Islamic Finance Principles Assessment
Riba — Does Liquity USD involve interest?
Liquity USD's V1 model relied on one-time fees rather than recurring interest, but V2 explicitly introduces "user-set interest rates" charged on borrowed LUSD — a design feature, not incidental misuse. This makes riba a genuine structural concern for V2 rather than a peripheral one. Muslim investors should treat V2 borrowing positions as problematic and approach LUSD holding itself with caution pending clearer resolution of how yield is sourced.
Assessment: Moderate Riba
Score: 56.1/100
Our methodology examines 10 criteria to evaluate how well Liquity USD avoids interest-based mechanisms.
Under V1, Liquity generated revenue solely from a one-time borrowing fee and a redemption fee, both algorithmically set and distributed to LQTY stakers — a fee-for-service structure closer to a permissible charge than to interest. V2 replaces or supplements this with an ongoing "user-set interest rate" on borrowed LUSD, with 75% of this revenue funding Stability Pools and 25% allocated by LQTY governance. An ongoing rate charged on borrowed principal, irrespective of any profit-sharing arrangement, functions economically as interest, making V2's borrowing-side revenue model a direct riba concern.
LUSD holders can deposit into the Stability Pool at any time, without lock-up, earning liquidated ETH collateral plus LQTY rewards — a variable return tied to actual liquidation events rather than a fixed guaranteed rate, which is favorable from a riba standpoint. However, since a portion of this reward stream in V2 derives from borrower-paid interest rather than purely from liquidation proceeds or fee income, the underlying character of some distributed yield is not clearly separable from interest-derived revenue, leaving the Stability Pool's Islamic classification unresolved for V2 participants.
Gharar — How much uncertainty does Liquity USD involve?
Gharar in Liquity USD is comparatively low: the team is named and credentialed, the code is open-source, and the collateral mechanics are transparent and well-documented. Uncertainty is not absent, however, particularly around how V2's interest-rate revenue interacts with Stability Pool payouts. Overall, informational uncertainty is well-mitigated, though the newer economic model introduces some unresolved structural ambiguity.
Assessment: Minor Gharar (Mostly Clear)
Score: 72.6/100
Our methodology examines 15 criteria including team transparency, audit quality, and governance.
Liquity's leadership is fully identified: founder Robert Lauko (PhD in Law, former DFINITY researcher), co-founder Rick Pardoe, current CEO Michael Svoboda, and other named developers such as Bingen Eguzkitza. This is not an anonymous or pseudonymous project. Institutional backers including Polychain, Founders Fund, Lightspeed, and Mark Cuban are disclosed, and the protocol has operated openly on Ethereum mainnet since April 2021. Code is fully open-source across public GitHub repositories with detailed technical documentation, and governance evolution from V1's immutable design to V2's on-chain module is publicly recorded, giving investors a high degree of visibility into project operations.
Liquity has undergone extensive, named third-party audits: Trail of Bits (January and March 2021), Coinspect (March 2021, December 2024, and January 2025 governance review), ChainSecurity (August 2024–May 2025 plus January 2025 governance review), Dedaub (August and November 2024), and formal verification by Certora (December 2024). This multi-firm, multi-year audit history covering both V1 and V2 substantially reduces contract-risk gharar. Collateralization mechanics, redemption arbitrage, and fee/interest structures are all publicly documented, though the precise revenue split and risk allocation under V2's interest-rate model warrant continued investor scrutiny.
Maysir — Does Liquity USD involve gambling or speculation?
Liquity USD is not designed as a speculative or gambling instrument; it is a collateralized stablecoin built for borrowing and payments utility. Its price-stability mechanism actively discourages speculative price swings rather than encouraging them. The main maysir-adjacent risk lies in how leveraged borrowing positions might be used by some traders, which is a matter of user conduct rather than protocol design.
Assessment: Moderate Maysir (High Risk)
Score: 69.8/100
Our methodology examines 11 criteria to determine whether Liquity USD is a gambling instrument or a genuine economic tool.
LUSD serves a concrete function: users lock ETH to mint a dollar-pegged stablecoin usable for payments, DeFi collateral, or treasury holdings, with adoption by multiple DAOs and prominence on Curve pools. The redemption-based arbitrage mechanism keeps LUSD's price anchored near one dollar, actively working against speculative price divergence. This productive, utility-driven design — providing liquidity and credit access against real collateral — distinguishes LUSD from purely speculative instruments whose value depends solely on price appreciation or chance-based payouts.
LUSD's core design channels genuine utility: overcollateralized borrowing, stable liquidity for DeFi participants, and treasury-grade stability recognized by institutional holders. Secondary-market trading of LUSD is generally narrow, since arbitrage keeps its price near parity, limiting the kind of volatile speculative trading seen in uncollateralized tokens. Some users may use borrowed LUSD for leveraged trading elsewhere, but this reflects third-party behavior rather than the protocol's own purpose, and should not be read as evidence that LUSD itself is a speculative or maysir-oriented instrument.
The Full 27-Point Screening
1. Legitimacy (4 criteria)
| Criterion | Score | Analysis |
|---|
| Team Transparency | 90/100 | Team members including the founder, co-founder, and CEO are named with verifiable credentials and public profiles across multiple sources. |
| Fraud & Scam Risk | 82/100 | No fraud, hack, or rug-pull indicators are reported for Liquity, and the protocol has run since 2021 without a disclosed exploit. |
| Use Case Legitimacy | 88/100 | The protocol provides clear, adopted real-world utility as a collateralized borrowing and stablecoin system used across DeFi and DAO treasuries. |
| Ethical Practices | 85/100 | The protocol's own design — ETH-collateralized stablecoin issuance — does not target any prohibited industry. |
Summary: Liquity is led by a named, credentialed team with a multi-year public track record and no reported fraud or regulatory action against the project itself.
