Liquity v2 Design

To set the stage, Liquity v2 improves on the pioneering architecture of Liquity v1 to create a novel Collateralized Debt Position (CDP) stablecoin called BOLD. The new design improves the peg stability and effective borrowing cost by introducing a user-set interest rate and ability to pledge multiple collateral assets, including yield-bearing liquid staking tokens (LSTs).

Similarly to Liquity v1, the second version of the protocol is heavily dependent on Stability Pools acting as the first line of defence to absorb liquidations of Troves whose loan-to-value (LTV) exceeds the liquidation threshold. Unlike Liquity v1, however, the second version of the protocol will have separate Stability Pools for each borrow market (namely WETH, Lido's wstETH and RocketPool's rETH).

The Stability Pools will earn a direct yield equal to 75% of the interest rate paid by the BOLD borrowers with the respective collateral with no intermediaries. Hence, Liquity V2 will behave similarly to money markets but with opposite spreads: depending on the utilization and integration of BOLD in the broader DeFi ecosystem, the Stability Pool will generally exceed the average borrow rates, something that isn’t possible on traditional lending markets where borrowers always pay higher rates than what the lenders receive due to idle assets in the smart contracts.

On top of receiving an ongoing BOLD yield from the interest paid by the borrowers, Stability Pools depositors also acquire discounted collateral during liquidations events. Like Liquity’s v1, liquidations are triggered when the LTV of a given Trove is below 91% (e.g. when the dollar market value of the pledged collateral is below 91c for a BOLD borrowed). Whenever a liquidation happens, BOLD is taken from the Stability Pool to pay the debt of the liquidated Trove, and the pool receives an equivalent amount of collateral, with a 5% discount on market price, from the liquidated user.