Liquity is a decentralized protocol that allows Ether holders to obtain maximum liquidity against their collateral without paying interest. After locking up ETH as collateral in a smart contract and creating an individual position called a "trove", the user can get instant liquidity by minting LUSD, a USD-pegged stablecoin. Each trove is required to be collateralized at a minimum of 110%. Any owner of LUSD can redeem their stablecoins for the underlying collateral at any time. The redemption mechanism along with algorithmically adjusted fees guarantee a minimum stablecoin value of USD 1. An unprecedented liquidation mechanism based on incentivized stability deposits and a redistribution cycle from riskier to safer troves provides stability at a much lower collateral ratio than current systems. Stability is maintained via economically-driven user interactions and arbitrage, rather than by active governance or monetary interventions. The protocol has built-in incentives that encourage both early adoption and the operation of multiple front ends, enhancing decentralization.