Founded in 2018, THORChain is an OG DeFi L1 chain that rose to fame with its innovative cross-chain swaps (THORSwap). Since then, the chain has expanded to offer lending and savings interest accounts.<\/p>\n
As of earlier today, THORChain withdrawals from its Lending and Savers products have been officially halted. THORSwap and the underlying chain are fine.<\/p>\n
The halted withdrawals come off the back of the painful decision<\/a> by THORChain co-founder JP Thor two weeks ago to pause deposits into the Savers and Lending program for a six-to-twelve month period \u2014 a decision which was overturned<\/a> by Thorchain validators.<\/p>\n The chain is sitting on about $200 million of BTC and ETH-denominated liabilities that it cannot afford to pay out, at least not without further crashing the price of its native token, RUNE.<\/p>\n Wait, why does RUNE enter the picture?<\/p>\n THORChain lending works differently to other DeFi money markets like Aave. On THORChain, lent collateral is instantly sold for its native RUNE token, which is then burned after swapping to a borrower\u2019s desired debt asset.\u00a0<\/p>\n When borrowers repay their loan, new RUNE is minted again to repurchase the borrower\u2019s pledged collateral from the market and repay it to borrowers.<\/p>\n This effectively places RUNE token holders as the counterparty for each loan.<\/p>\n This somewhat roundabout mechanism is nice if you\u2019re bullish RUNE. The mechanism design places RUNE at the center of the value accrual flywheel and increases its demand.\u00a0<\/p>\n The key risk here, however, is that this depends on RUNE outperforming assets like BTC and ETH that it is borrowed against. Simply put, THORChain\u2019s protocol design is long RUNE against BTC and ETH.\u00a0<\/p>\n When RUNE depreciates relative to BTC and ETH, more RUNE needs to be minted at the closure of the loan than the amount of RUNE that was burned initially.<\/p>\n This leads us to the unwanted outcome that is happening today: inflationary (and selling) pressure on RUNE rather than the intended effect of deflationary (and buying) pressure.<\/p>\n RUNE\u2019s tokenomics is also intertwined with its yield-bearing Savers product.<\/p>\n THORChain\u2019s Savers uses a kind of wrapped synthetic asset (called synths<\/a>) to allow single-sided asset exposure. Roughly, it works like this:<\/p>\n Note the similar \u201clong RUNE, short BTC and ETH\u201d dynamic at play here. This design protects against impermanent losses for LPs, but it also means LPs are taking a leveraged long on RUNE.\u00a0<\/p>\n Thus, RUNE\u2019s underperformance creates the same kind of downward spiral consequences for Savers, just as it did for its lending product.<\/p>\n The chart below shows the rate of RUNE mints far exceeding the rate of RUNE burn:<\/p>\n It\u2019s worth reiterating that THORSwap, the original use case of THORChain, is fine. It\u2019s still swapping about $50-60 billion in weekly trading volumes, and generated about $700k in fees over the past week.<\/p>\n The RUNE token, however, is down 44% on the week, which is not fine. It\u2019s the asset that needs to be sold to repay borrowers wanting to close their loans, or savers wanting to withdraw, but doing so would accelerate the crash of RUNE\u2019s price, which in turn leads to deeper insolvency.<\/p>\n Osmosis co-founder Sunny Aggarwal said of the THORChain debacle: \u201cThe situation unfolding with THORChain is eerily similar to what happened with Terra\/Luna implosion in 2022, where the protocol\u2019s solvency was too heavily dependent on the price performance of the native token.\u201d<\/p>\n Next steps? THORChain\u2019s co-founder suggests using protocol revenue and incentives from its sister company Rujira (previously Kujira)\u00a0 to make lenders whole over a 2-3 month timeframe while everything is on pause mode.<\/p>\n \u201cIt\u2019s uncertain whether lenders can be fully compensated. Some have suggested that the shortfall could be covered by protocol fees collected over time. But this overlooks an important point: the bulk of THORChain\u2019s liquidity comes from its lending and savers platform, ThorFi. So it doesn\u2019t make sense to consider THORChain and ThorFi as separate entities,\u201d Aggarwal told Blockworks.<\/p>\n For a deeper dive on the mechanics leading to THORChain\u2019s insolvency, see Blockworks Research\u2019s report<\/a> by analyst Luke Leasure from last week.<\/p>\n Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter<\/a>.<\/strong><\/p>\n Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter<\/a>.<\/strong><\/p>\n Get alpha directly in your inbox with the 0xResearch newsletter<\/a> \u2014 market highlights, charts, degen trade ideas, governance updates, and more.<\/strong><\/p>\n\n
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