Liquity Protocol investigates potential issues with its V2 stability pools, urges users to close positions

Liquity Protocol, a borrowing hub on Ethereum (ETH), reported a potential problem with its V2 vaults. The protocol called for all users to close their positions as a precaution. 

Liquity Protocol reported a potential issue with its V2 vaults, urging all users to close their positions for additional security as the team investigates the problem. Users were urged to disconnect their wallets, close their lending positions, and avoid interacting with unknown intermediaries or front ends claiming to connect to the protocol. 

The attack may have also affected Lido users, who may also deposit their tokens into Liquity vaults. Potentially, RocketPool users may also be affected, as Liquity allows the usage of liquid staking ETH as collaterals in its pools. 

⚠️ Notice to wstETH Users:

It is recommended to promptly withdraw tokens from Liquity V2 Stability Pool (“Earn”) as a potential issue is being investigated by their team.

For updates, refer to official Liquity channels. https://t.co/2ag6TcwK1q

— Lido (@LidoFinance) February 12, 2025

Rocketpool has not warned its users, though the warning may also apply to rETH holders. Nerite is also one of the partner protocols, as Liquity allows for multi-collateral deposits. The Nerite project is a fork of Liquity V2 on Arbitrum, suggesting the problem is fundamental to the smart contracts and is repeated on all chains.

There are no confirmed reports of missing coins and tokens, or drained vaults. LQTY tokens remain available in the vaults, and users can withdraw their collateral. The BOLD stablecoin remains fully backed and liquid. Liquity is fully permissionless, with no lockup periods, and end users can always withdraw their collateral. BOLD tokens can also never be frozen or blacklisted. While convenient for some users, those features also allow hackers and exploiters to move away with funds. 

Lending protocols remained one of the DeFi staples, a tool to tap the value of other tokens while using available stablecoin liquidity. Pools are also often the target of attacks, aiming for low-security points in smart contracts or vulnerable wallets. 

Liquidity V2 is a permissionless lending vault, where the team does not perform additional actions to release the funds. Both Lido and Liquity warned against scams and messages disguised as helping users retrieve their funds. 

The Liquity V2 is a relatively new vault on the Ethereum network, launched on January 23. The vault partnered with Nexus Mutual for protection against hacks, oracle attacks, and other exploits, though the protocol still encountered a problem.

Liquity is among the relatively large lending protocols, with significant WETH, wstETH, and rETH positions. The protocol reported $384.38M in value locked, with $80.71M locked in the new V2 vaults. 

The V2 lending pool allowed users to set up lending pools against their WETH, wstETH, and rETH reserves. Depositors of those tokens can mint BOLD at their preferred interest rate. Additionally, those that deposited BOLD for additional liquidity, could earn a passive income. For now, none of the collateral or loan assets are affected, but the protocol may be exposed to a potential attack. 

Liquity assets have spread to other DeFi projects, DEX, and other platforms, becoming a source of additional liquidity for trading or tapping other protocols for passive income. 

Liquity aimed to recover its growth in 2025

Liquity is one of the older DeFi lending protocols, ranked 44th based on its value locked. The protocol aims to grow its revenues while offering 2,79% APR for staking LQTY tokens. 

The Liquity vault is relatively niche, with around 13,878 holders of LQTY, and 8,322 holders of the LUSD stablecoin. Locking LUSD in the stability pool has an annualized yield of 6.44%. 

Liquity peaked in 2021 during the first DeFi boom, with over $4.4B in value locked. The 2022 market crash deeply affected the protocol, leaving it to work with a fraction of that liquidity. Currently, the lending vaults are over-collateralized, with a 527.7% total collateral ratio.

Following the news, LQTY traded at $1.06, with a minimal drawdown. The token has been drifting sideways at a fully diluted valuation of $106M. The protocol is valued even lower than newly launched meme tokens, despite being a producer of passive income and a liquidity hub. 

Liquity Protocol is also a fee producer, depending on market conditions. Fees from the protocol reached over $165K during the market peak in November, falling to around $69K in January, based on Token Terminal data. 

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