The fundamental purpose of a stablecoin is to preserve value.

To achieve this, a stablecoin must withstand both internal and external factors that could erode it, ensuring that its value remains stable.

Surprisingly, despite being called "Decentralized Finance," the industry lacks a diverse range of truly decentralized stablecoins. Apart from a few examples, such as LUSD and RAI, most stablecoins fail to meet this standard. A genuinely decentralized stablecoin is one that is backed by trustless collateral assets only, has no centralized counterparties, and whose core functions cannot be altered by anyone.

This shortage poses a significant issue for the industry as a whole. In response, initiatives have emerged to address this concern. For example, Bluechip is developing a rating system to evaluate the economic safety of stablecoins, while DeFiScan, is establishing a framework to assess the decentralization levels of protocols.

Drawing from these frameworks, the robustness of a stablecoin can be evaluated by assessing the following key parameters:

• Collaterization and redeemability
• Counterparty risk
• Decentralization

If a stablecoin or protocol scores poorly on these parameters, it's important to understand the associated risk factors and adjust your exposure accordingly.

Let's dive deeper into each of these.

Collaterization and redeemability

Collaterization of a stablecoin is paramount, as it forms the foundation of its value.

The ideal collateral asset is non-volatile and highly liquid. Currently the US Dollar is the prime collateral asset, which is why Tether and Circle use it to back their stablecoins.

However, those USD reserves need to be held offchain, in a bank, which is incompatible with the decentralized and trustless nature of DeFi.

Using on-chain representations of the US Dollar, such as USDT and USDC, is a common alternative, but this approach inherits the underlying ethical incompatibility and adds additional risks, including human error, non-transparent reserve management, blacklists, and smart contract vulnerabilities.

To build a truly decentralized and trustless stablecoin, only the best DeFi collateral assets should be used. These include ETH and time-tested LSTs like wstETH and rETH. 

BOLD uses only these core assets as collateral, holding them in segregated smart contracts that are not utilized in any way and can be redeemed by their owner at any time.

Counterparty Risk

In the context of DeFi, incorporating any element which is centrally controlled adds risk. The most obvious one is having offchain dependencies - tokens, custodians, service providers, etc. This reduces transparency, predictability and makes you susceptible to regulatory overstep.

Other serious, DeFi-centric risks are the ability to change core parameters via a multi-sig controlled by a small group of people or, to a lesser degree, via governance.

A successful governance model prioritizes decentralization, transparency, and efficient decision-making. Ideally, it fosters global participation, encouraging active and informed discussions that lead to community-driven decisions.

However, in reality, most DAOs struggle with issues like power concentration, voter apathy, increased vulnerability to hacks, and opaque decision-making. This often results in protocols being shaped by the interests of a small, influential group rather than the broader community.

The ideal governance, one which avoids this, is no governance at all - a protocol governed solely by the law of code. This approach ensures that rules are set from the outset, all outcomes are predictable, and the playing field is level for all participants. By removing the need for human intervention, this model increases transparency, predictability, and fairness.

Decentralization

Building decentralized and resilient systems is the foundation of this industry, yet hardly anyone is doing it. Why? Because creating permissionless and immutable contracts is a hard task, and developers are unwilling to relinquish control and their ability to make changes.

But this introduces its users to a whole set of risks:

• Core parameter changes (collateral, fees, token issuance…)
• User censorship risk / Blacklisting
• Bigger attack surface for hacks
• Platform censorship
• Custodian risk

In contrast, decentralized and immutable systems provide a safer and more transparent environment. By embracing decentralization, we can build more resilient, predictable and trustworthy systems that truly embody the spirit of DeFi.

A BOLD Stance

Liquity is known for creating unapologetically decentralized and resilient products: V1 and LUSD have both achieved the highest scores on Bluechip and DeFiScan.

V2 continues this tradition, refusing to compromise on decentralization and adhering to the same strict standards as V1. BOLD will join LUSD as one of the most decentralized stablecoins, while improving on it in terms of stability, scalability, and yield.

As a result, BOLD will become the go-to stablecoin for treasuries and individuals who value true DeFi principles.

Holding BOLD means having peace of mind, knowing:

• It will always be worth $1, thanks to direct redeemability
• No 3rd parties can access or influence your funds
• No admins or DAOs can introduce changes

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With Liquity V2 a new BOLD era for DeFi begins.

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