What Is Liquity V2? BOLD Stablecoin Explained

What Is Liquity V2?

Liquity V2 is the next generation of one of DeFi's most distinctive stablecoin protocols. The original Liquity launched in 2021, introducing LUSD, a decentralized, ETH-backed stablecoin. It maintained its peg through an immutable, non-upgradeable protocol with no administrative keys and charged zero interest rates.

Liquity became a cult favourite among DeFi purists for its uncompromising commitment to decentralisation, but its one-size-fits-all design left some user needs unaddressed.

Liquity V2 launched in 2025 with a redesigned architecture that introduces user-set interest rates, multi-collateral support, and a stablecoin yield-bearing mechanism. All these, while preserving the core principles that made the original protocol distinctive.

This guide covers how Liquity V2 works, what changed from V1, how its BOLD stablecoin and governance function, and the risks users should understand.

The Original Liquity: A Quick Recap

To understand V2, it helps to understand what made V1 notable. Original Liquity allowed users to deposit ETH as collateral and mint LUSD (the protocol's USD-pegged stablecoin) at a 110% minimum collateralisation ratio.

This was significantly lower than the 150% ratio required by MakerDAO at the time. Borrowers paid a one-time borrowing fee but no ongoing interest, making long-term ETH-backed borrowing very capital-efficient.

The protocol's stability was maintained through three mechanisms:

A stability pool where LUSD holders could deposit tokens to back liquidations (earning liquidation rewards).

A redemption mechanism that allowed anyone to swap LUSD for ETH at face value (creating arbitrage that maintained the peg).

The 110% minimum collateralisation ratio.

The protocol had no admin keys, no governance, and no ability to be upgraded. It was deployed once and designed to operate autonomously forever.

This immutability was both its greatest strength (zero governance risk, no rug pull potential) and its limitation (no way to adapt to changing conditions or user needs).

What Liquity V2 Changes

Liquity V2 represents a major redesign that introduces flexibility without abandoning the core principles. The new stablecoin is called BOLD, which replaces LUSD as the protocol's primary token. Several significant architectural changes distinguish V2 from V1.

User-set interest rates are perhaps the most consequential change. In V1, all borrowers paid the same one-time fee and no ongoing interest. In V2, each borrower chooses their own interest rate on their borrow position.

Higher interest rates provide greater redemption protection. Redemptions (the mechanism that maintains the peg) target positions with the lowest interest rates first.

Borrowers who want to avoid redemption can pay higher rates; borrowers willing to accept redemption risk can pay lower rates. This creates a market-driven interest rate curve that responds to demand for BOLD and the willingness of borrowers to protect their positions.

Multi-collateral support is another major addition. V2 supports ETH, wstETH (wrapped staked ETH), and rETH (Rocket Pool's staked ETH) as collateral types, each with its own branch of the protocol.

This lets users earn staking yields on their collateral while borrowing against it. For ETH stakers who want to unlock their capital without unstaking, the capital efficiency improvement becomes appealing.

Stability pool yield for BOLD holders is the third major change. Interest paid by borrowers flows to BOLD holders who deposit into the Stability Pool, creating a native yield source for holding BOLD.

As a result, BOLD turns into a yield-bearing stablecoin (for Stability Pool depositors) while maintaining decentralisation principles, competing more directly with protocols like MakerDAO's DAI Savings Rate and other yield-generating stablecoins.

How BOLD Maintains Its Peg

BOLD maintains its peg through similar mechanisms to the original LUSD, adapted for the new architecture. The minimum collateralisation ratio for positions (now called troves in each collateral branch) is set per-collateral.

This creates a floor on how much BOLD can be minted against any collateral. Positions that fall below this threshold are subject to liquidation.

Redemptions allow anyone to swap BOLD for the underlying collateral at face value (minus a small fee), which creates arbitrage opportunities when BOLD trades below $1.

If BOLD is trading at $0.97, a redeemer can buy BOLD on the market and redeem it for $1 worth of collateral, pocketing the difference. This arbitrage pressure pushes BOLD back toward $1.

Redemptions target positions by interest rate (lowest first), creating the incentive for borrowers to pay higher rates if they want to avoid having their positions redeemed against.

The Stability Pool absorbs liquidations. When a trove is liquidated, its debt is burned against BOLD in the Stability Pool, and the collateral is distributed to Stability Pool depositors.

During normal operation, this means Stability Pool depositors receive liquidation bonuses (acquiring collateral at a discount). During extreme market conditions, the Stability Pool can be depleted, at which point liquidations are redistributed to other troves.

