Discover our Liquity review for 2025, covering 0% interest loans, LUSD stability, and DeFi borrowing. Find out if Liquity suits your crypto needs.

Regulatory Compliance & Licensing

As a permissionless and immutable DeFi protocol on Ethereum, Liquity does not hold traditional financial licenses, instead relying on the decentralized nature of blockchain technology for compliance. This setup minimizes central points of failure and regulatory targets, aligning with Ethereum’s ethos.

The LQTY token, used for staking and rewards, could face scrutiny under securities laws in jurisdictions like the United States (e.g., via SEC classifications), but the protocol’s lack of ongoing governance reduces such risks compared to DAO-heavy platforms. All code is open-source and available on GitHub for public review, promoting transparency and allowing independent verification. Users are responsible for adhering to their local regulations, such as KYC/AML requirements in restricted regions, and the platform advises against use in sanctioned countries.

V2’s fully on-chain mechanics further avoid off-chain dependencies that could invite regulatory oversight. While DeFi regulations evolve globally (e.g., EU’s MiCA framework), Liquity’s design positions it well for compliance through decentralization.

Interest Rates & Earning Mechanics

Liquity’s earning model is distinctive: In V1, borrowers pay no ongoing interest, only a one-time borrowing fee starting at 0.5% (adjusted dynamically up to 5% based on redemption volume). V2 introduces flexibility with BOLD, where borrowers can set and adjust their own interest rates (typically ranging from 0% to 5% or higher in volatile markets) to deter redemptions and stabilize the peg.

This user-controlled approach allows for personalized risk management—lower rates increase redemption risks but reduce costs. Lenders, or rather Stability Pool depositors, earn yields primarily from liquidation gains: When a trove (loan position) falls below 110% collateral ratio, it’s liquidated, transferring a portion (up to 10.5% penalty) to the pool, yielding an average historical APY of about 2.17%.

Additional incentives come from LQTY token emissions, which can be staked for fee revenue shares. Redemptions—where users exchange LUSD/BOLD for collateral at face value—create arbitrage opportunities and help maintain the stablecoin peg. All mechanics are transparent, with real-time dashboards on the Liquity app showing trove health, pool yields, and fee structures. Yields fluctuate with market conditions, requiring active monitoring, but the absence of variable lending rates simplifies predictions compared to platforms like Aave.

Supported Assets

Liquity’s asset support is deliberately focused to ensure security and liquidity. V1 is limited to ETH as collateral for minting LUSD, leveraging Ethereum’s native asset for robustness. V2 expands this to include popular LSTs like Lido’s wstETH and Rocket Pool’s rETH, allowing users to borrow while earning staking rewards (typically 3-4% APY on ETH). This integration taps into the $30B+ liquid staking market as of 2025, enhancing capital efficiency. The protocol issues only LUSD (V1) or BOLD (V2) as borrowable assets, both USD-pegged stablecoins designed for stability.

While not as broad as multi-asset lenders like Compound (which supports dozens of tokens), Liquity’s ETH-centric approach minimizes oracle risks and ensures deep liquidity. Future roadmap hints at additional LSTs like cbETH, but no plans for volatile altcoins to maintain risk controls.

Loan Terms & LTV Options

Loans, termed “troves,” are overcollateralized with a strict minimum collateral ratio (CR) of 110% in normal mode (up to 91% LTV), dropping to 150% in recovery mode during high-risk periods to protect the system. V2 improves efficiency with adjustable rates influencing redemption thresholds. Terms are open-ended with no maturity dates, allowing borrowers to repay or adjust at any time without penalties. Liquidations are automated via the Stability Pool if CR falls below 110%, incurring a 0.5% gas compensation plus up to 10% penalty redistributed to depositors.

Redemptions serve as a secondary stabilization tool, where anyone can redeem LUSD/BOLD for collateral at par value, targeting riskiest troves first. No prepayment fees encourage flexibility, and V2’s rate adjustments add strategic depth. Real-time alerts via the app help manage positions, though users must vigilantly monitor ETH price volatility.

Fees & Cost Structure

Liquity keeps fees minimal and transparent: A one-time borrowing fee (0.5% minimum in V1, variable in V2 based on recent redemptions), a 0.5% redemption fee decaying over time, and Ethereum gas costs for transactions (typically $5-20 in 2025’s Layer-1 environment). No ongoing interest in V1 reduces long-term costs, while V2’s self-set rates are optional. Stability Pool deposits and withdrawals are fee-free, aside from gas. Compared to platforms with variable borrowing rates (e.g., 2-10% on Aave), Liquity’s structure is cost-effective for passive borrowers. All fees are displayed upfront in the interface, with no hidden charges.

