Liquity V2's Safety Mode: What You Need to Know
Maintaining system health and resilience is very important for an autonomous system. Liquity V2 has a special feature called "Safety Mode" to support system solvency while maintaining decentralization. Here's a simple breakdown of how it works and what it means for you.
What is Safety Mode?
Safety Mode kicks in when the overall health of a specific collateral branch (called the Total Collateral Ratio, or TCR) drops below a certain level known as the Critical Collateral Ratio (CCR). This means that Safety Mode can be triggered for one collateral branch while others remain unaffected. The CCR for the ETH branch is 150%, while the CCRs for rETH and wstETH are both 160%. You can monitor the conditions of each branch at: https://dune.com/liquity/liquity-V2
When Safety Mode is activated for a given branch, the system puts some extra restrictions in place to ensure full over-collateralization of the system. Importantly, borrower actions alone can not bring the system into Safety Mode. It can only be activated by branch interest accumulating, or the collateral price decreasing.
What Happens in Safety Mode?
As a borrower, you are still able to:
- Add Collateral: You can add more collateral to your Trove to help improve the TCR.
- Repay Debt: You can repay your debt to bring it down to the minimum level of 2000 BOLD. This helps reduce the overall debt in the system.
- Adjust your interest rate at least 7 days after your last adjustment. Interest rate adjustments are allowed as long as they are not “premature”, i.e. as long as they don’t incur an upfront fee and increase system debt.
The following operations are conditionally allowed:
1. Opening a Trove: the resulting TCR must be equal or greater than the CCR
2. Closing a Trove: the resulting TCR must be equal or greater than the CCR
3. Jointly adding collateral and minting new BOLD: the resulting TCR must be equal or greater than the TCR
4. Jointly withdrawing collateral and repaying debt: the collateral withdrawn must be matched by debt repayment on a 1:1 basis
The following operations are not allowed:
- Adjusting interest rate prematurely: The system disallows a premature rate change, which would incur a fee. This would increase the debt in the system, and therefore immediately decrease the current TCR
- Purely withdrawing collateral
- Purely drawing new BOLD debt
Although these restrictions do limit the ability to fully close positions, these funds remain in the system and are not lost. Once the TCR rises past the CCR again, the restrictions are lifted. If however the branch health continues to decline and the TCR falls below the branch’s “Shutdown Threshold” (e.g. due to a sharp collateral price collapse), then the branch will exit Safety Mode and actually shut down. In this case, all restrictions are lifted and borrowers may fully and immediately close their positions.
Why These Rules?
The rules in Safety Mode have two main goals:
- Preventing further issues: When the TCR is at or above the CCR, borrowers’ actions can't make the system's health worse.
- Improving system health: When the TCR is below the CCR, borrowers’ actions should help improve the system's health.
Examples
Example: Opening a New Trove allowed in Safety Mode
Situation- Collateral: $145m (in ETH)
- Debt: $100m (in BOLD)
- TCR = 145% (CCR in ETH branch = 150%)
Operation
- Alice deposits $7m worth of ETH and borrows $1m BOLD.
- After the action: collateral = $152m, debt = $101m
- TCR = 152 ÷ 101 × 100 ≈ 150.5 % → allowed (≥ 150 %).
Example: Opening a New Trove rejected because system would enter Safety Mode
Situation:
- Collateral: $160m
- Debt: $100m
- TCR: 160% (CCR in wstETH branch = 160%)
Operation
- Frank deposits $4m and borrows $4m BOLD.
- After the action: collateral = $164m, debt = $104m
TCR = 164 ÷ 104 × 100 ≈ 157.7 % → rejected (falls below 160 %).
Example: Normal Interest Rates during Safety Mode
Situation
- Collateral: $145m (in ETH)
- Debt: $100m (in BOLD)
- TCR = 145% (CCR in ETH branch = 150%)
Operation
- A user hasn’t adjusted its rates for 30 days. The user can adjust the rate normally but he needs to wait at least 7 days to adjust it again
Example: Premature Interest Rate adjustment in Safety Mode
Situation
- Collateral: $145m (in ETH)
- Debt: $100m (in BOLD)
- TCR = 145% (CCR in ETH branch = 150%)
Operation
- A user that has adjusted its rate two days ago, needs to wait for another 5 days to adjust the rate. During that time he might get hit by redemptions if the rate was set too low.
Conclusion
Safety Mode in Liquity V2 is designed to keep the system stable and healthy. By following these rules, you help ensure that the protocol remains strong and resilient. Understanding these guidelines will help you navigate Safety Mode effectively and contribute to the overall stability of the Liquity V2 ecosystem, even if you're a smaller user.
