Liquity v2: The self-healing CDP Liquity v1, being interest-free with a fixed-cost reward system, has proven to work reliably in low-interest environments and continues to be a viable option for borrowers in such scenarios. ​ However, in changing environments, there is a need for a protocol that is completely market-driven - a self-healing protocol that can adapt to any market situation without the need for governance. ​ Enter Liquity v2 - a look at some reasons why Liquity v2 will usher in a new era for CDPs. 👇 Empowering users with user-set interest rates Liquity v2 allows users to set their own interest rates, empowering them to become active interest rate makers. This democratizes the borrowing process, giving users more control and autonomy to tailor their rates based on their risk tolerance. ​ While borrowers can freely set and adapt their individual interest rates, they are expected to manage their rates in line with the market to avoid redemptions. Borrowers will pay recurring interest for the duration of their loans, benefiting from greater flexibility. Multi-collateral support v1 supports ETH as the sole collateral type, providing a straightforward and conservative option for users. Liquity v2 expands collateral support to include ETH along with select LSTs. ​ Borrowers can thus get liquidity or leverage while benefiting from auto-compounding staking yields. Each asset will have its own borrow market with distinct interest rates and risk parameters, further compartmentalizing risk. This also means that each borrow market will be able to develop its own range of rates. Enhanced capital efficiency v1's design included Recovery Mode to protect the system during extreme market downturns. The Recovery Mode is mainly needed due to a lack of sustainable yield for the Stability Pool, increasing reliance on redistribution for liquidations in the long term. ​ Liquity v2 eliminates Recovery Mode, enabling users to maintain higher loan-to-value (eg. 91% for WETH) ratios and reducing the risk of sudden liquidations. This is thanks to the sustainable yield that Stability Pool depositors receive from the interest rates that borrowers pay. ​ This results in a more stable and predictable borrowing environment, improving capital efficiency. ​ ​Novel redemption mechanics v1 pioneered robust built-in redemptions, ensuring stability for LUSD. The redemption feature allows any LUSD holder to exchange their stablecoins for $1 worth of ETH. When LUSD is below peg, users can buy it for e.g. $0.99 off the market and sell to the protocol for $1.00 worth of collateral; this mechanism maintains a hard price floor around $1 through direct arbitrage, and is key for LUSD’s reputation as the most resilient stablecoin. ​ Liquity v2 enhances this feature with a more sophisticated approach to redemptions. Instead of targeting the loans with the lowest collateral ratio, redemptions on v2 will now be performed in ascending order of individual interest rates. ​ Redemptions will mostly target LSTs with lower Stability Pool backing to reduce exposure to the corresponding LST. As with the user-determined interest rates, v2 relies on market-driven mechanisms to manage and reduce risk in the system. ​ To mitigate potential losses for borrowers hit by redemptions, the redemption fee charged to the redeemer remains inside the affected Troves rather than being diverted as in Liquity v1. Sustainable yield sources for $BOLD A successful stablecoin should not only be unstoppable and decentralized, but flexible enough to adapt to rising or falling market interest rates. ​ Unlike Liquity v1 and $LUSD, a significant portion of the interest rates generated by the protocol goes towards BOLD Stability Pool depositors and liquidity providers on select DEXes. ​ This provides an attractive, sustainable, and predictable yield source, enhancing the value proposition for $BOLD holders and fostering long-term engagement. ​ By enshrining a portion of the borrow fees toward protocol-incentivized liquidity, Liquity v2 sustainably supports $BOLD liquidity on external DEXes. ​ Multiple Troves capabilities To enhance user convenience, v2 makes it possible to manage multiple Troves from a single address. ​ In summary, Liquity v2 builds on the strong foundation of v1 with enhancements that improve flexibility, efficiency, and make it adaptable to any market condition. ​ All the key enhancements that Liquity v2 brings in one glance 👇