#Thorchain , a decentralized liquidity protocol, is facing significant challenges as its native token,
$RUNE , undergoes a steep decline in value. These developments expose critical
#vulnerabilities in its lending mechanics, raising serious questions about the protocol's long-term viability and solvency.
The Lending Mechanism and Its Flaws
Thorchain introduced a lending feature allowing users to borrow assets by collateralizing Bitcoin (
$BTC ). Upon borrowing, the system converted BTC collateral into RUNE, creating an inherent dependency on RUNE's value. The repayment process would require selling
#RUNE to reacquire
#BTC , leaving the protocol exposed to a cascading failure if RUNE's price fell.
This mechanism is now showing cracks:
Death Spiral Dynamics: A drop in RUNE's price creates pressure as borrowers repay loans, forcing the protocol to sell more RUNE to meet BTC obligations. This selling further depresses RUNE’s value, triggering a vicious cycle of price declines.Minting RUNE: To address outstanding liabilities, the protocol mints additional RUNE tokens. At the current price levels, complete loan closure would require the minting of 24 million RUNE tokens, exacerbating the oversupply issue and diluting the token's value.
Outstanding Liabilities and Pool Liquidity
The protocol’s current liabilities include:
BTC Collateral: 1,604 BTC is owed, but only 592 BTC is available in Thorchain's BTC pool.ETH Collateral: 18,258 ETH is owed, with 7,404 ETH available.
The gap in reserves is stark: 210 BTC and 1,725 ETH remain unaccounted for. This shortfall highlights the inability to fully repay depositors, even if borrowers return half of the owed amount.
Market Dynamics and Risks
Several factors are intensifying the crisis:
Shallow Pools: Liquidity pools for BTC and ETH are insufficient to cover liabilities, and the declining RUNE price discourages further liquidity provision.Shorting RUNE: Market participants are capitalizing on RUNE’s weakness, shorting the token and accelerating its decline.Arbitrage Opportunities: A widening gap between RUNE and BTC prices creates opportunities for arbitrage, further depleting USD liquidity pools.
Current Solvency Status
At current market prices, Thorchain's solvency hangs by a thread:
Available USD liquidity in the protocol is approximately $22-$23 million.Outstanding unmet liabilities exceed $24 million.
If RUNE's price continues to drop, the protocol will face a solvency crisis, triggering further panic and liquidation risks.
Broader Implications
The unfolding situation bears striking similarities to the Terra/Luna collapse in 2022. Both scenarios involved unsustainable tokenomics and over-reliance on volatile native tokens to back significant financial obligations. Thorchain's failure to account for systemic risks in its lending design now threatens the integrity of the entire protocol.
Lessons and Path Forward
The Thorchain crisis underscores an essential lesson for the crypto space: poorly designed systems with inherent vulnerabilities are prone to failure. Transparent and sustainable mechanisms, such as over-collateralized loans with minimal exposure to native token fluctuations, are crucial for maintaining stability.
Protocols like Lava, which embed traditional lending logic into smart contracts without relying on ponzinomics, offer a safer alternative for borrowing against assets like BTC. Such models avoid the cascading risks that arise from token dependency.
Call to Action
Immediate action is required to address Thorchain’s vulnerabilities. A coordinated focus on mitigating lending risks, improving liquidity, and stabilizing RUNE’s price is essential to prevent further damage. Institutions and users must remain vigilant as the situation evolves, as the crisis could have far-reaching consequences across the decentralized finance (DeFi) ecosystem.
Thorchain's current predicament serves as a cautionary tale. The promise of DeFi lies in decentralization and security, but these principles must be backed by robust and sustainable economic models. Without these, the industry risks repeating the mistakes of the past.
#RUNE/USDT $RUNE