Two days ago, the atebites X account pointed out that THORChain’s lending service currently does not have enough Bitcoin at all to repay creditors.
At the time of this post, the total amount of Bitcoins returned to depositors was 1,604 Bitcoins, but there were only 592 Bitcoins in the loan pool.
We need to raise awareness of how bad Thorchain lending is currently and how it poses a potential risk to the protocol itself.
As it stands, at the current market rate of RUNE, 24 million RUNE will be minted once the loan is fully terminated.
BTC collateral is 1,604, 18,258… pic.twitter.com/OykZbMQCdx
— Atebites (@ate_bites) January 8, 2025
As Lava founder Shehzan Maredia explained in a post on X, when you borrow on THORChain, THORChain sells the Bitcoin you pledged as collateral for its own token RUNE. When you repay the loan, they will sell the RUNE for Bitcoin to return the collateral.
I predicted that Thorchain would collapse when it launched in 2023. "lending" That’s happening now. The lesson people will never learn is that any cryptocurrency system that can fail will fail.
When you borrow on Thorchain, they sell your BTC collateral and…
— Shehzan (@MarediaShehzan) January 10, 2025
The actual mechanics of how this works is a little more complicated and is explained in detail on the THORChain website.
See the website screenshot below.
According to atebites, the main problem with this scenario is that half of the amount borrowed was borrowed in USD at a time when Bitcoin was trading at a price significantly lower than its current trading price.
This means that THORChain needs to mint over 24 million RUNE to meet current demand (as of January 8th). Although this is only about 8% of RUNE’s circulating supply, it will lead to a decline in the asset price and further reduce the purchasing power of THORChain, which seeks to buy back Bitcoin on behalf of creditors.
In addition to this, if traders start shorting RUNE, THORChain’s ability to purchase the amount of Bitcoin needed to redeem its creditors will be further reduced.
This could lead to something similar to the Terra/Luna death spiral we saw in 2022.
That said, Eric Voorhees, a prominent backer of the project, said that THORChain’s lending service is working as intended and there are no foreseeable risks.
Thorchain continues to work as designed.
Certainly, loan redemptions will cause downward pressure on RUNE prices, but the magnitude is not dangerous.
If you’re worried, go pay off your debt.
— Eric Voorhees (@ErikVoorhees) January 10, 2025
The core developer of THORChain, known as Nine Realms on X, also claimed that THORChain is resilient.
1/ Address community concerns
Lately, there has been a lot of discussion about the state of the network and the responsibility of unpaid lending protocols.
Let’s dig into the facts to uncover what’s really going on and why we remain confident in THORChain’s resilience.
— Nine Realms (@ninerealms_cap) January 10, 2025
Having said this, if you are still feeling bad about lending your Bitcoin to THORChain as collateral for a loan, you may want to redeem your Bitcoin. I would if I were using that service.
This article is a take. The opinions expressed are solely those of the author and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
