The revelation made by the atebites X account two days ago about the precarious state of THORChain’s lending service has sent ripples of concern through the crypto community. The account highlighted that THORChain’s lending service has a significant deficit in its Bitcoin pool, being unable to meet the demands of its creditors. The total amount of Bitcoin to be repaid to depositors stands at 1,604, while the lending pool possesses a mere 592 Bitcoin.
This situation is particularly alarming as it exposes the vulnerability of the THORChain lending system. The loan closure, at the current mark to market rates for RUNE, is expected to mint 24 million RUNE. This exacerbates the existing issue, as the lending service grapples with a dearth of Bitcoin while facing the prospect of a significant dilution of its own token.
Shehzan Maredia, the founder of Lava, took to X to lay bare the mechanics of lending on THORChain. The process involves THORChain selling the Bitcoin collateral of the borrower for its own token, RUNE. The repayment of the loan then involves the selling of the RUNE for Bitcoin, to return the collateral to the borrower.
The crux of the issue lies in the discrepancy between the value borrowed in U.S. dollar denominations and the current trading price of Bitcoin. Half the value borrowed was when Bitcoin was trading at considerably lower prices than it is today. To meet its current demands, THORChain will need to mint approximately 24 million RUNE, resulting in an 8% dilution of the circulating supply of RUNE.
The potential for a reduction in the price of the asset, coupled with the possibility of traders shorting RUNE, could further weaken THORChain’s purchasing power. This could trigger a spiral similar to the Terra/Luna debacle of 2022.
While it is unclear if this situation will culminate in a disaster, it would be prudent for users to consider redeeming the Bitcoin they’ve put up as collateral via THORChain’s lending service. This situation underscores the inherent risks and volatility in the crypto market, serving as a stark reminder for investors to tread with caution.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of BTC Inc or Bitcoin Magazine. This article is intended to provide a well-structured, engaging, and informative perspective on the current state of THORChain’s lending service.
