# DeFi Dollar Documentation
## Friendly fork of Liquity V2 on Ethereum
DeFi Dollar is an friendly fork of Liquity V2, which is a decentralized borrowing and stablecoin protocol that builds on the success of V1.
It enhances it in several ways to offer the best borrowing experience, a highly resilient Ethereum-native stablecoin (USDFI), and sustainable on-chain yield.
## Protocol Tokens
#### $USDFI
$USDFI is the native stablecoin of the DeFi Dollar protocol, designed to be a robust and censorship-resistant medium of exchange for the DeFi economy. It is always redeemable on-chain for $1 worth of underlying assets, maintaining its peg through a highly resilient and autonomous mechanism. Users can mint $USDFI permissionlessly by depositing a transparent basket of major DeFi protocol tokens and other trusted on-chain assets as collateral. Built upon the secure foundation of the Liquity v2 architecture, $USDFI operates with user-defined interest rates and without reliance on off-chain or centralized components, making it a truly unstoppable, on-chain dollar for a decentralized world.
**USDFI Token**: [0xa0ed3359902eff692e5b8167038133a73d641909](https://etherscan.io/address/0x0883eA1df0E3a5630Be9aEdad4F2C1E2d0182593)
#### $DEFI
$DEFI is the core utility token that powers the DeFi Dollar ecosystem. Its primary function is to empower holders to actively participate in the protocol's economy by using their tokens to direct the allocation of all system-generated fees. This powerful utility ensures that the protocol's economic incentives are steered by its most active users. The token is distributed through community-centric programs, such as liquidity rewards and the fair-launch Community Bootstrap Event, to foster widespread ownership and engagement from day one.
**DEFI Token:** [0x0883eA1df0E3a5630Be9aEdad4F2C1E2d0182593](https://etherscan.io/address/0x0883eA1df0E3a5630Be9aEdad4F2C1E2d0182593)
More info in [Technical Docs & Code Repository](/documentation/technical-docs-and-code-repository)
# General
### What is DeFi Dollar?
DeFi Dollar is an official fork of Liquity v2.
Liquity v2 is a decentralized borrowing protocol that lets users deposit tokens as collateral, and mint the stablecoin BOLD. In DeFi Dollar, the stable coin to mint is USDFI.
There are two main use-cases:
* Borrow USDFI
* Earn yield by depositing USDFI
### Does DeFi Dollar have governance?
DeFi Dollar is subject to minimal governance which is solely tasked with distributing Protocol Liquidity Incentives (PIL), directing 25% of the protocol's revenue to external initiatives.
Governance has no other functions or powers, as DeFi Dollar's smart contracts are immutable and not upgradeable.
# Borrowing and Liquidation
### What makes borrowing in DeFi Dollar so unique?
Pioneering user-set interest rates, DeFi Dollar allows users to borrow the stablecoin BOLD on their own terms. Borrowers can choose and adjust the rate they are willing to pay for their loans. Borrowers will establish market rates in accordance with their individual risk tolerance without relying on governance or algorithm rate management. Each collateral will also have their own respective borrow market which allows room for a market of rates to develop.
DeFi Dollar builds on the fundamentals that Liquity V1 introduced - a highly secure and immutable protocol which issues the most decentralized stablecoin in all of crypto.
All of this makes for a highly capital efficient, secure and decentralized borrowing experience which cannot be matched anywhere else.
### What is a Trove?
A Trove is DeFi Dollar version of a 'vault'. Each Trove is linked to an Ethereum address, and each address can have multiple Troves.
Each Trove allows you to manage a loan, adjusting collateral and debt values as needed, as well as setting your own interest rate.
### What types of collateral can I use?
You are able to use WBTC, LINK, UNI, AAVE, LDO, ENA, CRV, FXS, SKY and LQTY
### Is there a minimum debt?
Yes, a minimum debt of 2,000 USDFI is required for borrowing.
### **When do I need to pay back my loan?**
Loans issued by the protocol do not have a repayment schedule. You can leave your Trove open and repay your debt any time, as long as you maintain a healthy LTV.
### Is there a lockup period?
There is no lockup period. Users are free to withdraw their collateral deposits whenever they want. As an exception, withdrawals by borrowers are temporarily suspended if the total LTV of a borrow market goes above 75%.
### How do I decide on my LTV?
This depends on your personal preferences, primarily your risk tolerance and how actively you want to manage your position(s). To help with the decision, you'll find preset options on the user interface that can serve as a guide.
LTV quick-selection options
Please note that these examples are for illustration purposes only and do not represent definitive risk or safety thresholds. It's essential to determine your own risk tolerance and comfort level as a user.
If your LTV becomes too high, your position will be liquidated.
### How do Liquidations work in DeFi Dollar?
Troves get liquidated if the LTV goes above the maximum value (for example, 80% for WBTC).
DeFi Dollar uses Stability Pools as its primary liquidation mechanism to absorb liquidated debt and collateral. Each borrow-market has its own dedicated Stability Pool earning liquidation gains (in the respective collateral) in exchange for burning debt.
Just-In-Time liquidations and a redistribution of debt and collateral across borrowers of the same market handle liquidations as a last resort when the Stability Pool is empty.
A liquidated borrower usually incurs a penalty of 5% and will be able to claim the remaining collateral after liquidation.
A special case is when a Redistribution is necessary, then:
* For ETH, the loss amounts to 10% of the debt (at most). That corresponds to a max. loss of 9.09% expressed in terms of collateral.
* For rETH/wstETH the loss is 20% of the debt, corresponding to a max. loss of 16.67% expressed in terms of collateral.
### How am I compensated for liquidating a Trove?
The liquidation of Troves is connected with certain gas costs which the initiator has to cover. The protocol offers a gas compensation given by the following formula:
`0.0375 WETH + min(0.5% trove_collateral, 2_units_of_LST_or_WETH)`
The `0.0375 WETH` is funded by a [refundable gas deposit](https://docs.liquity.org/v2-faq/borrowing-and-liquidations#what-is-the-refundable-gas-deposit) while the variable `0.5%` part comes from the liquidated collateral, slightly reducing the liquidation gain for Stability Providers.
### What is the max Loan-To-Value (LTV)?
That depends on the collateral type you will use.
ETH will have a LTV of 90.91% while wstETH and rETH will have it at 83.33%.
### What is the refundable gas deposit?
To open a new Trove, the protocol requires a liquidation reserve of 0.0375 ETH regardless of the chosen collateral, which is set aside to cover the gas costs of a potential liquidation. The deposit is returned when the Trove is closed by the user (including upon redemptions).
### How much will I pay for my loan?
In DeFi Dollar, there are no upfront fees. Instead, you pay interest on an ongoing basis, making it suitable for short-term loans as well.
The interest you pay is determined by the rate you set yourself. For example, if you borrow 10,000 USDFI at a 5% interest rate, you'll pay \~500 USDFI in interest after one year. This interest is added to your outstanding debt.
### What are user-set rates?
In DeFi Dollar, users can set their own interest rates, giving them full control over costs and improving predictability. This feature allows for adaptability to various market conditions and helps stabilize BOLD's peg.
