How Does Liquity V2 Work?

Stablecoin|Risk B-|5 mechanisms|3 interactions

A stablecoin protocol where you deposit ETH as collateral and mint BOLD stablecoins, choosing your own interest rate. It holds $91M in deposits. Its C grade reflects a confirmed bug that forced $30M in withdrawals and redeployment, plus the risk that borrowers clustering at similar rates get wiped out simultaneously during redemptions.

TVL

$110M

Sector

Stablecoin

Risk Grade

B-

Value Grade

B-

Core Mechanisms

Interest/User-Set

Novel

User-set interest rates for borrowing positions

Borrowers choose their own interest rate; lower rates are redeemed first. Novel rate-setting mechanism that creates emergent herding behavior.

Fee/Upfront-Deterrent

Novel

Upfront fee as rate-change deterrent

Changing your interest rate requires paying an upfront fee, deterring frequent adjustments but creating rate stickiness during market shifts.

Governance/Time-Weighted

Novel

Time-weighted LQTY voting for yield direction

LQTY governance weight increases with staking duration; novel time-weighting approach for directing protocol yield.

Stability/Pool

Stability Pool for liquidation absorption

Stability Pool depositors absorb liquidations; confirmed bug in Feb 2025 forced $30M+ outflows and full redeployment.

Oracle/Chainlink

Chainlink + Redstone fallback oracle

Standard dual-oracle setup with Chainlink primary and Redstone fallback; well-tested pattern.

How the Pieces Interact

User-set interest rates↔Redemption orderingHigh

Borrowers cluster at similar rates; when redemptions hit that rate band, a large cluster is redeemed simultaneously, causing cascading position closures.

Yield from interest rates↔Stability Pool depositsHigh

High yield attracts SP deposits, but SP growth shrinks the liquidation buffer; yield drops, SP exits, buffer shrinks further in a reflexive loop.

Upfront fee deterrent↔Market rate shiftsHigh

Rate stickiness from upfront fees prevents borrowers from adjusting during rapid market moves, leaving positions at suboptimal rates vulnerable to redemption.

What Could Go Wrong

  1. Rate herding cascade redeems large clusters simultaneously
  2. Yield reflexivity loop shrinks liquidation buffer
  3. Confirmed SP bug forced $30M+ outflows and redeployment

Rate Herding Redemption Cascade

Moderate

Trigger: 60%+ of borrowers cluster within a 0.5% interest rate band, and ETH price drops 15%+ in 24 hours triggering mass redemptions against that band

  1. 1.Borrowers converge on a popular interest rate (e.g., 5%) creating a large cluster of positions — Redemption ordering means this entire cluster is redeemed simultaneously when the rate threshold is hit
  2. 2.ETH price decline triggers arbitrageurs to redeem BOLD against the lowest-rate cluster — Hundreds of positions close simultaneously; borrowers lose collateral exposure
  3. 3.Remaining borrowers panic-adjust rates, paying upfront fees to escape the next redemption band — Rate distribution becomes chaotic; upfront fees drain borrower capital
  4. 4.BOLD supply contracts sharply as redemptions remove stablecoin from circulation — BOLD liquidity dries up in DeFi integrations; peg stress emerges
  5. 5.Stability Pool depositors withdraw as yield drops from fewer borrowers paying interest — Liquidation absorption capacity diminishes just as market stress increases
See all 2 collapse scenarios in the full risk report →

Risk Profile at a Glance

Mechanism Novelty3/15
Interaction Severity10/20
Oracle Surface2/10
Documentation Gaps1/10
Track Record7/15
Scale Exposure5/10
Regulatory Risk1/10
Vitality Risk5/10
B-

Overall: B- (34/100)

Lower score = safer

More on Liquity V2

Is Liquity V2 Safe?

Safety analysis

Is Liquity V2 a Good Investment?

Value analysis

Full Risk Report

All mechanisms & interactions

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