Collateral Branches and Risk Isolation

Each collateral type in V2 operates as a separate branch with isolated risk parameters. The ETH branch, wstETH branch, and rETH branch each have their own troves, their own stability pool, and their own risk parameters.

This isolation means that an issue with one collateral type (for example, a problem with Rocket Pool affecting rETH) does not directly threaten positions backed by other collateral types.

Users can choose which branch to open a trove in based on their collateral holdings and risk preferences. ETH-backed positions have the simplest risk profile (just ETH price risk).

wstETH and rETH positions add the risk profiles of those liquid staking tokens (including peg deviations between the LST and underlying ETH, and staking protocol risk) but offer the benefit of earning staking yield on the collateral while maintaining a BOLD loan.

The LQTY Token and Governance

LQTY is Liquity's secondary token, used for governance and to capture a portion of protocol revenues.

In V2, the governance role is focused specifically on functions that cannot be hardcoded. For instance, directing a portion of protocol revenue to incentivise various activities (liquidity provision for BOLD, acquisition of Protocol-Owned Liquidity, etc.).

Critically, V2 still maintains Liquity's commitment to immutability for its core functions. The key economic parameters, such as minimum collateralisation ratios, redemption mechanics, and liquidation logic, are not governable.

Once deployed, they cannot be changed. Governance in V2 exists to direct incentives and revenue distribution, not to modify the protocol's fundamental behaviour. This preserves the trust-minimisation that made the original Liquity attractive while allowing some adaptability at the periphery.

Comparing Liquity V2 to Other Decentralised Stablecoins

Liquity's main philosophical competitor is Sky (formerly MakerDAO) with DAI/USDS. MakerDAO offers a much broader collateral set (including real-world assets) and more active governance, giving it more flexibility but also more governance surface area.

Liquity V2 stays closer to pure ETH/LST backing with an immutable core, appealing to users who prioritise minimal governance trust assumptions.

Ethena's USDe uses a delta-neutral hedging strategy rather than overcollateralisation, taking a fundamentally different approach to stablecoin design.

Frax Finance's frxUSD uses a hybrid algorithmic/collateral model.

Reserve Protocol's RTokens allow permissionless creation of collateral-backed stablecoins.

Usual Protocol offers yield-bearing stablecoins backed by tokenised T-bills.

Liquity V2's niche is the intersection of decentralisation purity and capital efficiency.

Liquity V2 offers a distinctive value proposition for users who want USD exposure backed entirely by on-chain, permissionless collateral, with minimal governance risk and predictable mechanics. Only a few competitors match that directly.

Risks and Considerations

Liquity V2 carries several risk factors. Smart contract risk is present despite extensive auditing.

V2 is a more complex codebase than V1, with multi-collateral branches, interest rate logic, and updated stability pool and mechanics. While V1's simplicity and long track record provide strong precedent, V2's new features create new attack surfaces.

Liquidation risk is fundamental to any collateralised borrowing protocol. Sharp ETH price drops can push troves below liquidation thresholds rapidly.

The 110% minimum collateralisation of V1 was notably aggressive, and V2 uses per-collateral ratios that are generally similarly tight. This means users must monitor their positions carefully or maintain significant buffers above the minimum.

Redemption risk is a unique concern in Liquity. If BOLD trades below peg, positions with low interest rates are redeemed first, effectively converting a borrower's debt position into an equivalent ETH position at face value.

For borrowers who wanted to maintain their ETH exposure, this is an unwelcome outcome. Users can reduce redemption risk by setting higher interest rates, but this comes at the cost of paying more to maintain the position.

Peg risk affects BOLD itself. While the protocol's mechanisms create strong pressure toward maintaining the peg, BOLD can trade at a discount or premium during extreme market conditions or when mechanism assumptions are stressed. Due to this, stability Pool depositors can face temporary losses if the pool pays out collateral during drawdowns.

Liquid staking token risk applies to wstETH and rETH collateral branches. These tokens carry smart contract risk from Lido and Rocket Pool, respectively, and can temporarily trade at discounts to underlying ETH. Users of these branches should understand the additional risk layers compared to the simpler ETH-only branch.

Using Liquity via Portals.fi

Portals.fi is a DeFi aggregation platform that allows users to interact with various DeFi protocols through a unified interface.

Users exploring decentralised stablecoins can access BOLD, related DeFi opportunities, and other protocols from a single access point.

For more information about how Portals.fi works, visit portals.fi.

This article is for informational purposes only and does not constitute financial advice. DeFi protocols carry inherent risks including smart contract vulnerabilities, liquidation risk, redemption risk, and peg risk.

Collateralised borrowing carries the risk of liquidation during sharp market movements. Always conduct your own research before interacting with any protocol. For our full disclaimer, please visit here.