Liquity V2 (and its forks) Stability Pool Compounder

MAX LRT Strategies
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Liquity V2 (and its forks) Stability Pool Compounder

Title: MAX LRT Type / Strategy Name

1. Select Your MAX LRT Category:

Selected Category: ynUSDx

Strategy Description:

Liquity V2, just like its previous version, allows users to deposit stablecoin (BOLD for V2, LUSD for V1) into a stability pool (SP) and earn LQTY and collateral for minting stablecoin. Whenever there is a liquidation, the SP funds are used to repay the debt on behalf of the minter, and in exchange, the SP receives collateral with around a 5% discount. By regularly checking our position in SP and swapping tokens other than stablecoin into stablecoin, we can earn a (almost) risk-free yield in USD.

Protocol Risks:

  • Smart Contract Risks: Stablecoin contracts and SP vulnerabilities may affect the strategy. Liquity V2 is undergoing a major update due to potential contract risk. However, there was no problem with their previous version, so I believe the new SP for V2 will be safe.
  • Market Risks: A Drastic drop in collateral price may result in loss of funds since a 5% discount may not be enough.
  • Operational Risks: We should monitor any potential updates to system parameters, such as the discount rate.

Protocol’s Liquidity History:

  • For V1 (LUSD), around 47M LUSD has been minted, 22M LUSD has been deposited in SP, and around 110k ETH (~ 200M USD) is backing LUSD.
  • SP depositors historically did not experience loss if they compounded appropriately. Sometimes, not compounding as soon as receiving collateral results in more profitable action; whenever they receive collateral, it’s usually buying the dip, which means the price is undershot so that they can benefit from price recovery of collateral asset.
  • There is no liquidity disruption, at least for LUSD.

Redemption Flows:

  • Detailed Flow:
    1. User request for redemption.
    1. Vault checks whether its SP position has tokens other than stablecoin.
  • 2.1. If so, swap them through DEXs, with the benchmark price as 30-minute TWAP at most liquid DEX pools, such as Uniswap or Curve.
    1. Update the exchange rate and return the fund to the user.
  • Potential Issues:
    1. If the volatility of receiving tokens is too significant, the swap may revert. To mitigate it is recommended that governance regularly do a swap or make it permissionless by rewarding the searcher who triggered the swap by sharing the portion of tokens.

Best-case Scenario: No other token is left, so the swap is skipped, and the user receives the token immediately.

Worst-case scenario: If volatility is too high, the swap will be reverted, and the whole transaction will be reverted.

Conclusion - Why Add This Strategy:

Buying the dip is one of the most profitable and steady strategies in almost any market. For instance, many derivative exchanges make vast amounts of money from liquidations. This strategy also earns the most money when the market is bad. So, if combined with other strategies that work well in a good market, ynUSDx can deliver steady and robust revenue to users.

Submitted by: wycfwycf
Date: Apr 2nd 2025 (in UTC)

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