Side X Side: Ironclad and Liquity V2

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

Ironclad is designed to mitigate Liquity v1 vulnerabilities by introducing a sustainable and scalable yield source for its native stablecoin. The system accomplishes this by rehypothecating collateral into an integrated lending module, generating yield that is used to drive demand to hold the stablecoin, while simultaneously bootstrapping the lending module supply-side.

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

Liquity v2 introduces several innovations aimed at improving the borrowing experience and addressing high-interest rate environment headwinds. Key changes include user-set interest rates, multi-collateral support, and transferable loans.
  • 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

Under-utilization remains a central challenge for CDP-based stablecoins. While borrower-set interest rates introduce an exciting new paradigm, they could trade one problem for another. Although redemptions no longer deter borrowers from taking high LTV loans, the cost of this benefit is a higher borrowing expense. To avoid redemptions, borrowers must pay a premium—likely exceeding the stablecoin market rate at any given time.

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.