What is Liquity v2?
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🟢 The simple version
Plain English — no jargon. Start here.
Liquity v2 is the next generation of the Liquity protocol introducing BOLD — a new stablecoin that accepts Ethereum liquid staking tokens (stETH, rETH, wstETH) as collateral and lets borrowers set their own interest rates, with lower-rate borrowers facing redemption priority over higher-rate borrowers.
Liquity v1 recap — the LUSD model
Liquity v1 (2021) was a breakthrough stablecoin protocol: LUSD could be borrowed at 0% interest (only a one-time fee), with ETH as the sole collateral. The system was completely immutable — no governance, no admin keys, no parameter changes ever. The peg mechanism used redemptions (LUSD holders could always redeem 1 LUSD for $1 of ETH), and the Stability Pool (LUSD depositors who act as liquidators). LUSD's 0% interest and governance-free design made it unique but also limited: no yield-bearing collateral support, no interest rate flexibility.
Liquity v2 — the BOLD redesign
Liquity v2 introduces BOLD as a new stablecoin with several significant design changes. First: LST collateral support — stETH, rETH, wstETH, and other liquid staking tokens are accepted as collateral, allowing the yield from staking to effectively subsidise the borrowing cost. Second: user-set interest rates — borrowers choose their own interest rate (within protocol bounds). Third: interest rate-ordered redemptions — when arbitrageurs redeem BOLD for collateral, they target borrowers with the lowest interest rates first. This creates competitive pressure for borrowers to set reasonable rates or face redemption of their position.
The interest rate game theory
The user-set rate + redemption-ordering creates an interesting game: a borrower who sets a very low rate (say 0.1%) saves on interest but is first to be redeemed against during a BOLD depeg. A borrower who sets a higher rate (say 3%) pays more interest but has redemption protection. Borrowers who are comfortable with potential redemption set low rates; those who want certainty set higher rates. This market mechanism allows the protocol to discover the equilibrium borrowing rate without governance.
Is it legal in India?
Yes. LQTY and BOLD are VDAs under Indian law. 30% tax and 1% TDS apply. See India regulation.
🟡 A bit more detail
For when you want to go a little deeper.
LST collateral — the yield advantage
Accepting liquid staking tokens as collateral is transformative for Liquity v2's economics. When stETH (yielding ~4%) is used as collateral to borrow BOLD, the staking yield on the collateral can effectively offset or exceed the BOLD borrow rate. At 4% stETH yield and 2% BOLD borrow rate, borrowers are net positive: earning more on collateral than paying on debt. This creates a highly capital-efficient position — levered staking yield — that was impossible in Liquity v1 (which only accepted non-yielding ETH).
Liquity v2 / BOLD is positioned as the governance-minimised alternative to DAI and FRAX for yield-seeking DeFi users. The combination of LST collateral + user-set rates + no governance creates a highly customisable but still trust-minimised stablecoin. The Stability Pool (where BOLD depositors act as backstop liquidators, earning liquidated collateral at a discount) continues from v1. LQTY holders can stake to earn a share of the protocol's interest revenue — the primary new LQTY utility in v2. Early adopters from Liquity v1 (LUSD holders) are the primary target market for BOLD migration.
The redemption mechanism — BOLD peg maintenance
BOLD's $1 peg is maintained through redemptions, identical in principle to LUSD v1. BOLD holders can redeem 1 BOLD for $1 worth of collateral at any time. When BOLD trades below $1, arbitrageurs buy BOLD cheaply and redeem it for $1 of collateral — profitable arbitrage that reduces BOLD supply and restores the peg. The innovation: redemptions target the lowest-rate borrowers first. A borrower with a 0.1% rate is redeemed before one with a 2% rate. This means the lowest-rate loans act as the "cushion" for peg maintenance — they bear the cost of peg stabilisation in exchange for paying lower interest.
Key Liquity v2 metrics: BOLD circulating supply, LST collateral composition, interest rate distribution (histogram of borrower-set rates — shows equilibrium), Stability Pool size (larger = safer), and redemption frequency (indicator of peg pressure). The key risk: LST de-pegs. If stETH temporarily trades below ETH (as it did during the June 2022 Celsius crisis), collateral values could be marked down, triggering liquidations. Live data: CoinGecko · v2.Liquity.org.
🟣 The full technical picture
For the technically curious.
Liquity v2 smart contract architecture
Liquity v2 uses a multi-collateral design with separate "branches" per collateral type — an ETH branch, a stETH branch, an rETH branch, each with independent Trove managers, price feeds, and stability pools. This isolation prevents contagion: a stETH de-peg event affects only the stETH branch's liquidations, not WETH collateral. Each branch has its own BOLD stability pool for branch-specific liquidations. The BOLD token is shared across all branches — BOLD minted against stETH and BOLD minted against rETH are fungible. Cross-branch redemptions follow interest rate ordering globally across all branches simultaneously.
Source: Liquity v2 documentation. docs.liquity.org/v2 · Liquity v2 GitHub: github.com/liquity/bold
LQTY staking in v2 — earned interest
In Liquity v1, LQTY earned one-time issuance fees and Stability Pool rewards. In v2, LQTY stakers earn a share of ongoing BOLD borrow interest payments from all branches. The interest rate set by each borrower is split: a portion goes to the branch's Stability Pool (as compensation for liquidation risk), a portion goes to the LQTY staking contract. The LQTY staking yield is therefore proportional to total BOLD in circulation and average interest rate — creating direct protocol revenue sharing with LQTY holders from system utilisation.
Liquity v2's "Trove" (CDP position) interest accrual uses a "batch manager" system. Borrowers can join a "manager batch" operated by a third party (a yield optimizer, a dashboard, a protocol) that manages interest rate adjustments on their behalf. The batch manager can increase or decrease the borrower's interest rate within agreed bounds, allowing automated rate optimisation. For example, a batch manager might increase a borrower's rate slightly just before a large redemption event (protecting from redemption) and decrease it afterward (reducing interest cost). This creates a market for interest rate management services built on top of Liquity v2's infrastructure.
Key facts
- Stablecoin: BOLD (replaces LUSD in v2)
- Collateral: ETH + LSTs (stETH, rETH, wstETH)
- Interest rates: User-set (low rate = redemption priority risk)
- Peg mechanism: Redemptions (lowest-rate borrowers first)
- Governance: Minimal (Liquity v2 philosophy)
- LQTY utility: Earn share of BOLD interest payments
- Architecture: Multi-branch (collateral-isolated)