Introducing Liquity V2

Liquity V2 introduces several innovations to improve capital efficiency and user experience. One of the most notable features is the ability for users to set their own borrow APYs when creating collateralised debt positions (CDPs). The introduction of BOLD, the new stablecoin in Liquity V2, provides DeFi users with a fresh alternative for saving and earning, while also bringing more liquidity into the ecosystem.

BOLD

BOLD, Liquity’s new stablecoin, is designed to power more efficient savings and earnings within the DeFi ecosystem, with the following key features:

• Ethereum native (ETH and LST-backed)

• Protocol-enshrined real yield

• User-set interest rates

• Directly redeemable

• Immutable

Read more here.

Borrow APYs & Redemptions

Borrowers in Liquity V2 will set their own interest rates. The positions paying the lowest interest rates are liquidated first against redemptions. This system introduces both flexibility and complexity, as borrowers must balance between setting low rates for capital efficiency and maintaining high enough rates to avoid liquidation against redemptions.

Problem Statement

Market Complexity and APY Volatility:

While the user-set interest rate feature offers flexibility, it presents several challenges for BOLD borrowers:

• Borrow APY Fluctuations: Stablecoin borrow APYs, such as for USDC, often fluctuate significantly across top DeFi lending protocols, which in turn introduces liquidity volatility across the DeFi landscape. BOLD, being a new stablecoin, will also face these fluctuations, but with the benefit where users can control their costs. Thus, this makes it critical for users to actively manage their borrow APYs to avoid their troves getting redeemed.

• Redemption Risks: If borrowers set their interest rates too low, they risk having their positions redeemed first during redemption events, which results in a collateral swap, and lack of exposure to ETH. This makes it a unique challenge for BOLD borrowers, as monitoring their position is key.

• Builder Challenges: Developers building use-cases for BOLD would need tools to help users optimise interest rates while maintaining protocol liquidity and a healthy peg.

How to Mitigate the Problem?

The solution must offer real-time, data-driven insights to help users and builders:

• Predict Borrow APY Trends: Users need tools to accurately forecast APY fluctuations, helping them set optimal rates to avoid liquidation.

• Dynamic Rate Adjustments: Borrowers need the ability to adjust their rates in realtime based on changing market conditions, especially in response to sudden market volatility.

• Liquidity and Risk Management for Builders: Developers need advanced tools to help them optimise interest rate strategies across various collaterals and fluctuating borrowing conditions.

Lucidity’s APY Prediction

Lucidity is building the personalisation layer for Web3, offering AI-powered prediction models that provide personalised insights into DeFi ecosystems. By leveraging both on-chain and off-chain data, Lucidity will help users and builders make informed, data-driven decisions to optimise borrowing, lending, and risk management.

Proposed Solution

1. Real-Time Borrow APY Prediction and Optimisation for BOLD Borrowers

Lucidity’s AI models are designed to predict borrow APY fluctuations in realtime, particularly for stablecoins like BOLD. By analyzing historical data, market trends, and collateral behaviours, Lucidity will help borrowers set optimal interest rates. These models will enable BOLD minters to:

• Avoid a Redemption event: Lucidity will provide real-time alerts and insights, allowing borrowers to adjust their APYs proactively when market conditions shift, reducing the risk of being redeemed

• Maximise Borrowing Efficiency: Users can set competitive interest rates that ensure their positions are attractive to lenders without overexposing themselves to unnecessary risks.

2. Personalised Recommendations for Borrowers

Lucidity’s AI models will soon offer personalised recommendations to borrowers by continuously analyzing their position data and market trends. This would help users avoid setting rates that might expose them to redemptions, which is a key risk for BOLD borrowers. The ability to dynamically adjust APYs ensures that users can maintain borrowing efficiency without risking their positions being liquidated.

3. Advanced Tools for Builders and Developers

Builders and developers working within the Liquity ecosystem will benefit from real-time APY forecasting provided by Lucidity. These tools will help builders with:

• Optimising Liquidity Management: By predicting market trends, developers can help users maintain optimal borrowing and lending conditions, ensuring stable liquidity flows in the protocol.

• Real-Time Market Intelligence: Builders can integrate Lucidity’s AI models into their applications, giving their users access to real-time insights that improve decision-making.

Conclusion

Lucidity’s integration with Liquity V2 offers a targeted solution to the challenges posed by APY fluctuations and BOLD redemptions. By delivering personalised APY predictions, Lucidity will enable borrowers to optimise their borrowing strategies, minimising risk and improving capital efficiency across Liquity ecosystem. The collaboration between Lucidity and Liquity represents a significant step forward in bringing AI-powered personalisation to DeFi and the broader Web3 ecosystem.

About Lucidity

Lucidity is building the foundational layer to power a new era of personalisation in web3.

While Web2 has mastered delivering tailor-made experiences through sophisticated recommendation algorithms, such personalisation is fundamentally absent in web3. Web3 applications are often generic, one-size-fits-all, that fail to leverage the wealth of on-chain data available to create meaningful interactions.

We believe that the next generation of on-chain applications will be defined by their ability to deliver experiences that are highly personalised and optimised to the preferences of end-users and builders. Lucidity aims to power this vision through an ensemble of prediction models fused into a general-purpose matching engine. Read more in our docs.

If you're a protocol, builder, or community looking to enhance user experiences through predictive insights, Lucidity’s engine can empower your ecosystem with personalisation and intelligent decision-making. Reach out to power the new era of personalised on-chain interactions together!