2. Project Operations (9 criteria)
| Criterion | Score | Analysis |
|---|
| Core Protocol Business | 80/100 | The base protocol operates in the collateralized lending/stablecoin sector, a permissible business category in itself, separate from the interest question assessed elsewhere. |
| Transaction Fees | 65/100 | Borrowing and redemption fees are algorithmically set and paid to LQTY stakers rather than to a controlling party, though the shift toward ongoing interest in V2 tempers this. |
| Treasury Assets | 60/100 | Sources mention only an LQTY endowment earning yield inside the Stability Pool, with no clear disclosure of any interest-bearing treasury holdings. |
| Revenue Model | 35/100 | Liquity V2 explicitly adopts "user-set interest rates" as its core revenue mechanism, making current protocol revenue interest-based. |
| Transparency | 92/100 | Code is open-source on GitHub with detailed technical documentation, whitepapers, and published audit reports. |
| Governance | 68/100 | V1 is described as governance-free and immutable, while V2 adds an audited but more centralised on-chain governance module via LQTY staking. |
| Launch Fairness | 30/100 | Genesis allocation gave 57.6% of LQTY supply to team and investors, described in sources as well above industry-standard insider concentration. |
| Token Distribution | 35/100 | Insiders retain majority control of token supply despite multi-year vesting schedules and nominal community categories. |
| Speculation/Utility Ratio | 82/100 | LUSD's redemption-arbitrage design actively suppresses speculative price deviation, and its dominant uses are borrowing, DeFi collateral, and treasury holding. |
Summary: The protocol is an open-source, ETH-collateralized borrowing system whose fee revenue flows to token stakers, though token launch and distribution were heavily weighted toward insiders.
3. Financial Health (4 criteria)
| Criterion | Score | Analysis |
|---|
| Protocol Revenue | 35/100 | Protocol revenue under V2 comes from borrower-paid, user-set interest rates, an explicitly interest-based source. |
| Financial Status | 85/100 | LUSD has held its peg since 2021, is reported significantly overcollateralized, and has gained adoption as a DAO treasury asset. |
| Interest Assessment | 25/100 | V1 loans were interest-free, but V2 explicitly introduces ongoing borrower-paid "interest rates," making interest a core current-protocol feature. |
| Audit Quality | 95/100 | Multiple named firms — Trail of Bits, Coinspect, ChainSecurity, Dedaub, and Certora — conducted audits and formal verification between 2021 and 2025 with public reports. |
Summary: LUSD is a well-audited, overcollateralized, established stablecoin, but its V2 revenue model is explicitly built on borrower-paid "interest rates."
4. Token Economics (5 criteria)
| Criterion | Score | Analysis |
|---|
| Token Purpose | 88/100 | LUSD is a genuine utility stablecoin for borrowing, collateral, and treasury purposes rather than a speculative meme asset. |
| Governance Rights | N/A | Governance functions appear to attach to the separate LQTY token rather than LUSD, so LUSD's lack of governance rights is a neutral stablecoin design feature. |
| Rewards Distribution | 68/100 | Stability Pool rewards are variable, tied to actual liquidation events and fee/interest flow rather than a fixed guaranteed rate. |
| Speculation Controls | 78/100 | LUSD's redemption mechanism creates a hard arbitrage-based price floor/ceiling near $1, an explicit anti-speculation feature. |
| Asset Backing | 85/100 | LUSD is fully backed by ETH collateral held in audited smart contracts, overcollateralized well beyond the stated minimum. |
Summary: LUSD functions as a genuine utility stablecoin with built-in peg-stabilizing, anti-speculation mechanics and real collateral backing, though governance rights sit with a separate token.
5. Staking Mechanism (5 criteria)
| Criterion | Score | Analysis |
|---|
| Mechanism Type | 78/100 | The Stability Pool, LUSD's native yield venue, is non-custodial with no lock-up and withdrawals available at any time per documentation. |
| Islamic Contract Classification | 40/100 | Stability Pool depositors share liquidation risk pro-rata, but part of their return in V2 derives from borrower-paid interest, leaving the Islamic contract classification unresolved in the sources. |
| Rewards Structure | 68/100 | Rewards vary with liquidation events and protocol fee flow rather than being fixed or guaranteed. |
| Documentation | 82/100 | Mechanics and risks of the Stability Pool and related staking are documented in detail across official docs. |
| Shariah Alignment | 42/100 | The explicit introduction of "interest rates" as a V2 yield source leaves a core riba-related question unresolved despite otherwise low operational gharar. |
Summary: LUSD's native yield venue, the Stability Pool, is non-custodial and flexible, but its return partly derives from an interest-based revenue stream whose Islamic classification remains unresolved.
Overall Assessment: Liquity is a transparent, well-audited, genuinely useful stablecoin project whose main outstanding Shariah concern is the V2 shift toward an explicit borrower-interest revenue mechanism.
Written by ThanvirFounder, Ex Director S&P Global Energy
Reviewed by Imam Omar SiddiqiShariah Scholar