THORChain Faces Debt Crisis, Drawing Parallels to Terra/Luna Collapse

THORChain, a decentralized cross-chain liquidity protocol, has paused its network operations due to a significant debt crisis amounting to nearly $200 million.

Similarities to Terra/Luna Collapse

Sunny Aggarwal, Co-Founder of Osmosis, a decentralized exchange in the Cosmos ecosystem, believes THORChain’s liquidity issues mirror the 2022 Terra/Luna collapse. According to Aggarwal, “The situation unfolding with THORChain is eerily similar to what happened with Terra/Luna implosion in 2022, where the protocol’s solvency was too heavily dependent on the price performance of the native token.”

THORChain’s design inherently positions it as reflexively long on its native token, RUNE. This means the protocol’s solvency is contingent upon RUNE’s price outperforming assets like Bitcoin and Ethereum, which are used as collateral. Recent market trends have not favored RUNE, leading to financial instability.

Debt and Liabilities

THORChain currently faces $97 million in borrowing liabilities and $102 million in depositor and synthetic asset liabilities, pushing it to the brink of bankruptcy. In response, THORChain has suspended its lending and savings programs, particularly affecting BTC and ETH withdrawals.

This decision is part of a 90-day restructuring plan aimed at stabilizing the system and mitigating further risks. However, as Aggarwal pointed out, “it’s uncertain whether lenders can be fully compensated. Some have suggested that the shortfall could be covered by protocol fees collected over time.”

Thorchain needs to maintain significant liquidity over the long term. But this will be challenging because ThorFi’s lenders and savers will logically be trying to withdraw their funds en masse.

Risk Management and Sustainable Design

Effective risk management and sustainable design are crucial to prevent such scenarios and protect users’ funds. Aggarwal emphasized that “the bulk of THORChain’s liquidity comes from its lending and savers platform, ThorFi. So it doesn’t make sense to consider THORChain and ThorFi as separate entities.”

Investors and users should be aware of the inherent risks associated with protocols heavily reliant on the value of their native tokens. To mitigate these risks, consider the following tips:

  • Diversify your investments to minimize exposure to a single protocol or token.
  • Conduct thorough research on a protocol’s design and risk management strategies before investing.
  • Stay informed about market trends and adjust your investment strategy accordingly.

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