Security Architecture & Custody

Security is a cornerstone of Liquity’s design: Smart contracts are immutable after deployment, eliminating upgrade risks, and have undergone rigorous audits by top firms including Trail of Bits (initial), ChainSecurity, Recon, and Dedaub (for V2 in 2025). The protocol minimizes dependencies, relying only on Chainlink oracles for ETH price feeds to reduce attack vectors. Users maintain full custody via non-custodial wallets like MetaMask, with no protocol-level access to funds.

The Stability Pool and redemption mechanisms decentralize liquidation risks, preventing cascading failures. Since launch, there have been no major breaches or exploits, though V2’s early 2025 deployment revealed non-critical bugs in interest calculations, resolved via a safe redeployment without impacting users. Bug bounties up to $250,000 further incentivize white-hat discoveries.

Insurance & Risk Mitigation

Liquity does not offer traditional insurance like Nexus Mutual covers; instead, it employs built-in mechanisms: Overcollateralization buffers against volatility, the Stability Pool absorbs liquidations with incentives, and redemptions enforce the peg by targeting weak positions. In recovery mode, higher CR requirements (150%) protect the system during stress. Risks include oracle manipulation (mitigated by Chainlink’s decentralization) and extreme market crashes, but historical performance shows resilience (e.g., surviving 2022’s downturn). Users can hedge via external tools, but the protocol’s design prioritizes self-insurance through incentives.

User Experience (Web & Mobile)

The Liquity web app (app.liquity.org) features a clean, intuitive interface with step-by-step guides for opening troves, depositing to pools, and monitoring positions. Wallet integrations are seamless (MetaMask, WalletConnect, etc.), and real-time data on CR, fees, and yields enhances usability.

Mobile access works via browser-based wallets, though no native app exists, requiring some technical savvy for gas management. Educational resources, including detailed docs and tutorials, help onboard newcomers. V2 adds dashboards for rate adjustments, improving interactivity. Overall, it’s user-friendly for DeFi veterans but may intimidate beginners due to concepts like redemptions.

Customer Support & Community

Support is community-led, with active channels on Discord (over 10,000 members), X (@LiquityProtocol), and Telegram for discussions and troubleshooting. The team hosts regular AMAs and provides comprehensive documentation, including FAQs and audit reports. No 24/7 centralized helpdesk, but response times are quick via community moderators. The governance-free model fosters a collaborative ethos, with forums for feature suggestions. Strong engagement is evident in LQTY staking participation and ecosystem integrations.

Unique Features & Differentiators

Liquity stands out with:

• Zero-Interest Borrowing (V1): No ongoing rates, just one-time fees for cost predictability.
• User-Configurable Rates (V2): Borrowers set their own interest to manage redemption risks dynamically.
• Stability Pool Mechanism: Decentralized liquidations that reward depositors instantly, more efficient than auctions.
• Immutable & Governance-Minimal Design: No DAO votes or upgrades, reducing centralization and attack surfaces.

These elements differentiate it from Aave or Compound, which rely on variable rates and governance, offering a purer, more efficient DeFi experience focused on ETH liquidity.

Historical Performance & Market Events

Since its 2021 launch, Liquity has shown consistent growth, peaking at over $2 billion TVL in 2022 before stabilizing post-bear market. It weathered the 2022 crypto winter without incidents, maintaining LUSD’s peg amid volatility. The 2025 V2 rollout initially boosted TVL by 20% but faced stability pool bugs, resolved swiftly without losses—demonstrating operational resilience. No hacks or major defaults have occurred, and integration with LSTs has driven renewed interest. Market events like Ethereum’s Dencun upgrade (lowering gas fees) have positively impacted usability.

Risks & Transparency

With fully open-source code on GitHub and immutable contracts, Liquity exemplifies transparency—anyone can verify operations. No governance means no insider influence; all changes (like V2) are new deployments. Detailed audit reports, on-chain metrics, and public dashboards ensure accountability. The team’s communication during the V2 incident was prompt and honest, rebuilding trust effectively.

Future Outlook & Roadmap

Looking ahead, Liquity’s 2025-2027 roadmap emphasizes V2 optimization, including more LST collaterals (e.g., EigenLayer integrations) and potential Layer-2 deployments for lower fees. BOLD adoption is targeted to rival established stablecoins, with ecosystem expansions via partnerships. Amid DeFi’s projected growth to $100B+ TVL, Liquity is well-positioned, though navigating regulatory shifts and competition from RWA platforms remains key.