THORChain pauses Bitcoin and Ether lending amid bankruptcy risks

THORChain, a decentralized cross-chain liquidity protocol, has temporarily suspended its lending and savings programs for Bitcoin and Ether.

The resolution approved by network node operators on January 23 aims to prevent a bankruptcy crisis and fix the protocol's liabilities.

Orion (9r), a token developer at THORChain, explained the decision to temporarily stop ThorFi redemptions:

“To protect LPs and maintain network stability, we recommend that nodes choose to temporarily block Torfay ransoms,” Orion wrote in a Discord message. The developer added that exchanges will continue to work normally. The 90-day grace period allows communities to develop a plan to stabilize operations.

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What is THORChain?

THORChain facilitates permissionless cross-chain exchanges, allowing users to trade assets such as Bitcoin (BTC), Ether (ETH) and other assets without central intermediaries. The decentralized exchange is supported by Liquidity Pools (LPs), where users deposit cryptocurrencies to receive payments.

THORChain's native token, THORChain (RUNE), acts as the protocol's economic backbone, ensuring liquidity and enabling the settlement of trades.

THORFi, on the other hand, represents THORChain's experimental decentralized finance (DeFi) layer that offers features such as loans and savings programs.

Lending and saving programs allowed users to deposit BTC and ETH to get products or take out loans. The program owes about $200 million, mainly in BTC and ETH. If users return their loans and savings positions at the same time, the protocol fails to meet its obligations, resulting in rejection.

In DeFi, liquidity occurs when the value of a borrower's bond falls below a required threshold due to a fall in asset value or an increase in debt. This process ensures that the creditors are paid and the system is solvent. Liquidation is automatically triggered by smart contracts, often resulting in asset sales.

Responses from the community

The decision has sparked reactions in the crypto community, with some expressing concern about the protocol's financial health while others are optimistic about its potential for recovery.

Community member JP.THOR said:

The protocol makes a lot of money and can service its debt – once it's restructured. All will be cold. People have 90 days to come up with a plan.

Meanwhile, anonymous user TCB listed THORChain's liabilities, including $97 million in loans and $102 million in savings. “If nothing is done, it will be a race to the exit, and all the value of the protocol will be lost,” TCB posted on X.

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TCB compared the situation to “Chapter 11 bankruptcy” and offered restructuring as the best course of action.

“Option 1: First exiters get the full $75m, $1.5b wiped off the map. Option 2: The value of the network is maintained, and everyone works together to grow that $200m capital.

Haseeb Qureshi, managing partner at Dragonfly Capital, asked if this was the first onchain restructuring.

Eric Voorhees, founder of cryptocurrency exchange Shapeshift, acknowledged the importance of the node operators' decision to block the provision of loans and savings withdrawals, as deposits for these programs were lost a year ago due to rising risks.

“It's clear at this point that these designs failed, they were very dangerous,” Voorhees said, describing loans and savings as burdensome experimental features of the protocol.

As of writing, the core DEX functionality of the protocol remains intact and liquidity providers can continue to deposit and withdraw continuously.

Following the announcement, the price of RUNE dropped by 32% to $2.10.

Cointelegraph acquired THORchain but did not receive a response by publication.

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