In Liquity V2, users have full control by setting their own interest rates. This introduces a new primitive to DeFi, so let's explore how to use it.
When opening a loan, you need to set your collateral and debt amounts, which determines your loan-to-value ratio. With Liquity V2, you now have a third parameter to control: your interest rate.
The interest rate sets the cost of your loan, as well as your risk of redemption.
These two factors are inversely related. The lower your rate, the cheaper your loan, but the higher your risk of redemption, and vice versa.
This is because
$BOLD redemptions for protocol collateral are processed against lowest interest rate positions first.
This creates two primary user types:
- Aggressive: wants the cheapest loan possible and is willing to closely monitor their position and adjust their rate frequently.
- Passive: prefers a hands-off approach, willing to pay a higher rate for the peace of mind that comes with a low-maintenance position.
Between these two stereotypes, there are many different risk profiles. You need to determine where you fit in and act accordingly.
How to set your rate
To determine your ideal rate, you need to consider two factors:
- The rates set by other borrowers, given your redemption risk is relative to other users’ positions.
- Current rates across DeFi, which provide a sense for the market's theoretical equilibrium rate.
The positions of other borrowers can be viewed on the borrow screen. As you adjust your rate, the debt in front and your costs will change.
For example, suppose you see a large number of borrowers on Liquity V2 in the 8.5% range. You could then position yourself at 10% and be confident that you're paying a relatively low rate with lower redemption risk, despite the overall market suggesting it's a riskier position.
While your primary benchmark is the rate distribution across other borrowers, you can help position yourself by using rate dashboards like
@DefiLlama, Sphere by
@BlockAnalitica , and
@SuperlendHQ.
On this chart from the Sphere dashboard you can see that currently 8% is an aggressive borrow rate, and 16% a passive one.
You can also view current market rates for borrowing stablecoins across multiple markets and compare them in a table format, here an example from DefiLlama.
You can filter it based on various criteria easily, finding the exact data you need.
Impact of the BOLD price
Redemptions usually occur through arbitrage when BOLD trades below $1, as they're not profitable otherwise. Therefore, when BOLD is above $1, the risk of redemption is nearly zero.
If BOLD trades above peg for a prolonged period of time, users will adjust their rates to the downside, decreasing their cost and allowing them to increase the circulating supply.
Putting it all together
Your interest rate determines both the cost of your loan and your risk of redemption. Lower rates reduce your cost but increase your redemption risk. Set your rate in line with how actively you want to manage it, and keep an eye on the price of BOLD.