Cross-chain swap protocol THORChain has put its THORFi services on hold thanks to financial uncertainties linked to allegations of insolvency.
ThorChain founder JP Thorbjornsen and the development team have decided to pause THORFi services as part of a 90-day “restructuring” plan to reduce the problems associated with its “Savers and Lending” programs, which appear to have accumulated a lot of unserviceable debt.
ThorChain is a decentralized liquidity protocol that facilitates cross-chain asset swaps while eliminating the need for wrapped tokens or centralized exchanges. The platform allows traders to exchange native assets like Bitcoin, Ethereum, and others directly on one platform, using its native token, RUNE, to facilitate transactions and secure liquidity pools.
Why THORChain paused THORFi services
While trading functionalities like swaps remain accessible to users, lending operations under THORFi have been paused.
The pause of lending operations is a proactive attempt to prevent mass exit, which could spell further doom for the platform. Haseeb Qureshi, Dragonfly’s managing partner, likened the situation to a “bankruptcy freeze,” highlighting a serious liquidity crunch.
As a result, there are now concerns regarding THORChain’s ability to come through for creditors if there are sweeping redemptions due to a shortage of Bitcoin reserves in THORFi lending pools.
The 90-day restructuring initiative was enforced via validator nodes, and in response, the price of RUNE has dropped more than 30% over the past 24 hours.
RUNE’s market value is under siege
RUNE’s market price is down for many reasons, but the latest is THORChain’s executive decision to pause lending operations.
Another major reason is the inflation of the circulating supply. The inflation was caused by factors like block rewards distributed to validators since RUNE is minted to reward participants, which dilutes its value. In fact, there is a growing consensus that rewards need to be reduced, but the specifics are still being debated.
Other mechanisms affecting the RUNE token include the Savers and Lending programs, which were just put on hold. The Savers program was originally designed to create buy pressure for RUNE. However, it has instead worsened the situation by creating substantial sell pressure when users withdraw their deposits.
When users enter Savers, they need to purchase RUNE, but when they leave, they sell it. All is well as long as RUNE is not underperforming relative to Bitcoin. If it is, as users exit at lower prices, they trigger further declines in RUNE’s value, which creates a feedback loop.
Another factor creating inflationary pressure on RUNE is lending. While it has already been paused, its lingering impact continues to affect the RUNE price because loans and collateral, primarily backed by BTC and ETH, have created liabilities that are hard to repay as the value of RUNE declines.
The situation is exacerbated by current market conditions forcing more RUNE token mints to cover obligations and further dilute the token. It is also compounded by a lack of liquidations within the protocol, causing many to worry that this could potentially affect RUNE’s value and diminish THORChain’s spending ability, mirroring 2022’s Terra/Luna collapse.
The threat of insolvency grows
ThorChain-based synthetic assets, or synths, derivative tokens that mimic the value of cryptocurrencies like Bitcoin and Ether, are also under scrutiny. They are assets collateralized by liquidity pools that balance the original asset and RUNE, THORChain’s native token.
The protocol’s reliance on RUNE for collateralization and vulnerability to market fluctuations could exacerbate these risks. That’s why some community members are worried that the protocol could be insolvent.
“In the event of any large debt redemption and/or savers and synths deleveraging, it is certain that TC cannot meet its bitcoin and eth-denominated obligations,” a community member, TCB, pointed out.
In the meantime, the community is considering proposals for an economic redesign to help stabilize the network. The founder believes that things will smoothen out after restructuring.
“The protocol makes a ton of money and can service the debt — once restructured,” said Thorbjornsen. He already anticipated community backlash but is prepared to make the tough calls if it guarantees the protocol’s long-term viability.
Despite the multiple protocol hacks ThorChain has experienced in the past and the ongoing issues, the protocol has already made significant progress in decentralization and cross-chain liquidity. However, to ensure its survival, the ThorChain team is looking to confront these internal challenges head-on once and for all, despite the risks.
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Source: https://www.cryptopolitan.com/rune-price-drops-thorchain-pauses-services/