Frequently Asked Questions about Liquity

Liquity V2 is a decentralized borrowing protocol built on Ethereum that allows users to take out interest-bearing loans against ETH and liquid staking tokens (LSTs) such as wstETH and rETH. Unlike Liquity V1, the V2 protocol introduces user-set interest rates, giving borrowers full control over the rate they pay.

The protocol mints BOLD, a decentralized stablecoin pegged to the US dollar. BOLD is backed exclusively by ETH-based collateral, making it one of the most decentralized stablecoins available on Ethereum today.

Key features include:

• No redemption penalties when maintaining a healthy loan-to-value ratio
• User-defined interest rates with no minimum floor enforced by the protocol
• Multiple collateral types: ETH, wstETH, and rETH, each in a separate market
• Stability Pools that earn BOLD interest and collateral liquidation proceeds

BOLD is the native stablecoin of the Liquity V2 protocol. It is soft-pegged to 1 USD and is minted when users open a loan position by depositing ETH, wstETH, or rETH as collateral.

Liquity maintains BOLD's peg through two core mechanisms:

• Redemptions: Any BOLD holder can redeem 1 BOLD for $1 worth of collateral at any time, which creates a hard floor under the peg. This incentivizes arbitrageurs to buy BOLD below $1 and redeem it for collateral profit.
• Liquidations: When a loan's collateral ratio falls below the minimum threshold, the position is liquidated. The collateral is distributed to Stability Pool depositors, keeping the system solvent and BOLD fully backed.

BOLD is a fully on-chain, immutable, and governance-minimized stablecoin — no admin keys can mint BOLD outside of the normal borrowing process.

Liquity V2 supports three collateral types, each operating in an isolated market with its own Stability Pool and risk parameters:

• ETH — Native Ether, with a maximum LTV of approximately 90.91%
• wstETH — Lido Wrapped Staked Ether, with a maximum LTV of approximately 83.33%
• rETH — Rocket Pool ETH, with a maximum LTV of approximately 83.33%

Each market operates independently, meaning a liquidation event in the wstETH market does not affect the ETH market. This isolation reduces systemic risk across the protocol.

Future versions of Liquity may introduce additional collateral types through governance or upgrades, but the initial V2 launch focuses exclusively on ETH and its most liquid staking derivatives.

To borrow BOLD on Liquity V2, follow these steps:

• Connect your Ethereum wallet (MetaMask, WalletConnect, etc.) to the Liquity app
• Navigate to the Borrow section and choose your collateral type: ETH, wstETH, or rETH
• Deposit your chosen collateral and specify the amount of BOLD you wish to borrow
• Set your preferred annual interest rate — you control this parameter directly
• Confirm the transaction in your wallet

Your loan is now active. You can monitor its health, adjust the interest rate, add or withdraw collateral, and repay BOLD at any time without any lock-up periods or early repayment fees.

Minimum loan size: Liquity V2 requires a minimum debt of 2,000 BOLD per position to ensure economic viability and prevent dust positions.

One of the defining features of Liquity V2 is the user-set interest rate model. Unlike V1 which charged a one-time issuance fee, V2 charges an ongoing interest rate that borrowers set themselves.

Key points about the interest rate system:

• You can set any rate from 0.5% to 1000% APR, though very low rates expose you to redemption risk
• Interest accrues continuously and is added to your outstanding BOLD debt over time
• You can adjust your interest rate at any time, subject to a cooldown period after each change
• Setting a higher rate reduces your redemption risk but increases borrowing costs
• Interest paid by borrowers flows to Stability Pool depositors as yield

The average rate across all ETH-backed loans on Liquity reflects market demand for BOLD leverage. You can monitor current average rates on the dashboard to position your loan competitively.

Liquidation in Liquity V2 occurs when your loan's collateral ratio falls below the minimum required threshold (110% for ETH, 120% for wstETH and rETH). This can happen when the price of your collateral drops significantly.

When a liquidation occurs:

• Your collateral is seized and distributed to Stability Pool depositors proportionally to their BOLD deposit
• Your outstanding BOLD debt is cancelled
• Any remaining collateral above the debt value (the liquidation surplus) is returned to you

To avoid liquidation on Liquity, you should:

• Maintain a comfortable buffer above the minimum collateral ratio
• Monitor your position regularly, especially during volatile market conditions
• Add more collateral or repay part of your debt if your ratio approaches the liquidation threshold

Unlike some other protocols, Liquity does not charge an additional liquidation penalty beyond what is necessary to maintain system solvency.

Redemptions are a core mechanism in Liquity that maintain BOLD's $1 peg. Any user can redeem BOLD for $1 worth of collateral from the lowest-interest-rate loans in the system.

How redemptions work:

• BOLD holders can redeem 1 BOLD for $1 worth of collateral (minus a small redemption fee)
• Redemptions target the loans with the lowest interest rates first, moving up the list
• If your loan is redeemed against, your debt decreases but so does your collateral — your net equity is preserved minus the fee
• Your loan-to-value ratio improves after a redemption hits your position

To minimize your redemption risk on Liquity, set a competitive interest rate that is above the average for your collateral market. The dashboard shows current average rates to help you calibrate your position accordingly.

Liquity V2 offers yield-bearing Stability Pools where you can deposit BOLD to earn two types of rewards:

• Interest income: BOLD interest paid by borrowers is routed to Stability Pool depositors proportionally to their share of the pool
• Liquidation gains: When loans are liquidated, the collateral (ETH, wstETH, or rETH) is distributed to SP depositors. Because liquidations happen below the maximum LTV, depositors typically receive collateral worth more than the BOLD they contributed to cover the debt

There are three separate Stability Pools on Liquity — one for each collateral type. You can deposit into any or all of them based on your risk preference and desired collateral exposure.

