Two days ago, atebites’ X account pointed out that THORChain’s loan service currently does not have nearly enough bitcoin to repay its creditors.
At the time of posting, the total amount of bitcoin to be returned to depositors was 1,604, while the lending pool only had 592 bitcoin in it.
We need to raise awareness of how bad shape Thorchain lending is right now, posing a potential risk to the protocol itself.
As it stands, with the current market interest rates for RUNE, a complete closure of the loan will mark 24 million RUNE.
1,604 in BTC security, 18,258… pic.twitter.com/OykZbMQCdx
— atebites (@ate_bites) 8 January 2025
As Lava founder Shehzan Maredia explained in a post on X, when you borrow on THORChain, they sell the bitcoin you pledge as collateral for their own token, RUNE. When you repay your loan, they sell RUNE for bitcoin to give you back your security.
I predicted the Thorchain collapse in 2023 when they launched theirs "lending" function, and it’s happening now. The lesson people never seem to learn: any cryptosystem that can fail will fail.
When you borrowed on Thorchain, they would sell your BTC collateral for their…
— Shehzan (@MarediaShehzan) 10 January 2025
The actual mechanics of how this works are a bit more complex and are detailed on the THORChain website.
See screenshots from the website below:
The primary problem in this scenario is that half of the value borrowed in US dollars was borrowed when bitcoin was trading at significantly lower prices than what bitcoin is trading at today, according to atebites.
This means that in order for THORChain to meet its current requirements, it must mint up to 24 million RUNE (as of January 8). While this would only be about 8% of the circulating supply of RUNE, it would lead to a reduction in the price of the asset, giving THORChain even less purchasing power as they attempt to buy back bitcoin on behalf of their creditors.
If traders were to start shorting RUNE on top of this, THORChain’s ability to purchase the necessary amount of bitcoin to redeem its creditors would be further diminished.
This could lead to something similar to the Terra/Luna death spiral we saw in 2022.
That said, prominent supporter of the project Erik Voorhees shared that THORChain’s lending service is working as intended and there is no foreseeable danger:
Thorchain continues to work as designed.
Yes, loan redemptions cause downward pressure on the RUNE price, but scale is not dangerous.
If you are worried, just go and pay off your loan.
— Erik Voorhees (@ErikVoorhees) 10 January 2025
A core developer of THORChain, who goes by the name Nine Realms on X, also made the case that THORChain is resilient:
1/ Dealing with societal concerns
There has been a lot of discussion lately about the state of the network and the outstanding lending protocol liability.
Let’s dive into the facts to shed light on what’s really happening and why we remain confident in THORChain’s resilience.
— Nine Realms (@ninerealms_cap) 10 January 2025
With all that said, if you still feel bad about loaning THORChain your bitcoin as collateral for a loan, you might want to cash it in. If I used the service, I would.
This article is one Take. Opinions expressed are solely those of the author and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.