Ironclad & Liquity v2: A Brief Analysis
Ironclad and Liquity v2 are both designed to tackle the key challenges of Liquity v1, which tend to reinforce each other: downward peg pressure driven by carry trades in high-interest rate environments and capital inefficiency caused by the threat of redemptions.
Both Ironclad and Liquity v2 represent significant advancements over Liquity v1, addressing core inefficiencies while introducing novel mechanisms to balance yield generation, native stablecoin incentives, and redemption risks.

Ironclad

Strengths
- Interest-Free Loans — No interest accrued on iUSD borrows.
- System Capital Efficiency — Stablecoin collateral is active capital in the lending module.
- Lowest minimum collateral ratios (MCR) — Lowest MCRs across all CDPs in DeFi.
- Management Fee on Yield-Bearing Collateral — Prevents downward peg pressure by discouraging looping borrowed iUSD.
Weaknesses
- Redemption Risk, Under-Utilization — Borrowing is constrained by the fear of redemptions.
Liquity V2

- User-Set Interest Rates – Enables borrowers to determine their own interest rates, allowing borrower flexibility and improved adaptation to market rates.
- Multi-Collateral Support – Expands collateral options beyond native ETH to include Ethereum Liquid Staking Tokens (ETH LSTs), broadening user accessibility.
- Transferable Loans – Introduces the ability to transfer debt positions, adding flexibility for borrowers.
Strengths
- Improved Redemption Protection – Redemptions are ordered based on ascending interest rates paid, enabling borrowers to opt for higher rates to avoid liquidation rather than relying solely on high collateral ratios.
- Improved LTV Ratios – Lower MCRs than Liquity v1, enabling more capital efficient loans without the fear of redemptions.
- Built-In Yield – Interest payments from borrowers create an organic yield stream for stablecoin holders, driving demand for the native stablecoin.
Weaknesses
- High-Interest Borrowing – Borrowers must pay a premium in interest to retain their positions.
Conclusion

Ironclad still faces under-utilization, but it minimizes redemptions while maintaining zero-interest loans through rehypothecation and a management fee. The yield generated from collateral rehypothecation, along with a fee designed to discourage folding (looping), helps reduce the time spent below peg, thereby mitigating redemptions.
Ultimately, Liquity v2’s effectiveness in practice remains to be seen. While it narrows the collateral ratio gap, the game-theoretic complexities surrounding interest rate competition could present new challenges to overcome in order to reach scaling escape velocity.