User-set interest rates facilitate a capital-efficient equilibrium between USDFI borrowers and holders in a fully market-driven manner. Additionally, these rates serve as the primary revenue source for USDFI holders, generating a continuous, sustainable real yield for USDFI depositors and liquidity providers.
Borrowers should set their rates based on their [redemption](/faq/redemptions-and-delegation) risk tolerance.
Read more about setting your rates [here](https://www.liquity.org/blog/interest-rate-management-in-liquity-v2).
### Can I adjust the rate?
Yes, you can always adjust your interest rate at any time. Since you as a user get to set your own interest rate, you have full autonomy over your borrowing costs.
Note however, that a fee corresponding to 7 days of average interest is charged when opening the loan, as well as on any rate adjustments that happen less than 7 days after the last adjustment. Without it, low-interest rate borrowers could evade redemptions by sandwiching a redemption transaction with both an upward and downward interest rate adjustment, which in turn would unduly direct the redemption against higher-interest borrowers.
### How do I decide on the right rate for me?
Setting an interest rate determines a user’s redemption risk and needs to be aligned with your goals and how actively you want to manage your position.
Users can also decide to delegate interest rate management to a third party, who can set your interest rate and charge a fee for this service (see [link](https://docs.defidollar.io/faq/redemptions-and-delegation#what-is-delegation-of-interest-rates)).
By opting to manage your own rate, you will have to weigh the savings from a lower rate against the higher redemption risk and the increased adjustment frequency with potential additional costs (premature adjustment fees and gas costs).
Since redemptions are performed in ascending order of interest rate (for the respective collateral asset), you will typically want to keep a buffer of other borrowers with lower rates in front of you. Choosing higher rates may increase the recurring costs of your loan, but give you peace of mind regarding unexpected market fluctuations.
You can see the distribution of other users’ rates in a histogram and position yourself accordingly.
Redemptions usually occur when USDFI is trading below $1 minus the current redemption fee. Keeping an eye on the past [redemption activity](https://dune.com/liquity/liquity-v2#redemptions) can help you assess the overall redemption risk, serving as an additional data point for your rate selection.
In general, those willing to actively monitor their positions, or borrowing for shorter periods of time, may opt for lower rates. Conversely users optimizing for a more passive, long-term position would be better off with setting a higher relative interest rate.
### What could the average interest rate be?
These will be set, continuously, by the market and will vary over time. We would expect that, on average, rates should be similar to borrowing on Sky or Aave using ETH or staked ETH. However, due to the flexibility of user-set rates, it is possible that some users will pay significantly lower rates during certain periods.
Given that 75% of the interest revenue is directly paid out to USDFI depositors , we further expect that stablecoin deposit yields should be comparable, if not higher than what competing CDP’s and lending markets offer. Thanks to the attractiveness of USDFI and assuming the emergence of external use cases (monetary premium), this could lead to lower borrow rates overall than offered by other platforms. Learn more about the spread between borrowers and lenders in this [article](https://www.liquity.org/blog/liquity-v2-a-de-facto-reference-rate-for-defi).
### What determines the riskiness of my Trove?
There are two key parameters to consider:
* **Loan-to-value (LTV)**: This is based on your debt-to-collateral ratio and affects your risk of [liquidation](#how-do-liquidations-work-in-liquity-v2).
* **Interest rate (IR)**: You set this rate yourself, and it influences your risk of being [redeemed](/faq/redemptions-and-delegation).
You have the flexibility to set these parameters as you see fit, allowing you to control the relative riskiness of each Trove. You can create multiple Troves under the same address, enabling you to manage different risk profiles for different portions of your portfolio.
### Are there any other fees related to borrowing?
To impede Trove redemption evasion strategies where borrowers try to minimize their interest payments in an unfair manner, a small “premature adjustment fee” is charged on interest rate changes that happen within less than 7 days since the last adjustment (or the opening of the Trove). The premature adjustment fee is equal to 7 days of average interest on the respective borrow market. Note that this fee differs from the user’s set interest rate.
The fee is denominated in USDFI and added to the Trove's debt. The same fee is charged when a new Trove is opened or when its debt is increased (only affecting the added debt).
### How many Troves (loans) can I open with the same address?
You can have multiple open Troves for the same collateral or across different collateral types, all represented as separate NFTs.
### Are Troves transferable?
Yes, they are represented as a NFT (ERC-721), hence easily transferable between wallets. When you send the NFT you also send full access to your Trove and all the funds within it.
Please note that more advanced strategies like ‘selling’ Trovess on secondary markets like OpenSea comes with inherent risks, and caution is advised.
### How do I loop my exposure?
Looping allows you to borrow USDFI against your deposited collateral and use it to buy more collateral, increasing your exposure to the underlying . DeFi Dollar comes with built-in automation to achieve this with one click (zappers).
Make sure you choose a frontend that supports this functionality, and be mindful of liquidity / slippage.
### How are collateral risks mitigated?
DeFi Dollar will have three separate borrow markets for the different collateral types with their own Stability Pools (for efficient liquidations), user-set interest rates, and LTV factors for their respective assets.
Risks are mitigated through temporary borrowing restrictions in times of low collateralization of a given market, a redemption logic prioritizing collateral with less Stability Pool backing, and a collateral shutdown as an emergency measure to maintain system balance and protect against market instability.
Keep in mind that despite all these measures, USDFI remains dependent on the three mentioned collateral assets and there is no strict guarantee that it remains over-collateralized in case of a sudden collapse of a collateral asset.
### What mechanisms are in place if the Stability Pool is empty?
If the Stability Pool doesn’t cover the full entire debt and gets completely emptied by the liquidation, the system falls back to the following liquidations modes.
The liquidator can freely choose between two fallback liquidation modes for the debt exceeding the funds in the Stability Pool:
1. Just-in-time (JIT) liquidation: the liquidator sends an amount of USDFI corresponding to the (remaining) debt in exchange for 105% of its nominal value in (staked) token.
2. Redistribution: the liquidator triggers a redistribution, through which the Trove’s entire debt and collateral is redistributed to all fellow borrowers of the respective collateral market, in proportion to their own collateral amounts. Thus, the respective borrowers will receive a share of the liquidated collateral and see their debts increase proportionally.
# USDFI & Earn
### What is USDFI?
USDFI is the USD-pegged stablecoin issued in DeFi Dollar. It’s fully decentralized, over-collateralized and backed by collateral in the protocol.
In contrast to most of its competitors, USDFI is a resilient stablecoin by design:
* only backed by crypto assets (no real world assets or custody by centralized players)
* not subject to collateral changes and protocol upgrades (immutable)
* directly redeemable (always convertible in a fast and liquid way)
### What are USDFI's main benefits compared to other stablecoins?
* USDFI uses only the most decentralized assets as collateral - like LINK, UNI and AAVE
* It is always redeemable for the underlying assets, meaning you can always swap it as if worth $1, for the collateral backing it
* The contracts used to issue USDFI are immutable, not allowing any changes and significantly reducing attack vectors
* USDFI has native incentives via Protocol Incentivized Liquidity directed by governance, ensuring that there will always be sufficient liquidity to handle transactions
### What is USDFI's peg mechanism?
DeFi Dollar's market-driven monetary policy through user-set interest rates enables USDFI's peg to dynamically respond to situations where the token is above or below $1.
