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Liquity V2 will allow borrowers to set their own borrowing costs, offering a new approach to DeFi, and the protocol plans to pay back the bulk of its revenues to liquidity providers.
Liquity’s upgraded protocol aims to increase competition in the DeFi yield race and plans to go live in the third quarter. The new stablecoin BOLD will co-exist with Liquity’s existing LUSD stablecoin, allowing investors to use liquid staking derivatives of ETH as collateral to provide liquidity or leverage.
The planned upgrade of decentralized finance (DeFi) lending platform Liquity (LQTY) will include an over-collateralized stablecoin that uses ether (ETH) liquid staking tokens as backing assets and allows user-determined interest rates for loans. According to the protocol, this will be a first in DeFi.
“Current protocols either rely on slow and potentially incompatible human management to adjust interest rates or lack a targeted way to use interest payments to increase demand for stablecoins,” notes the white paper published Tuesday. “Liquity V2 will change this.”
Details of the new version are scheduled to launch at the end of the third quarter, while new yield-earning strategies and ROI will help DeFi native stablecoins weather the crypto winter in 2022 and 2023. For example, Aave and Curve introduced their own stablecoins last year, with Ethena’s “synthetic dollar” generating returns from USDe, bitcoin (BTC) and ETH futures, attracting $2.3 billion in deposits.
Liquity is known as a stablecoin lender that allows users to get loans in over-collateralized LUSD stablecoins at 0% interest by depositing ETH into the protocol. In May 2021, at the peak of the previous crypto bull market, the total value locked (TVL) on the protocol exceeded $4 billion. It’s currently at around $700 million, according to DefiLlama data.
The new stablecoin, BOLD, will co-exist with LUSD. It will allow borrowers to borrow ETH and liquid staking ETH derivatives by depositing them as collateral and set their preferred interest rate, and plans to repay most of the revenue from borrowing fees into the stability pool and secondary markets promoted by the protocol.
The idea behind allowing borrowers to set loan rates is to align incentives: The more borrowers are willing to pay, the more revenue they contribute to the protocol, and that revenue is paid out to BOLD holders in stability and liquidity pools.
“LUSD is great for its decentralized capabilities, but it lacks the flexibility to adapt to changing market conditions such as rising or falling interest rates,” Samrat Lekhak, head of business development and communications at Liquity, said in an interview on Telegram. “During periods of positive interest rates, it implies the need for a constant source of return for the stablecoin, which BOLD provides.”
Liquity plans to implement the protocol by the end of the third quarter of this year, Lekhak said.
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