THORChain Suspends Bitcoin and Ether Lending Programs to Prevent Insolvency Crisis

On January 23, 2024, THORChain, a decentralized crosschain liquidity protocol, announced the temporary suspension of its lending and savers programs for Bitcoin (BTC) and Ether (ETH). The decision, which was approved by the network’s node operators, aims to prevent an insolvency crisis and restructure the protocol’s debts. This pause will last 90 days, allowing the community time to devise a plan to stabilize operations.

Why the Pause? Addressing Liquidity and Debt Concerns

THORChain’s developer, Orion (9r), explained the reasoning behind the decision, emphasizing the need to protect liquidity providers (LPs) and maintain network stability. In a message posted to Discord, Orion stated:

“To safeguard LPs and maintain network stability, we are recommending nodes vote to temporarily suspend ThorFi redemptions.”

The pause is especially critical given that THORChain’s lending and savers programs face significant liabilities, around $200 million, primarily in BTC and ETH. If users were to redeem their loans and savings positions simultaneously, the protocol would struggle to meet its obligations, risking a liquidation event.

THORChain is a decentralized crosschain liquidity protocol designed to enable permissionless swaps between cryptocurrencies like Bitcoin, Ether, and others. Its decentralized exchange (DEX) operates via liquidity pools (LPs), where users can deposit assets to earn fees.

The protocol’s native token, RUNE, is the economic backbone of THORChain, ensuring liquidity and facilitating the settlement of trades.

THORFi, an experimental layer built on top of THORChain, offers decentralized finance (DeFi) services such as lending and savings programs. The platform allows users to deposit BTC and ETH to earn yields or take out loans. However, the experimental nature of these programs has now become a potential risk, given the mounting liabilities.

In decentralized finance (DeFi), liquidation occurs when the value of a borrower’s collateral falls below a required threshold, often due to price volatility or rising debt. The smart contracts governing these processes trigger automatic asset sell-offs to ensure lenders are repaid and the system remains solvent. If THORChain’s lending and savers programs face mass withdrawals, the protocol could enter a situation where liquidation becomes inevitable, leaving both lenders and borrowers at risk.

Community Reactions: Concerns and Optimism Amidst Crisis

The news of the pause has sparked a range of reactions within the crypto community. Some users are concerned about THORChain’s financial stability, while others are optimistic about the protocol’s recovery.

JP.THOR, a community member, expressed confidence in THORChain’s ability to service its debts once the restructuring process is complete:

“The protocol makes a ton of money and can service the debt — once restructured. Everyone chill. Folks have 90 days to devise a plan.”

Meanwhile, a user known as TCB highlighted the protocol’s liabilities, which include $97 million in lending and $102 million in savers. TCB warned that if no action is taken, the protocol could face a “race to the exit,” potentially wiping out its entire value. TCB also compared the situation to a “Chapter 11 bankruptcy,” proposing two potential options for restructuring:

• Option 1: Pay out the $75 million of the first exits, but sacrifice $1.5 billion of the protocol’s total value.
• Option 2: Preserve the network’s value and work together to recover the $200 million of capital.

Haseeb Qureshi, managing partner at Dragonfly Capital, even questioned whether this might be the first on-chain restructuring in the crypto space.

Eric Voorhees, the founder of cryptocurrency exchange ShapeShift, acknowledged the necessity of the decision to freeze lending and savers withdrawals. He noted that these programs had already been suspended for new deposits a year ago due to growing concerns about their sustainability.

“At this point, it’s clear these designs failed, they were too risky,” Voorhees said, describing the lending and savers programs as “experimental features” that eventually became a burden on the protocol.

Despite the challenges, THORChain’s core DEX functionality remains unaffected, allowing liquidity providers to continue depositing and withdrawing without interruption.

The Market Response: RUNE’s Price Takes a Hit

Following the announcement, THORChain’s native token, RUNE, saw a sharp 32% drop, falling to $2.10. This price dip reflects the uncertainty surrounding the protocol’s future, as the pause in lending and savers programs raises questions about its ability to meet obligations and maintain liquidity.

THORChain’s decision to pause its lending and savers programs is a significant move aimed at preventing an insolvency crisis and stabilizing the protocol’s finances. With a 90-day window to restructure, the community and developers will need to work together to find a solution that can preserve the network’s value and restore confidence. As the situation unfolds, it will be critical for the crypto community to monitor THORChain’s next steps and the broader implications for decentralized finance.