When USDFI trades above $1, borrowers tend to reduce their rates due to lower [redemption](/faq/redemptions-and-delegation) risk, making borrowing more and holding USDFI less attractive. This helps correct the price downwards.
In contrast, when USDFI trades below $1, arbitrageurs will initiate redemptions to restore the peg. Moreover, borrowers' exposure to redemption risk prompts them to increase interest rates, boosting demand for USDFI (and Earn deposits) and pushing its price upward.
### How can I earn with DeFi Dollar?
* Stability Pool deposits (Earn): Earn protocol revenue by depositing USDFI into the various Stability Pools.
* Protocol Incentivized Liquidity (PIL): Supply liquidity for USDFI onto the incentivized external DEXes.
### Where does the yield for Earn come from?
The yield comes from two sources:
* **Interest payments:** Each borrow-market funnels 75% of the of its revenue to its Stability Pool depositors (Earners). This is paid out in USDFI.
* **Liquidation gains:** Your USDFI will be used to liquidate under-collaterized loans, effectively buying their collateral with a \~5% discount. This is paid out in (staked) collateral token.
All the yield is fully sustainable, scalable and “real”, with no token emissions and lockups.
### Is there a lockup period?
There is no lockup period. Users are free to withdraw their USDFI deposits whenever they want.
### What is the estimated yield on Earn?
The yield is a representation of the rates borrowers are paying. Since 75% of the borrowers’ interest payments go to Earn, the effective yield can exceed the average interest rate paid in a borrow market if less than 75% of the USDFI supply is deposited to the respective Stability Pool. This yield amplification sets DeFi Dollar apart from competitors and money markets where lending rates cannot be higher than borrow rates.
Check historic rates our Dune Dashboard (currently in preparation).
### Why are there multiple Stability Pools?
The goals are to:
* Establish separate borrow markets for different collateral assets with their own market driven interest rates, using the Stability Pool backing to dynamically split [redemptions across the available collaterals](/faq/redemptions-and-delegation).
* Compartmentalize the risks as much as possible when depositing to the respective Stability Pools (Earn) by giving the depositors control over which collateral assets they want exposure to in case of liquidations.
### How do risks differ for the different Stability Pools?
Users can deposit their stablecoins into the Stability Pool of their choice, aligning with their risk preference and the types of collateral they're comfortable being exposed to. By selecting pools associated with specific collateral tokens, participants can tailor their risk exposure and potential reward profile.
By offering separate pools for different collateral types, the system allows users to choose their exposure based on the perceived risk and potential return. This compartmentalization helps manage systemic risk, ensuring that impacts from liquidations in one asset class don't disproportionately affect the entire ecosystem.
It is important to note that all USDFI holders including depositors still remain dependent on USDFI to keep its peg, remaining exposed to the collateral tokens.
# Redemptions and Delegation
### What are redemptions?
Redemptions serve the crucial purpose of keeping USDFI pegged to the US Dollar, creating a price floor around $1. They do this in a decentralized way without reliance on centralized assets or 3rd parties.
A redemption is essentially swapping USDFI for collateral tokens at face value, as if 1 USDFI is exactly worth $1. Redemptions can be initiated by anyone, but are only profitable when USDFI <$1.
The redeemer sends USDFI to the protocol and in return gets a mix of collateral tokens (minus the redemption fee). The redeemed amount is split among the different collateral assets based on their current Stability Pool backing (see [link](#docs-internal-guid-6cda6d73-7fff-78b8-1c4f-6cb96385a98a) for more info).
Redemptions start from the borrower paying the least interest.
Read more about how to [protect yourself ](#how-can-i-stay-protected)from redemptions and what happens if [you are redeemed](#what-happens-if-my-trove-gets-redeemed).
You can also watchi this [9 min video](https://www.youtube.com/watch?v=CQVmjFx987A) on redemptions.
### What happens if two Troves have the same IR?
In this case, the "Last In, First Out" (LIFO) principle applies, meaning the Trove that set its interest rate more recently will be redeemed first.
### When can redemptions occur?
A redemption can occur at any time, but will likely only happen when it is profitable to do so. This is usually the case when the price of USDFI is less than $1 (minus the current redemption fee).
### Who can initiate a redemption?
Any Ethereum address can initiate a redemption, provided that they have a sufficient amount of USDFI to do so. However, we expect redemptions to be mainly performed by professional bots rather than humans.
### What happens if my Trove gets redeemed?
You can think of redemptions as if somebody else is repaying your debt and retrieving an equivalent amount of your collateral in return.
If your collateral is redeemed, an equivalent amount of your debt in USD terms is repaid. The redeemer receives your collateral, less the redemption fee, which remains in your Trove. This means that at the time of redemption you have not lost any money in USD terms, likely even made a small gain with the received redemption fee as the peg recovers.
Example with ETH at $3'000:
* Before the redemption: 10 ETH collateral, 20,000 USDFI debt.
* After the redemption: 5.025 ETH collateral, 5,000 USDFI debt.
You can see your collateral and debt reduced equally (in USD terms) and the redemption fee (0.025 ETH) being added to your collateral value.
Partially affected Troves whose debt stays above the minimum debt threshold of 2000 USDFI continue to work as before, while Troves whose debt is reduced to a lesser amount (or 0) switch to a dormant operating mode (see below for [more](#docs-internal-guid-927901d5-7fff-c7a0-2e9f-964ab271257a) info).
### How do redemptions work using three collateral assets?
In contrast to LUSD, USDFI is backed by a multitude of collaterals. Instead of letting the redeemer freely choose the collateral to redeem, DeFi Dollar optimizes the process for economic safety. Redemptions are thus serviced through a collateral mix in a way that enhances the overall backing of USDFI.
The process starts with the Troves paying the lowest interest rates in each collateral market and continues until the full amount of USDFI is exchanged for collateral assets. Redemptions can be partial or full, as illustrated below.
In this example, the rETH market shows a full redemption of the first Trove and a partial redemption of the second. The wstETH and ETH markets have one partial and two full redemptions, respectively
Example redemption across all three collateral markets
### How is the collateral split determined?
The split is dynamic, optimizing for the economic safety of the system. The logic is straightforward: the riskier a collateral is, the more redemption volume is directed to that market. In other words, if a market's Stability Pool is relatively small compared to its total debt, it's considered riskier, as there's a higher likelihood of bad debt occurring in extreme events.
To mitigate this risk, the system redeems proportionally to the "outside debt" of each collateral type. This is calculated as the total debt borrowed against a specific collateral minus the size of the Stability Pool for that borrowing market.
Here is an example: given outside debt amounts of 100 USDFI, 50 USDFI and 100 USDFI respectively, a redemption will result in a 40% (WETH), 20% (wstETH) and 40% (rETH) split.
