Two days ago, atebites X's account pointed that out THORChain loan service at the moment there is nowhere near enough bitcoin to pay back their creditors.
At the time of the post, the total number of bitcoins that have been paid back to investors was 1,604, and there were only 592 bitcoins in the loan pool.
We need to raise awareness of just how bad the current Torchain loan format is, which could be a threat to the protocol itself.
As it is now, at the current mark to market rates for RUNE, the total loan closing will hit 24 million RUNE.
1,604 in BTC collateral, 18,258… pic.twitter.com/OykZbMQCdx
— atebites (@ate_bites) January 8, 2025
As Shehzan Maredia founder of Lava explained in a post on X, when you get a loan on THORChain, they sell the bitcoin you put up as collateral for their own token, RUNE. When you pay back your loan, they will sell the RUNE for bitcoin to give you back your collateral.
I expected Thorchain to drop in 2023 when they launched theirs "a loan" feature, and it's happening now. The lesson that people never seem to learn: any system in crypto that can fail will fail.
When you borrowed on Torchain, they would sell your BTC collateral for their…
— Shehzan (@MarediaShehzan) January 10, 2025
The actual mechanics of how this works are a bit more complicated and are explained on the THORChain website. See screenshots from the website below:
The main issue in this situation is that half of the value borrowed in US dollar denominations was borrowed when bitcoin was trading prices much lower than those at which bitcoin is trading today, according to atebites.
This means that for THORChain to meet the current demands, it needs up to 24 million RUNE (as of January 8). Although this would only be about 8% of the circulating supply of RUNEit would lead to a decrease in the price of the asset, which would give even less purchasing power to THORChain while they are trying to buy back bitcoin on behalf of the creditors.
If traders had to start shorting RUNE in addition to this, THORChain's ability to buy the necessary amount of bitcoin to redeem its creditors would decrease further.
This could lead to something similar to the situation Terra/Luna's death spiral we saw in 2022.
Therefore, even if it is not a given that this situation will end in a crash, you may want to redeem the bitcoin you put up as collateral through the THORChain loan service just in case.
This article is a Take. The views expressed are entirely those of the author and do not necessarily reflect the views of BTC Inc or Bitcoin Magazine.
