest rates—that accrue over time. For an ETH-A Vault, rates range from 3% to 10%, depending on risk level and governance decisions.
This means:
- Long-term borrowers pay significantly more
- Rates can increase unexpectedly due to governance votes
- Higher minimum collateral ratio (150%)
Liquity: Fixed Borrowing Fee
Liquity charges a one-time borrowing fee ranging from 0.5% to 5%, currently averaging around 0.5%. This fee is added to your debt upfront—no recurring interest.
Benefits:
- Predictable costs
- Lower entry barrier for long-term loans
- Minimum collateral ratio of just 110%, maximizing capital efficiency
Cost Comparison Example
| Loan Amount | Protocol | Upfront Cost | Monthly Cost |
|---|---|---|---|
| $10,000 | Maker | $0 | ~$46 (at 5.5%) |
| $10,000 | Liquity | $50 (0.5%) | $0 |
After just one month, Liquity becomes cheaper. For long-term positions or yield farming strategies, this model offers superior cost control.
Frequently Asked Questions (FAQ)
Q: Is LUSD safer than DAI?
A: In terms of decentralization and collateral purity, yes. LUSD is backed solely by ETH and governed by code, whereas DAI relies heavily on centralized assets like USDC.
Q: Can I use tokens other than ETH on Liquity?
A: No. Liquity only accepts ETH as collateral to preserve simplicity, security, and decentralization.
Q: What happens if my Trove is redeemed?
A: If your loan is among the riskiest (lowest collateral ratio), it may be partially liquidated when someone redeems LUSD. Always maintain a healthy collateral buffer.
Q: Why does Maker rely so much on USDC?
A: To stabilize DAI’s peg during high volatility. However, this introduces centralization risk that contradicts DeFi’s core principles.
Q: Which protocol is better for long-term borrowing?
A: Liquity—due to its zero-interest model and lower collateral requirements—offers superior cost efficiency for extended loans.
Q: Does Liquity have a governance token?
A: No. Liquity intentionally avoids a governance token to prevent centralization and ensure protocol immutability.
Final Thoughts: Efficiency Meets Philosophy
While MakerDAO remains a DeFi pioneer with massive adoption and TVL dominance, Liquity represents the next evolution—a leaner, more predictable, and truly decentralized alternative.
For users who value:
- Predictable costs
- Minimal collateral requirements
- Full decentralization
- Code-based trust over human governance
Liquity offers a compelling case in 2025’s maturing DeFi landscape.
Whether you're borrowing for yield farming, hedging exposure, or accessing liquidity without selling ETH, understanding these protocols empowers smarter financial decisions.
👉 Start exploring decentralized lending platforms built for the future.