### Is there a redemption fee?
Yes. The redemption fee mechanics are broadly the same as in Liquity V1, but with adapted parametrization leading to a faster fee decay. The redemption fee is taken as a cut of the total collateral tokens drawn from the system in a redemption. Contrary to V1, the fee does not go to the LQTY stakers but stays with the users as part of their collateral.
Redemption fees are based on the `baseRate` state variable, which is dynamically updated. The `baseRate` increases with each redemption, and exponentially decays according to time passed since the last redemption (half-life of 6 hours).
Upon each redemption of x USDFI: `baseRate` is decayed based on time passed since the last fee event and incremented by an amount proportional to the fraction of the total USDFI supply to be redeemed, i.e. `x/total_usdfi_supply`
The redemption fee percentage is given by `min (0.5% + baseRate, 100%)`.
The redemption fee (red line) follows this dynamic over time as redemptions occur (blue bars).
### How can I stay protected?
The risk of redemption depends on two factors: the interest rate you set and the price of USDFI.
**The interest rate** you set determines how much USDFI must be redeemed before it's your turn. The higher your rate, the more USDFI is redeemable before you, and vice versa.
You can see this on any frontned, in the example below the number is 41M.
This means that 41M USDFI must be removed from the system before it would reach you. However, this number is relative, and you also need to consider recent redemption activity. While past events don't guarantee future outcomes, they can serve as a useful guide.
For example, if only 200K USDFI were redeemed in the last week, you're comparatively safer than if 15M were redeemed. You can monitor past redemptions in our [Dune dashboard.](https://dune.com/liquity/liquity-v2#redemptions)
**The price of** USDFI is the second crucial factor. When it trades above $1, redemptions become unprofitable and should cease. If demand for USDFI is strong, it can maintain a price above $1 for an extended period, as was often the case for LUSD.
During such times, you can comfortably reduce the interest rate you're paying without increasing your risk of redemption.
### What is delegation of interest rates?
Interest rate delegation is a feature in DeFi Dollar that allows borrowers to delegate the management of their interest rate to a third party. This enables them to create a passive, hands-off position, while still keeping a competitive rate and low redemption risk.
There are three types of delegations:
* To a third party manager: A specialized entity which provides predetermined strategies for batches of multiple Troves and charges a fee for the service
* To an automated and decentralized contract strategy: A predefined strategy managing interest rates in an autonomous manner
* To your own wallet: Delegate to a hot wallet when on vacation, or to a friend
It is important to note that a delegate or contract strategy can do nothing else but set the interest rate in a predetermined range, significantly limiting the risks of the borrowers.
Borrowers should thus keep an eye on the interest rate range and the maximum update frequency (relevant in case of premature adjustments) preset by the manager.
### Who are the current active interest rate delegates?
Coming soon.
EntityCollateral AssetDelegate AddressDescription
*Note that DeFi Dollar is not responsible for the actions of any delegates. Please do your own research.*
### What happens if there are issues with the smart contract for delegating interest rates?
Your Trove would not be affected - the only thing would get affected is the interest rate at which your position is set.
### Why are redemptions not a feature of both LTV & interest rate, but only interest rate?
Given that the *raison d’etre* for redemptions is to diminish USDFI supply in response to reduced demand, and interest rates drive demand, rate-based redemption processing is a more sustainable and effective lever to reach market equilibrium. Actively managing for both interest rate and LTV would weaken the ability to enforce market-level interest rates and deposit yields, while complicating the process for the system and its users
### What happens when redemptions cause a debt of a Trove to fall below the minimum amount?
If the redeemed amount exceeds the debt of an affected Trove, it doesn’t get closed as in Liquity V1, but remains open with 0 USDFI debt and the remaining collateral. The owner of a fully redeemed Trove may close it by withdrawing the remaining collateral, or borrow anew to bring its debt above the minimum of 2000 USDFI, topping up its collateral if needed.
In the scenario that the redeemed amount of a Trove does not exceed the debt of a Trove, but would leave it between 0 and 2000 USDFI, the Trove would remain open with the remaining debt, and the remaining collateral. The owner of the Trove may close it by paying off the remaining debt and withdrawing the remaining collateral, or borrow anew as described above.
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# Technical Docs & Code Repository
A technical system summary including contract descriptions, function descriptions, and more is available in the V2 developer README.
### Technical papers
[Whitepaper](https://bafybeibjommrelqjw22vewpddgfdnm5geoz747gv2zeuy7njwivpfcy3xa.ipfs.w3s.link/Liquity%20v2%20-%20Whitepaper%20rev.%200.3%20\(November%2C%202024\)%20\(1\).pdf)
### Code base
[Bold Core](https://github.com/liquity/bold) [Governance](https://github.com/liquity/V2-gov/tree/main)
### Audit reports
[ChainSecurity - Core Protocol Audit Report](https://www.chainsecurity.com/security-audit/liquity-bold-smart-contracts), December 2024
