Two days ago, the atebites X account pointed out that THORChain’s lending service currently has nowhere near enough bitcoin to repay its creditors.
As of the time of the post, the total amount of bitcoin to be repaid to depositors was 1,604, while the lending pool only had 592 bitcoin in it.
We need to be raising awareness on just how bad of a shape Thorchain lending is right now, posing a potential risk to the protocol itself.
As it stands, at current mark to market rates for RUNE, complete loan closure will mint 24 million RUNE.
1,604 in BTC collateral, 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, they sell the bitcoin you put up as collateral for their own token, RUNE. When you repay your loan, they sell the RUNE for bitcoin to give you back your collateral.
I predicted the Thorchain collapse in 2023 when they launched their "lending" feature, and it's happening now. The lesson people never seem to learn: any system in crypto that can fail will fail.
When you borrowed on Thorchain, they would sell your BTC collateral for their…
— Shehzan (@MarediaShehzan) January 10, 2025
The actual mechanics of how this works are a bit more complex and are detailed on THORChain’s website. See screenshots from the website below:
The primary issue in this scenario is that half of the value borrowed in U.S. dollar denominations was borrowed when bitcoin traded at significantly lower prices than that at which bitcoin trades today, according to atebites.
This means that for THORChain to meet its current demands, it will need to mint upwards of 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, which would give THORChain even less purchasing power as they try to buy bitcoin back on behalf of their creditors.
If traders were to start shorting RUNE on top of this, THORChain’s ability to purchase the required amount of bitcoin to redeem its creditors would diminish even further.
This could lead to something akin to the Terra/Luna death spiral we saw in 2022.
With that said, prominent supporter of the project Erik Voorhees shared that THORChain’s lending service is operating as it was intended to and that there is no foreseeable danger.
Thorchain continues working as designed.
Yes, loan redemptions cause downward pressure on RUNE price, but scale is not dangerous.
If you're worried, just go pay off your loan.
— Erik Voorhees (@ErikVoorhees) January 10, 2025
Though it isn’t a given that this situation will end in disaster, you may want to redeem the bitcoin you’ve put up as collateral via THORChain’s lending service just in case.
This article is a Take. Opinions expressed are entirely the author’s and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
