Title: Concerns Raised Over THORChain’s Lending Service’s Bitcoin Repayment Capacity
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Caption: Keep track of Frank’s updates on X.
Two days prior, the atebites X account raised an alarming issue – THORChain’s lending service seemed to lack sufficient bitcoin to settle its creditors. At the time of the report, the total owed bitcoin to depositors amounted to 1,604, with the lending pool only holding 592 bitcoin.
Twitter Post: The current state of THORChain’s lending service needs attention. Its precarious status poses a potential risk to the protocol itself. With current market rates for RUNE, a complete loan closure would mint 24 million RUNE. The BTC collateral stands at 1,604… (atebites)
Shehzan Maredia, the founder of Lava, further clarified the workings of THORChain in an X post. According to Maredia, when you borrow from THORChain, your bitcoin collateral is sold for their token, RUNE. Upon loan repayment, the RUNE is sold for bitcoin to restore your collateral.
Twitter Post: I foresaw the downfall of Thorchain in 2023 when they introduced their “lending” feature, and it’s unfolding now. People never seem to learn: any crypto system that can fail will fail… (Shehzan Maredia)
The actual operation of this system is slightly more intricate and is explained in detail on THORChain’s website.
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The main problem arises because half of the borrowed value in U.S. dollars was loaned when bitcoin was trading at much lower prices than it is today, as noted by atebites. This means that to satisfy its current obligations, THORChain would have to mint an estimated 24 million RUNE (as of January 8). Although this would only account for about 8% of the circulating supply of RUNE, it would inevitably decrease the price of the asset, diminishing THORChain’s buying power as they attempt to repurchase bitcoin for their creditors.
If traders begin shorting RUNE additionally, THORChain’s capacity to acquire the necessary amount of bitcoin to settle its creditors could further decrease. This could potentially trigger a similar situation to the Terra/Luna downfall witnessed in 2022.
However, Erik Voorhees, a notable project supporter, reassured that THORChain’s lending service is functioning as intended, posing no imminent threat.
Twitter Post: Thorchain continues to operate as planned. Yes, loan redemptions exert downward pressure on RUNE price, but the scale is not alarming. If you’re concerned, simply repay your loan. (Erik Voorhees)
“Nine Realms,” a core developer for THORChain on X, also defended THORChain’s resilience.
Twitter Post: Addressing Community Concerns. There’s been much debate recently about the network’s state and the outstanding lending protocol liability. Let’s examine the facts to clarify what’s truly going on and why we remain confident in THORChain’s resilience. (Nine Realms)
Given these developments, if you’re uneasy about having loaned THORChain your bitcoin as collateral, it may be wise to redeem it. If I were a user of the service, that would be my course of action.
Note: This article is an opinion piece. The views expressed are solely those of the author and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