[Dedaub - Core Protocol Audit Report I](https://dedaub.com/audits/liquity/liquity-v2-aug-28-2024/), August 2024
[Dedaub - Core Protocol Audit Report II](https://dedaub.com/audits/liquity/liquity-v2-second-audit-nov-11-2024/), November 2024
[Certora - Formal Verification](https://certora.cdn.prismic.io/certora/Z1tLJJbqstJ98b8J_LiquityVerificationReport.pdf), December 2024
[Coinspect - Bold Core Smart Contract Audit](https://www.coinspect.com/doc/Coinspect%20-%20Smart%20Contract%20Audit%20-%20Liquity%20-%20Bold%20-%20v241231.pdf), December 2024
[Coinspect - Bold Governance Audit](https://www.coinspect.com/doc/Coinspect%20-%20Smart%20Contract%20Audit%20-%20Liquity%20-%20Bold%20Governance%20-%20v250120.pdf), January 2025
[ChainSecurity -Governance Smart Contract Audit](https://www.chainsecurity.com/security-audit/liquity-v2-governance), January 2025
[Dedaub - Governance Audit 1](https://dedaub.com/audits/liquity/liquity-v2-governance-1st-audit-aug-12-2024/), August 2024
[Dedaub - Governance Audit 2](https://dedaub.com/audits/liquity/liquity-v2-governance-2nd-audit-nov-11-2024/), November 2024
[Dedaub - Governance Audit 3](https://dedaub.com/audits/liquity/liquity-v2-governance-3rd-audit-dec-22-2024/), January 2025
### Economic modelling and simulation
[Chaos Labs: Mechanism Design Review](https://cdn.sanity.io/files/zmh9mnff/production/ca6a4815e62b05f33fb3ec56c5a4c42d6b7ddbec.pdf), October 2024
### Core Contract Addresses
* **DEFI Token:** 0x0883eA1df0E3a5630Be9aEdad4F2C1E2d0182593
* **USDFI Token**: 0xa0ed3359902eff692e5b8167038133a73d641909
* **Collateral Registry**: 0x1ec9287465ef04a7486779e81370c15624c939e8
* **Hint Helpers**: 0xa1557bf95e42ddb458b56c76530263495d067219
* **Multi Trove Getter**: 0x5db0ee97bb7bc82b025a3f65f2c4108577855955
### Protocol Constants
* **ETH Gas Compensation**: 0.0375 ETH
* **Interest Rate Adjustment Cooldown**: 7 days
* **Maximum Annual Interest Rate**: 250%
* **Minimum Annual Interest Rate**: 0.5%
* **Minimum Debt**: 2000 tokens
* **Stability Pool Yield Split**: 75%
* **Upfront Interest Period**: 7 days
## Contract Addresses
### FXS
* **Collateral Token**: 0x3432b6a60d23ca0dfca7761b7ab56459d9c964d0
* **Addresses Registry**: 0x58edc0621eacbe9a8d0d708287d3c13bb27cb459
* **Active Pool**: 0xafda3bda63bf2fdc7eca9a134e28c5626ec1dde0
* **Borrower Operations**: 0x74d7f2f3dac55831b75a0a152468665a7f5a6621
* **Collateral Surplus Pool**: 0x4d69b6672fc715f78a1f41e45e6f9b0dc1cd62c3
* **Default Pool**: 0xe0d8cb6703b02c72c05414b8e6bfe94c1f0674f3
* **Sorted Troves**: 0x95dd1379efa42557338dbd6c3417ecb6667b25e7
* **Stability Pool**: 0xcd4ebd6f318c19048509db8daf85a4af3542e64e
* **Trove Manager**: 0xa3ea296cb0ef46ebf093919bd408bd4e4f337f03
* **Trove NFT**: 0xd7eefc668772d38babbb266bd4859bd47a1f40df
* **Metadata NFT**: 0x9d75d13d5cf0e95a2afefe85505bb7f68ad91a0b
* **Price Feed**: 0x5860cf562dfb789a70d928b089fcb6770648db24
* **Gas Pool**: 0xf567c44f0796aef43b489e8514a89f2b90b5e347
* **Interest Router**: 0x0268d016717884632a7fd05043687cef2e51137f
* **Gas Comp Zapper**: 0x0ef7c21e115a09333f92c4899db8be367e8441e3
* **Leverage Zapper**: 0x0ef7c21e115a09333f92c4899db8be367e8441e3
### LINK
* **Collateral Token**: 0x514910771af9ca656af840dff83e8264ecf986ca
* **Addresses Registry**: 0x9fc6ad9c5fa7e9e010e7a2535e6b8f061bd2c521
* **Active Pool**: 0xd5ddbf9be067133cfa19f893afa27d3ff56fb89d
* **Borrower Operations**: 0xd4bfe1af51fb89101ca9cec804d76017f2419bc4
* **Collateral Surplus Pool**: 0xe713131cb56c357b68b0795543dfbb1c5ccbcd14
* **Default Pool**: 0x1f747a0cdbf6253e0fa7cb75939c504b16130054
* **Sorted Troves**: 0x8fa078b8c96857844098ca890ad05439c8bf5817
* **Stability Pool**: 0xde41a35e454a0508d20ce246aff13970586b1e27
* **Trove Manager**: 0x8593ec30aee8dbed9df005e78d83f7b623ebeaa6
* **Trove NFT**: 0x559dfc2de8463d5fb45d8afedeec20a77e2c6883
* **Metadata NFT**: 0x5f07ea4bc193cc0b8af4af4cb0f1bf2d32beb78f
* **Price Feed**: 0xbc21070d7a0a8c12c57b43a0da337eec79741195
* **Gas Pool**: 0xe43e1c2121f402153f5e4ff36cc1b56c103305d2
* **Interest Router**: 0x0268d016717884632a7fd05043687cef2e51137f
* **Gas Comp Zapper**: 0x420815c23b03387866e89dc3e8cd168603cd8528
* **Leverage Zapper**: 0x420815c23b03387866e89dc3e8cd168603cd8528
### UNI
* **Collateral Token**: 0x1f9840a85d5af5bf1d1762f925bdaddc4201f984
* **Addresses Registry**: 0xcfa999437161563d5d8a91b1e37c5f0a2c439296
* **Active Pool**: 0xfef7e6471812c876e94ac3a93cab147d303e0159
* **Borrower Operations**: 0xa7317c72e5e58019ee79e2a9d021919d1d3da7eb
* **Collateral Surplus Pool**: 0x8d4e72533f9c8652a3f9297a97c98887e9fe584e
* **Default Pool**: 0x42ee97dd6148aec0d27254f9c126246e24dfe742
* **Sorted Troves**: 0x0cb12f03f11db49e1f55e9ad249a31759244b686
* **Stability Pool**: 0x8b93d8e6892c838832ca547c362dcffc62f6e854
* **Trove Manager**: 0x72bfd09d166891c253982f1eabb81f3260e46667
* **Trove NFT**: 0xe18b389f16893d86ef8299ffd05e5ca75de043f9
* **Metadata NFT**: 0xb9a26cb5840519fa74f729a7904cfff64fa6e72b
* **Price Feed**: 0xb58189b9543381216fb7c050ffa6e6c2b848bcf9
* **Gas Pool**: 0x798d918a5846d411098aed8668cd94b3aff922fb
* **Interest Router**: 0x0268d016717884632a7fd05043687cef2e51137f
* **Gas Comp Zapper**: 0x35b8e99987e086b98ca0f5111dda53eff7c549ee
* **Leverage Zapper**: 0x35b8e99987e086b98ca0f5111dda53eff7c549ee
### SKY
* **Collateral Token**: 0x56072c95faa701256059aa122697b133aded9279
* **Addresses Registry**: 0xeeaf41e63bcddf645f0719bec010944c5b493480
* **Active Pool**: 0xe9396dbd6bd9b0298980475772216165b2fe7bf9
* **Borrower Operations**: 0xf14f629f3e922f0562c7b691a6fe8c2175cbf4a2
* **Collateral Surplus Pool**: 0xffb588e31eb64b4cabb7f84b5995149b6b18869f
* **Default Pool**: 0x66eab81c82db69f454608366871b44ed2dd711a2
* **Sorted Troves**: 0x216db6b694ed79b49e170a145288b1fe5ddf1cc8
* **Stability Pool**: 0x45fdabb2eb0f10ffe192eda92af1f58eee6d393c
* **Trove Manager**: 0xfe69417cc583ea9f4335be92c325e7cdc5def499
* **Trove NFT**: 0xdcbedba4ec1d0caab9877d2c66a865c932247ce4
