The lid-driven cavity does not need to have cavitation (ie. bubbles forming in liquid). It can be a single fluid, which can be liquid or gas, and you will see the characteristic recirculation regions form in the corners. Depending on the Reynolds number, you may see a separation region on the top of the side wall opposite the direction of wall motion (as in the top of the left wall if the top wall is moving left to right). We often call these recirculation bubbles and separation bubbles, but that does not mean there is a gas-in-a-liquid kind of bubble.
Depending on the Reynolds number, the flow may be steady or unsteady. Reynolds numbers under 1000 will be steady and not show the separation region. At Reynolds numbers of 1000 to 5000, there will be a separation bubble that gets progressively stronger, and the corner recirculation bubbles may start to separate. Beyond Reynolds numbers of 3000 to 5000 or so, the flow will be unsteady and high enough Reynolds numbers will begin to transition to something like turbulence.
I spent quite a bit of time working this problem during my PhD thesis and the setup and results are in Chapter 5, Section 3 (and this was published in a journal as well). Check either source for references to the classic literature and datasets.
The initial conditions for this case do not matter really -- a bad choice will just take longer to reach the correct solution (unless it causes the code to blow up or something). Quiescent is just fine -- although if the wall Mach number is large, the sudden impulse could be numerically destabilizing.
In the classic setup, the boundary conditions are no slip walls everywhere, with the top wall moving. If your code is using the compressible form of the governing equations, then you will need to use isothermal boundary conditions for temperature unless you are running at a very low wall Mach number. This is not discussed in the classic papers because they use incompressible codes. But, when the velocity is coupled to the internal energy, the dissipation of the kinetic energy constantly injected at the top wall will continually increase the temperature in the cavity unless an energy sink is applied by keeping the wall temperatures fixed.