A New Era of Decentralized Stablecoins

If this is your first cycle, you may not be wise to the history of decentralized stablecoins in DeFi. Maker DAO pioneered the CDP model, with DAI launching as the first crypto-backed stablecoin in 2015. DAI dominated the decentralized stablecoin sector during Ethereum’s early years, serving as the primary uncensorable alternative to centralized options like USDT and USDC.

In late 2019, Maker introduced the idea of adding USDC as collateral in an effort to stabilize the price of DAI during times of extreme volatility. Following the market crash in early 2020, a proposal was successfully passed to include USDC to the collateral basket. With USDC now embedded into the DAI system, it was no longer an uncensorable stablecoin, drawing criticism from those who valued its original, decentralized design. However, this shift also spurred innovation, paving the way for a new generation of decentralized stablecoins. In early 2021, RAI from Reflexer and LUSD from Liquity emerged as the new champions of decentralization.

LUSD instantly became a fan favorite, attracting decentralization maxis en masse and absorbing over $4 billion in total value locked (TVL) in a matter of weeks. Since then, Liquity has been widely regarded as a cornerstone of Ethereum DeFi. As decentralized stablecoins have come and gone, LUSD has remained a pillar of decentralization and stability, even providing a safe haven for DeFi users in times of extreme uncertainty.

Today, Liquity v1 stands as the most forked stablecoin protocol in history. Its robust design and efficient liquidation mechanisms have inspired countless developers to build upon its success. Our team is among them; we’ve spent nearly three years iterating on Liquity v1, introducing features like multi-collateral support and rehypothecation, as showcased in Ironclad’s CDP module.

In February of last year, the Liquity team introduced Liquity v2, their next evolution, along with a new stablecoin named BOLD. After nearly a year of careful preparation, Liquity v2 is ready to launch, opening a new chapter for decentralized stablecoins.

Ironclad x Liquity

Following widespread forking of the v1 codebase, similar activity was expected for v2. The Liquity team saw this as an opportunity and developed a strategy to capitalize on the highly anticipated release of the evolved tech stack.

Coining the term forkanomics, Liquity has signed licensing agreements with more than 15 teams, each dedicated to maintaining and expanding a unique v2 implementation, on their own respective networks, and in support of Liquity itself.

We are thrilled to announce that we have signed an exclusive agreement to bring Liquity v2 to Base under the Ironclad banner.

This partnership marks a significant step forward in advancing the Base ecosystem and reinforcing Liquity’s position as a leader in the stablecoin sector.

Several collaborative forks have been announced, with many more to follow:

@NeriteOrg  on  @arbitrum
@felixprotocol  on  @HyperliquidX
@QuillFi  on  @Scroll_ZKP
@asymmetryfin  on  @AmpleforthOrg
@beraborrow  on  @berachain
@Virtue_Money  on  @iota

We are proud to add the Ironclad name to this growing list of talented builders.

Liquity V2 Design

Liquity v2 introduces several significant innovations designed to address the challenges Liquity v1 faced during the DeFi bear market of 2022 and 2023. In a high-interest-rate environment where short-term U.S Treasury Bills (USTs) yield approximately 5%, competing for capital becomes increasingly challenging. Some key advancements in v2 include:

User-Set Interest Rates
Traditional interest rate models (IRMs) in DeFi, such as the widely-used jump rate curve, often lack adaptability to changing market conditions. Governance-set rates exacerbate this issue, as they are slow to implement and frequently lag behind real-time market demands. Liquity v2 resolves these shortcomings by introducing borrower-set interest rates, giving users complete control over their debt. This innovation provides borrowers with full flexibility while enabling the market to establish interest rates that more accurately reflect the demand for debt.

Improved Redemption Protection
Redemptions are crucial for maintaining the stablecoin’s $1 peg, allowing users to purchase it on the market and redeem borrower collateral for profit. In the v1 system, redemptions are ordered by collateral ratio, prioritizing the least-collateralized positions. This discourages high loan-to-value borrowing, resulting in excessive over-collateralization and reduced capital efficiency. Liquity v2 addresses this by ordering redemptions based on ascending interest paid. Borrowers can avoid redemption by opting to pay higher interest rates, rather than maintaining excessively high collateral ratios.

Real, Sustainable Yield
One of the key challenges Liquity v1 faces is the imbalance between demand to long and short the stablecoin. In a high-interest rate environment, offering interest-free loans comes at the risk of being on the short end of a carry trade. If short-term USTs are yielding 5%, the market rate for lending stables in DeFi will trend towards those returns. The carry trade, in this instance, would involve borrowing and shorting LUSD (interest-free) to take advantage of high lending rates on Aave or similar.

Liquity v2 offers a source of sustainable yield on top of built-in liquidation revenue. Fees paid by the borrowers can be used to drive demand to hold (long) the native stablecoin via the stability pool.

Support for New Collateral
Over the past couple years, the most popular asset class in DeFi has been liquid staking derivatives, particularly ETH LSTs and LRTs. Liquity v2 has been built for multi-collateral support, namely interest-bearing derivatives, widening the user base and improving PMF while maintaining the core values of Ethereum alignment and decentralization.

You can read more about Liquity v2 in their blog here.

A BOLD Alignment

The forkanomics strategy embodies a spirit of collaboration over competition. While each fork introduces its own unique implementation, all are committed to the growth and success of the core protocol and its stakeholders. Aligned with this vision, we are allocating 5% of the ICL supply to incentivize early adopters and liquidity providers of BOLD.

Details about the specific positions eligible for these incentives will be shared in the coming weeks, ahead of our launch.

Ironclad on Mode

We will continue to grow and expand Ironclad’s lending infrastructure on Mode in tandem with our Base launch. Our dual-network/protocol strategy will not only widen our audience, but also strengthen our presence on both platforms, leveraging the ecosystem of protocols and communities participating in the Liquity v2 expansion effort.

We are extremely excited to embark on this new journey alongside you all. Stay tuned for further updates regarding revenue sharing, ICL tokenomics updates, and our Base stablecoin implementation.

Join the discussion in our Discord for more frequent updates ahead of our launch on Base.