* **Metadata NFT**: 0xef06e61fc136a38acbf0d268402626efc4a301dc
* **Price Feed**: 0x7ec4e404e2c3209f072e20ea2cfca80edbc56038
* **Gas Pool**: 0xcc3cd87284b794b53821cff5f97fbc4d98226108
* **Interest Router**: 0x0268d016717884632a7fd05043687cef2e51137f
* **Gas Comp Zapper**: 0x680d1ffe1aeb199a7d2e6a6764a2a80231db51f8
* **Leverage Zapper**: 0x680d1ffe1aeb199a7d2e6a6764a2a80231db51f8
### CRV
* **Collateral Token**: 0xd533a949740bb3306d119cc777fa900ba034cd52
* **Addresses Registry**: 0xaa28653a8e8e040198dccbcc41e622bc7da67eaf
* **Active Pool**: 0xca51e5c32f63dfaaa74c4be4a63e830b0c10aee0
* **Borrower Operations**: 0xb8ff8fa35bdc415658f73619ac95ebd9072b710c
* **Collateral Surplus Pool**: 0x6044ce04cc13574fda99dbb02bd3d38ede28c857
* **Default Pool**: 0x7ece962b9f412f6a593315e7756a853019953712
* **Sorted Troves**: 0x586ca75dd980f193d374c3ed691f196a4e2688ea
* **Stability Pool**: 0x2c145aa00d9cef896f7fb99a9fb07d935976e3b3
* **Trove Manager**: 0x7c103815b2264e556bcc1d1c446a8c7dc677a17e
* **Trove NFT**: 0x99d8a1e89da15f5c2fd954808483a9b192d5a807
* **Metadata NFT**: 0x6d49722a526592bd614ab0d25803e0191d51fae3
* **Price Feed**: 0x74a71272b9f71e667da6d2988120c909f23cecc5
* **Gas Pool**: 0x90fe3006f7688feed26ff363888203aed177707b
* **Interest Router**: 0x0268d016717884632a7fd05043687cef2e51137f
* **Gas Comp Zapper**: 0x1784b9cf74a120a598005cbf912fdbb09021fc03
* **Leverage Zapper**: 0x1784b9cf74a120a598005cbf912fdbb09021fc03
### AAVE
* **Collateral Token**: 0x7fc66500c84a76ad7e9c93437bfc5ac33e2ddae9
* **Addresses Registry**: 0x9f95ea2198a1d47d752b5a1e6ec0524b22bf0ed3
* **Active Pool**: 0x6dac843b1045bd17892f0a612797950e0b441bb9
* **Borrower Operations**: 0x27046382bf4038aeadce9ef55dc2a1ddde40cde5
* **Collateral Surplus Pool**: 0x80ed1a92ac613f5bbd6d5e8be93587a15f8c7910
* **Default Pool**: 0x299b2cd95d6f6e21511109648e9a99dcadd0766a
* **Sorted Troves**: 0xf11da023d236cc7fdc5f4ee24bdff69d144d8d55
* **Stability Pool**: 0xf0198e08d33a97853b7e6ea7c7dc7e975d5c261c
* **Trove Manager**: 0x7f7a7c8fa49584b81ca922b594de658a9c1ca98a
* **Trove NFT**: 0x3665fc2c2d7b4682eb8ce676a09a71239366f045
* **Metadata NFT**: 0xb4c88e48325faf5dbf1654c9f233a89b2712643b
* **Price Feed**: 0xa931451e5e9937a35574b1f3aa286dd9cbc5cbac
* **Gas Pool**: 0xccc0155b5fa766b69f57e66ff4111baccd7d3adc
* **Interest Router**: 0x0268d016717884632a7fd05043687cef2e51137f
* **Gas Comp Zapper**: 0xf70c92df15bf7f9c1b451ed53d653a1fa9b60795
* **Leverage Zapper**: 0xf70c92df15bf7f9c1b451ed53d653a1fa9b60795
### YFI
* **Collateral Token**: 0x0bc529c00c6401aef6d220be8c6ea1667f6ad93e
* **Addresses Registry**: 0xa56d1ca0fa3a205725e26fab322c4f5423163178
* **Active Pool**: 0x3e69e49418064341c36c7fd9a97440714a019d48
* **Borrower Operations**: 0x7b6ca435720829dae4ce8264a467f02b0737d879
* **Collateral Surplus Pool**: 0x8cb4298825999ab50af39aa7637b222922b63284
* **Default Pool**: 0x5002c04906ae6af0da18c777f3a5e397496a40e5
* **Sorted Troves**: 0x49ca0a1c7da3d8625dd62e2a1717bfae9082dc8c
* **Stability Pool**: 0xa72f1f5c00e64e68fddef30a0c2438d053fc666b
* **Trove Manager**: 0xa75378f271405eb53ef1c4827ef10a8048af8c1a
* **Trove NFT**: 0xe3a0cf7166a45e8715d6f35c29bbab83848ce26a
* **Metadata NFT**: 0x2e4913d5485116a59ad2794bc31d6213b5a6eddf
* **Price Feed**: 0x68cd607f783fcbe5ae50ed470aa3b447b49e3c47
* **Gas Pool**: 0x94d1ad14453857ee5237266317b3fa3300a80be8
* **Interest Router**: 0x0268d016717884632a7fd05043687cef2e51137f
* **Gas Comp Zapper**: 0xd10a5dd2f8e8e2bcecb9a2ee5e21c624892121b7
* **Leverage Zapper**: 0xd10a5dd2f8e8e2bcecb9a2ee5e21c624892121b7
### LDO
* **Collateral Token**: 0x5a98fcbea516cf06857215779fd812ca3bef1b32
* **Addresses Registry**: 0x3b9e6af83705a7e01cc557746ba1573ebffa2f5c
* **Active Pool**: 0x6a9a25e002129ade67a0ef2e58a35e04e10b1edc
* **Borrower Operations**: 0x60b6a5a67bbb2bef72e1dbb1ce22c5092af84d29
* **Collateral Surplus Pool**: 0xd124c44e465798ef59b4cbb2ea46933383301173
* **Default Pool**: 0xa9aca2785fd9c9eb10d562f45e0657f0de59510e
* **Sorted Troves**: 0xdf50ffa4afacb1fb4e821b07f51798232005e910
* **Stability Pool**: 0xdee019f44c33940fb64889f8f8e475a6dc87973d
* **Trove Manager**: 0x5ff5db53c68f288f5dc57e6b2eb4dcc80ec37485
* **Trove NFT**: 0x6446566ccd8a27dc38cffaca79e502036b0074c7
* **Metadata NFT**: 0x83be18b2dbb30229d70d13c17cff798d7481b729
* **Price Feed**: 0x8fc0ed79d7d58ec1541bb65f9d2a423e3035ed49
* **Gas Pool**: 0xf87430d6fa2274a5f565e243136fa6666f82a984
* **Interest Router**: 0x0268d016717884632a7fd05043687cef2e51137f
* **Gas Comp Zapper**: 0x3e7f74ebd184d9eb44beb6b4fe69ceeae1051576
* **Leverage Zapper**: 0x3e7f74ebd184d9eb44beb6b4fe69ceeae1051576
### LQTY
* **Collateral Token**: 0x6dea81c8171d0ba574754ef6f8b412f2ed88c54d
* **Addresses Registry**: 0x8f863ca01b6a688df237c6c233e2e3b17009c881
* **Active Pool**: 0x1c627f3f096f53f3ea51878e0907a6664e5b9844
* **Borrower Operations**: 0x376466c5aaec6dfa888bbb5523a6510788617246
* **Collateral Surplus Pool**: 0xcb0ee2631ff9382ecc2a347b4b72073ce30ad669
* **Default Pool**: 0xf04b8374f4543863407dd157e596509e2d845c6a
* **Sorted Troves**: 0x88f48a2993ebe1dc1e2a4a879bd50a2e61a746c9
* **Stability Pool**: 0xc64fd2b3a948658698250a3b51946ecc3880f32d
* **Trove Manager**: 0xbeb4609ffff4ee01f31019a7fd6525e823ac0dfe
* **Trove NFT**: 0x521217a51fcbe0e4df3f8f89ad8aa0453e4fa1d2
* **Metadata NFT**: 0x95082e5dc37efcae44888d9964f690d4079da440
* **Price Feed**: 0xcd0700037754ea9bca3877ad970e20dc3eaf8b6d
* **Gas Pool**: 0x5a2621accf0014d3d58c93a3bdff29f26e71caba
* **Interest Router**: 0x0268d016717884632a7fd05043687cef2e51137f
* **Gas Comp Zapper**: 0xe3f0cb37cea75af068557b32a395c50adfe64560
* **Leverage Zapper**: 0xe3f0cb37cea75af068557b32a395c50adfe64560
### WBTC
* **Collateral Token**: 0x2260fac5e5542a773aa44fbcfedf7c193bc2c599
* **Addresses Registry**: 0x531f506435efb1c9f9bebadfee2eb179563ef1b2
* **Active Pool**: 0x2e4d932afaee7b88b39bf0665af307982ba88a9b
