Everyone may be talking about governance on Ethereum, but the yet-to-launch stablecoin startup Liquity is taking a contrarian view: zero governance. 

That doesn’t mean it won’t offer a yield farming option, though, because there’s no good reason not to deploy the popular growth hack when it’s working so well elsewhere.

Liquity has started running ideas for farming schemes by its early supporters, including organizing a public Zoom session on the topic on Aug. 19.

The startup is making a stablecoin mint that works much like MakerDAO, lending against collateral with a low-volatility token. It has many major differences from the original decentralized finance (DeFi) project, however. Most notably, Liquity’s smart contract will adjust as needed (a governance committee of token-holding people will not be needed).

Read more: One Billion, Two Billion, Three Billion, Four? DeFi’s Knocking on TradFi’s Door

“All of the system parameters are automatically controlled by the algorithms,” Robert Lauko, CEO of Liquity, told CoinDesk in a phone call. This takes it a little further than Reflexer Labs, which is also a twist on MakerDAO that takes a governance-minimized stance.

It all means Liquity won’t have a governance token but is still planning on using liquidity mining to stimulate early adoption: It is offering a “growth token” (GT) that will continuously earn holders small amounts of revenue from Liquity fees.

Just which behaviors Liquity will reward with its GT remains a bit of an open question discussed on the recent call. The founders don’t plan to actually release their system until early next year. In the meantime, they are gathering feedback on just which behaviors to incentivize.

Liquidity mining is a very specific category of yield farming, the one that has generated most of the excitement here in 2020 for DeFi. The idea is that people who entrust their crypto to some protocol will get some new token in return as an incentive. So far, that has generally been a governance token, one that gives holders the right to make decisions about a protocol. Governance tokens also carry a price, of course, so the allure of “free money” also serves as an effective incentive.

Read more: ETH Lite: Reflexer Labs Raises $1.7M to Build a Somewhat-Stable Coin for DeFi

The danger of eschewing governance is that mistakes can only be fixed with a fork, but allowing a broad user base to change a project carries its own risks. “Auditors are somewhat very wary of upgrade patterns,” Richard Pardoe, the core developer of Liquity and a co-founder, told CoinDesk.

Right now Liquity’s founders are looking at models for how to reward users for getting in early

On a conference call to discuss the pros and cons of different incentives, Nicola Santoni of Lemniscap, a blockchain fund, said rewards can be “like a drug in the DeFi space, very addictive.”

How it works

Liquity allows users to stake ether (ETH) and borrow a stablecoin against it, currently called LQTY. It’s like MakerDAO in that way. Users stake ETH into what’s called a “trove” and then they can borrow against the value of that ETH (much like MakerDAO’s “vaults”).

The advantage of Liquity to users is it allows for a collateralization ratio for lending of 110%, most of the time. In other words, it generally won’t liquidate a loan unless collateralization falls below that ratio. That said, it also enforces an overall ratio across the protocol of 150%; if the average collateralization falls below that figure, it could start incentivizing users to top up their ETH deposits.

Liquity is able to offer lower collateralization because it has brought liquidations right into the smart contract. Users have an incentive to stake LQTY to its stability pool. Liquity will use this pool of tokens to retire troves that have fallen below the minimum collateralization. In exchange, everyone in the pool will share the ETH taken from the retired trove.

As a backup, if the stability pool runs out of LQTY, Liquity actually redistributes the ETH and the debt to everyone else in the system. Generally speaking, CEO Lauko explained, this should mean that most users end up with more in new ETH than they do in new debt.

Liquity's liquidity mining

Last week, about 20 or so supporters showed up on a Zoom call to discuss different incentive schemes for earning GT.

“Early adopters will get more than latecomers. I think that’s fully in line with how most projects are doing yield farming,” Lauko said in the intro to the conference call.

Founders, advisers and investors will all get an allocation of GT, too, but the precise proportions are still undecided.

Liquity is also awarding some amount of GT to companies that set up frontends for Liquity, because it’s not going to make one. Many crypto companies have encouraged others to build atop them (such as Dharma and Compound or Veil and Augur), but it’s unusual for one not to make a frontend at all.

Read more: Crypto Lender Dharma Pivots to Stablecoin Savings Accounts

Other behaviors that Liquity might want to incentivize include: depositing into the stability pool, borrowing LQTY and contributing it to decentralized exchanges, such as Uniswap. Then, of course, it can do some combo of all these things.

“We don’t want to create incentives that are forcing people into a behavior that isn’t continuously helping the system,” Ashleigh Schap, a member of the Uniswap team who’s helping Liquity with business development, said on the call. For example, she pointed out, if there is too much reward for the stability pool, no one will actually use LQTY in the world.

“The system only needs to be protected so much,” she said.

Nicola Santoni of Lemniscap encouraged Liquity to try to find a way to make incentives shift with time. Early on, the team might need to attract one set of participants, whereas later the needs could change. 

“When you find your market, you might need to incentivize something else,” he cautioned.

However, he noted this is challenging with a no-governance model.

Nothing was settled on during the call so interested parties with strong opinions about how to structure liquidity mining can still weigh in on Discord, where they can also find out about future community calls. There may not be any governance once it goes live, but Liquity seems to be unusually open to feedback until then.

The point is still to make a system that actually works for users with a real need to borrow. 

“The system needs to work without incentives,” Lauko said.