Additionally, third-party vault products like sBOLD by K3 Capital and yBOLD by Yearn offer automated strategies that rebalance across pools to optimize your yield over time.

The Multiply feature in Liquity V2 allows you to amplify your exposure to ETH and its staking yield with a single transaction. It is designed for users who want leveraged long positions on ETH without manually executing multiple steps.

Under the hood, Multiply works by:

• Depositing your ETH (or LST) as collateral
• Borrowing BOLD against it
• Swapping the borrowed BOLD back to ETH (or LST) via a DEX
• Depositing the additional ETH/LST back into your position

This loop runs in a single transaction using a flash-loan mechanism. The result is a leveraged position where both your gains and losses from ETH price movements are amplified. Multiply positions still accrue interest like regular Liquity loans, so the cost of leverage is the interest rate you set on your BOLD debt.

LQTY is the governance and incentive token of the Liquity ecosystem. It was originally introduced with Liquity V1 and continues to play a central role in V2.

By staking LQTY on Liquity V2, you can:

• Direct incentives: Staked LQTY holders vote on how BOLD incentives are distributed across Stability Pools, effectively steering liquidity within the protocol
• Earn V1 revenue: LQTY stakers continue to receive a share of Liquity V1 protocol revenues, including borrowing fees and redemption fees from the original protocol
• Participate in governance: Voting power is proportional to your staked LQTY, giving you a say in key protocol decisions

LQTY has a fixed maximum supply of 100 million tokens. It is available on Ethereum and can be staked directly through the Liquity V2 app. Staking does not lock your tokens — you can unstake at any time.

Liquity V2 has undergone extensive security audits by multiple independent firms prior to its mainnet deployment. The protocol is designed with a security-first philosophy, including:

• Multiple independent smart contract audits from reputable security firms
• Immutable core contracts with no admin keys or upgrade mechanisms that could change user positions
• A formal verification process for critical mathematical components
• An active bug bounty program to incentivize responsible disclosure
• Battle-tested design principles inherited from Liquity V1, which secured over $1 billion in TVL

While Liquity has taken significant steps to ensure the security of its smart contracts, all DeFi protocols carry inherent risks including smart contract bugs, oracle failures, and market risks. Users should always do their own research and only deposit funds they can afford to lose. Audit reports are publicly available in the Liquity documentation.

Liquity V1 and V2 are separate protocols that run simultaneously. Here is a comparison of the key differences:

• Stablecoin: V1 issues LUSD; V2 issues BOLD
• Collateral: V1 supports only ETH; V2 supports ETH, wstETH, and rETH in isolated markets
• Interest model: V1 charges a one-time issuance fee; V2 charges a continuous user-set interest rate
• Minimum ratio: V1 has a 110% minimum collateral ratio; V2 has varying ratios depending on collateral type
• Yield: V2 Stability Pool depositors earn ongoing interest from borrowers, not just liquidation gains
• LQTY stakers: Continue to earn V1 fees; V2 adds incentive direction capabilities

Both versions of Liquity coexist on Ethereum mainnet. You can visit the V1 app at v1.liquity.app if you have existing LUSD positions or want to use the original protocol.

Liquity V2 relies on decentralized price oracles to determine the value of collateral relative to BOLD debt. Oracle prices are used for:

• Calculating current loan-to-value ratios
• Triggering liquidations when collateral value falls below the minimum threshold
• Determining collateral value during redemptions

Liquity uses Chainlink as its primary oracle, with fallback mechanisms to handle temporary outages or oracle manipulation attempts. In the event of an oracle failure, the protocol has safeguards that pause sensitive operations to protect users.

Oracle risk is one of the primary systemic risks in any DeFi lending protocol. A severely manipulated or incorrect oracle price could trigger incorrect liquidations. Liquity mitigates this risk through multi-oracle design, delayed price updates, and circuit breakers, but the risk cannot be entirely eliminated.

Liquity V2 is currently deployed exclusively on Ethereum mainnet. The protocol requires the security guarantees of the Ethereum base layer, and its tokenomics are designed around Ethereum's block structure and finality.

However, the Liquity ecosystem is expanding through Friendly Forks — third-party protocols built on the Liquity V2 codebase that may deploy on other networks or introduce additional collateral types. Current friendly forks include Orki Finance and Felix, which may offer Liquity-style borrowing on other chains.

BOLD and LQTY are ERC-20 tokens on Ethereum and can be bridged to L2s using standard bridges, but the core borrowing and earning functionality remains on Ethereum mainnet. Always verify you are interacting with official Liquity contracts before connecting your wallet.

Beyond the native Liquity Stability Pools, BOLD holders have access to a growing ecosystem of external yield opportunities across DeFi:

• Curve BOLD/USDC pool: Provide liquidity to earn trading fees and potential BOLD incentives
• Uniswap v4 BOLD/USDC: Concentrated liquidity provision for higher fee capture
• Spectra LP sBOLD: Fixed-rate yield products built on top of sBOLD
• Upshift Airdrop Farming Vault: Automated strategies combining Liquity yield with airdrop farming
• Lagoon Airdrop Farming Vault: Similar automated vault strategies for yield optimization
• yBOLD by Yearn: Automated yield aggregation across multiple Liquity pools
• sBOLD by K3 Capital: Professionally managed BOLD yield strategy

A comprehensive list of all BOLD yield sources is tracked on the Liquity Dune analytics dashboard. APRs vary and change frequently based on market conditions and liquidity depth.