* **Borrower Operations**: 0xc94fb896b392ff1264060f5e1e91b71681d47819
* **Collateral Surplus Pool**: 0x88cba6a2a74157bc8473b34e697fb37458cfcbc4
* **Default Pool**: 0xc48599ded8dd1063044e83709709bcff4fe42e09
* **Sorted Troves**: 0x09b7bb4752c03c63eee8c32d034cb2612f493e9d
* **Stability Pool**: 0xcac3c0647868f041d1005adaf14920dfcc2b6969
* **Trove Manager**: 0x8b1eeba73fb9b385d2589a16307e29ae580387df
* **Trove NFT**: 0x709dc0cad52cc74d376613b861936c301300b2e1
* **Metadata NFT**: 0x6e8a088205436fe6e5e1f7e599d1202122958142
* **Price Feed**: 0xba1ae98ef8c0857f8a657f03b44ed31a4d0d921e
* **Gas Pool**: 0x0da5b5a4b5dee905352d088e6157e4b211ad5c5e
* **Interest Router**: 0x0268d016717884632a7fd05043687cef2e51137f
* **Gas Comp Zapper**: 0xc4cc6b5d7dfb2c6515f3eb8fa4c8f80fab4773af
* **Leverage Zapper**: 0xc4cc6b5d7dfb2c6515f3eb8fa4c8f80fab4773af
# Brand Assets
{% file src="/files/IhEfzIUU2AuxU8z7qBNf" %}
# Risk Disclosure
### **Dependencies**
* Oracles: Chainlink and Pyth for collaterals
### Chain Risk
* Deployment chain: Ethereum Mainnet
* Cross-chain: none (native to Mainnet and no cross-chain risks)
* Bridging: CCIP through Chainlink
While USDFI itself is native to Ethereum, it may eventually be supported by Chainlink’s Cross-Chain Interoperability Protocol (CCIP) for bridging. Once USDFI gets bridged to to other chains through CCIP, it will inherit security from Chainlink's existing network of decentralized nodes on the bridged Layer 2s.
### **Smart Contract Risks**
Liquity V2 has no manual pause, freeze, or shutdown functions. However, the protocol is capable of initiating an automatic shutdown of a borrow market in case of an extreme price drop of the respective collateral asset leading to insufficient collateralization, or an oracle failure of that particular collateral asset.
* See our audits for more information: DeDaub and ChainSecurity
* Pause function: none
* Protocol freeze function: none
* Protocol shutdown function: Yes, it would be algorithmically targeted towards a specific branch
* USDFI whitelist or blacklist: none
* USDFI transfer freeze functionality: none
### Collateral Risk
* Collaterals assets accepted: WBTC, LINK, UNI, AAVE, LDO, ENA, CRV, FXS, SKY and LQTY
* Collaterals assets accepted within the protocol are non-upgradeable and cannot be changed
**What’s the shared-collateral risks?**\
Each supported collateral asset constitutes an individual borrow market with its own group of borrowers and a separate Stability Pool backing their debts. This separation impacts user groups differently:
* Borrowers: Collateral risk is limited to the collateral asset held by the borrower. A borrower isn’t negatively affected by a failure of another collateral asset.
* USDFI Holders: As a multi-collateral stablecoin, USDFI is reliant on effective liquidations of undercollateralized loans in every borrow market to remain overcollateralized. Holders are subject to the risks of all supported collateral assets.
* Earners: SP depositors only get exposure to the asset they have opted for. However, as USDFI holders, they are similarly affected by potential depegging.
**Are there any safety mechanisms in place for potential de-pegs of the underlying collateral asset?**\
The protocol aims to protect each borrow market from becoming undercollateralized by throttling debt creation and collateral withdrawal in unhealthy markets and by shutting down the entire market as a last resort. There are two safety thresholds:
* Critical Threshold (CT): If the TCR of a borrow market falls below the CT (e.g., 150%), new debt creation is prohibited. Collateral withdrawal is allowed as long as it goes along with a debt repayment greater than or equal to the collateral withdrawn.
* Shutdown Threshold (ST): If the TCR drops below the ST (e.g., 110%), the protocol triggers the shutdown of the borrow market and disables all borrowing operations except for closing Troves. Users can redeem USDFI against the respective collateral at a more favorable exchange rate than the current oracle price.
### Oracle Risk
If Chainlink oracles fail, collateral markets might get priced inaccurately, leading to unfavorable redemptions or excessive or delayed liquidations. Oracle staleness could also cause problems by using out-of-date prices during shutdowns, leading to improper liquidations or redemptions.
**Mitigation:**
* The system tracks staleness thresholds and shuts down a branch if the price hasn't been updated for a preset period (e.g., 48 hours for rETH).
* Upon shutdown, redemptions use the last recorded price, limiting the time window for exploiters to take advantage of a stale oracle.
#### Infrastructure Risk
* Onchain infrastructure: None other than Infura nodes (transactions could get delayed or dropped) None for on-chain functionality.
* Open-source and publicly accessible off-chain infrastructure. The Graph integration will allow for indexing and querying, but remains publicly accessible.
### Governance and Economic Risk
* Core protocol: is immutable - nothing can updated or changed
* Upgradable code: none
* Upgradable parameters: none
* Timelocks: none
* DeFi Dollar multisig can only direct 25% of the revenues e.g. as liquidity incentives to LP pools. More information can be found [here](https://github.com/liquity/V2-gov/blob/main/README.md).
**Bad Debt mitigation and Branch Shutdown:**\
In extreme cases, such as a severe drop in collateral value or failure of a supported collateral, the system may become undercollateralized. This could lead to the shutdown of a specific collateral branch or market, and the remaining debt could become "bad debt"—unbacked by sufficient collateral. This could in the worst case lead to bank runs: a portion of the system debt can not be cleared, and hence a portion of the USDFI supply can never be redeemed.
**Mitigation:**\
Liquity V2 has built-in shutdown thresholds. When a collateral market's total collateral ratio (TCR) falls below the *Critical Threshold (CT)*, debt creation is paused, and collateral withdrawals are restricted. If the TCR drops further to the *Shutdown Threshold (ST)*, the protocol shuts down the market, freezes new borrowing, and triggers urgent redemptions. These redemptions are designed to clear as much debt as possible by allowing users to redeem USDFI at favorable rates. Additionally, redemptions are split in proportion to the "outside" portion of the respective debt, which is defined as the total debt borrowed against a certain collateral minus the size of the SP of the respective borrowing market.
That way, redemptions primarily reduce the debt of the borrowing market with the lowest SP backing, reducing the risks that the market ever drops below the thresholds. This triggers the liquidation of all collateral within that market to buy back and burn as much USDFI as possible. However, if the collateral price crash is severe, some portion of USDFI may become unbacked.
If this unbacked portion is small, the system can still function with USDFI retaining its peg, assuming no major loss of confidence. However, if confidence erodes, USDFI may depeg, leading to mass redemptions across healthier markets. In the worst-case scenario, the remaining debt-backed USDFI supply could be fully redeemed, leaving only the unbacked portion, potentially reducing USDFI's value to zero.This could happen even if the failed collateral represented a small portion of the entire market. The outcome ultimately depends on the market’s confidence in USDFI and the system’s ability to mitigate further risks.
### Liquidity Risk
Liquity V2 operates three distinct borrow markets, each backed by its own collateral types (ETH, wstETH, and rETH). Each market features separate stability pools, user-set interest rates, and individual Loan-to-Value (LTV) ratios tailored to the specific asset. This market structure allows for precise risk management, ensuring that liquidations and redistributions occur independently within each collateral market.
To support the stability of USDFI, Liquity V2 uses borrower-paid interest to create demand and facilitate liquidations. Borrower interest is directed into two primary venues:
1. Stability Pool (75%): Each borrow market is linked to a corresponding Stability Pool, where 75% of the interest paid by borrowers is deposited. USDFI depositors in the Stability Pool earn a portion of this interest, along with liquidation gains in the respective collateral asset. This structure helps maintain liquidity and solvency in each borrow market by absorbing liquidation events.
Potential risk: There's no guarantee that the liquidation gains are actually gains. In the worst case, e.g. when the oracle lags behind or an LST flash-crashes within a few blocks, the gains could turn into losses.
1. Protocol-Incentivized Liquidity (25%): The remaining 25% of interest goes to liquidity providers (LPs) as incentives, with the allocation split determined through weekly gauge voting. This incentivizes liquidity on decentralized exchanges, enhancing overall protocol stability and USDFI liquidity.
### **Redemption mechanism and risk for** USDFI **Stability**
To prevent USDFI from falling below $1, Liquity V2 includes a redemption mechanism. Any USDFI holder can redeem 1 USDFI for $1 worth of collateral, ensuring that USDFI remains pegged to its intended value. Redemptions are prioritized by the lowest interest rate Troves first, allowing borrowers to maintain their positions while keeping the system balanced. Importantly, redemptions do not result in a net loss for borrowers but ensure the peg remains intact.
### **Liquidation Process**
In the event of liquidations, the system first looks to the Stability Pool associated with the liquidated collateral type. If the Pool contains sufficient USDFI, it burns an amount equivalent to the borrower’s debt and redistributes the borrower’s collateral (105% of the debt) to the Pool’s depositors. These depositors receive both collateral and debt shares, proportional to their deposits.
If the Stability Pool is depleted and cannot cover the entire debt, the system falls back on two other liquidation modes:
* Just-in-Time (JIT) Liquidation: A liquidator deposits the amount of USDFI needed to cover the remaining debt directly into the Stability Pool, immediately triggering liquidation in exchange for 105% of the nominal debt in the collateral asset (e.g., WETH).
* Redistribution Mode: If JIT liquidation is not chosen, the entire debt and 110% of it in collateral is redistributed to fellow borrowers who hold the same type of collateral. Their debt increases proportionally, but they also receive a share of the liquidated collateral, ensuring system-wide balance.
This multi-layered liquidation process ensures that each collateral market is isolated from the others, minimizing systemic risk and allowing users to manage their positions independently.
### MEV Risks
**Frontrunning risk** Borrowers may attempt to evade redemptions by either adjusting their Trove’s interest rate or closing and reopening their Trove. This "frontrunning" could occur when the USDFI price falls below $1, as savvy borrowers try to protect their positions from redemptions that would otherwise target them based on their user-set interest rates. Both “hard” frontrunning (directly from mempool observations) and “soft” frontrunning (reacting to the USDFI peg) could negatively affect redemption efficiency and system stability, while also unfairly affecting borrowers that are playing by the rules.
**Mitigation:**\
Two fees are applied to disincentivize this behavior:
1. Upfront Borrowing Fee: Charged when a borrower opens a Trove or increases its debt, this fee is calculated as 7 days’ worth of average interest on the respective collateral branch. By applying this fee, borrowers are discouraged from continually closing and reopening Troves to evade redemptions, as it increases the cost of frequent adjustments.
2. Premature Adjustment Fee: When a borrower changes their interest rate too soon after the last adjustment (within a predefined cooldown period), they incur an additional opening fee. This mechanism prevents borrowers from rapidly adjusting their rates to avoid being prioritized in redemption processes, especially when rates are moving toward their redemption thresholds.
These measures help ensure that borrowers cannot easily front-run system redemptions.
**Flash Loans risk**\
In Liquity V2, redemption routing reduces the outside debt of each collateral branch proportionally. Flash loans could allow attackers to temporarily deposit USDFI into Stability Pools (SPs) of branches they wish to avoid, redirecting redemptions toward more favorable collateral branches. This could lead to arbitrage opportunities where the attacker selects assets with lower slippage on external markets.
However, while this strategy might increase profits for the attacker, it does not extract direct value from the protocol or impact the overall system health. The protocol’s design, with competitive redemption fees and the use of flash loan fees, naturally mitigates the risks associated with this manipulation. Flash loan fees reduce the profitability of such actions, and the competitive nature of redemption arbitrage further limits the potential benefits.
Mitigation: No fix is required because the risks are contained by the high costs of flash loans and the minimal impact on the protocol’s stability. Redemption routing is a soft measure designed to nudge the system toward balance, and the protocol remains reliant on the broader health of all collateral markets. Therefore, the system’s resilience is maintained despite these isolated arbitrage opportunities.
### NFT loan transfer risk
Troves are now represented as NFTs, enabling improved transferability and management of positions while maintaining the core stability mechanisms of the protocol. Troves are meant to be transferred between different owner accounts (e.g. hot and cold wallets), however, trading them in a marketplace poses additional risks. For example, Trove delegations and management accounts are not cleared after a transfer, the trove owner is able to reduce the trove's collateral before a trade, among other adversarial scenarios that could be used by malicious sellers on marketplaces.
