The Thorchain Death Spiral | Doomed or Diamond?

ICYMI, Thorchain sank over 40% yesterday as the price started to drop and concern of savers and lending debt started to mount.

These debt concerns are not new news. We've had people yelling from the rooftops about it for months now. Pretty much since the day they went live.

I have always been a fan of the innovative approach of Thorchain. I like that they experiment and build amazing new tech. That being said, I have also seen that experimentation - when not properly isolated - can lead to massive fallout. I've experienced this personally with some of the experiments we've ran with the LEO Ecosystem and this led to me to hyper-consolidating the project and focusing on what we did best.

I believe that Thorchain has just had this same epiphany. Though, they are going to the edge of bankruptcy in order to learn it. I have long been a holder of RUNE and a proponent of a multi-chain, decentralized exchange future.

In this post, I'll tell you what happened and tell you if I think RUNE and Thorchain still have a future.

What Happened

Lending launched somewhere around May of 2023. It immediately sparked a lot of interest and controversy. The idea of "no liquidation, no expiration, no interest" loans was fascinating and also concerning.

When they came out, I was on the fascinated side of the aisle. I wanted it to go live and then watch what happened. Thorchain is typically quite intelligent about having caps on things and ensuring that a spiral cannot happen with these caps.

The caps kept getting raised and some within Thorchain's leadership decided that it was a great way to pump the price of RUNE. Pumping the price of RUNE led to the caps getting raised more (since they are priced in RUNE). This ultimately led to a lot of loans getting opened.

Additionally Savers (the ability to single-side LP BTC, ETH, etc.) also created mounting debt.

With these two DeFi tools, the Protocol effectively shorts BTC, ETH and other assets and longs RUNE.

When these features launched, RUNE's price was vastly outperforming BTC and other assets. This seemed like a genius idea that would create a "flywheel" and pump the price of RUNE to infinity and beyond.

Over time, a different picture became clear. BTC cracked $100k and outperformed altcoins (including RUNE) in a massive way.

The protocol is short BTC and long RUNE, remember? This turned out to be a horribly large loss for the protocol as BTC outperformed RUNE by over 300%.

As it stands, Thorchain's current liabilities are:

1. Roughly $97M in lending (ETH and BTC)
2. Roughly $102M in savers and synthetics (ETH, BTC, etc.)

The Thorchain protocol pays back loans by minting RUNE and selling it into the pools. If everyone were to recall their loans, the protocol would likely death spiral to 0 (like FTX, Luna, etc.).

The threat of death spiraling is sometimes all it takes to kickstart the death spiral.

If you go back just 2 years ago, you'd also see the massive bank runs that put things like SVB out of business. A threat of a bank run is often all it takes to actually create a bank run. If everyone starts running for the exists simultaneously, then you will have the exact problem you feared.

According to TCB, roughly $4M in debt was recalled yesterday. This led to the price decreasing. Then some people started saying that the protocol was on the verge of insolvency. The more people claimed their debt from Savers / Lending, the more the price deteriorated.

Then JP posted a Tweet and said:

"If $RUNE hits $2.50 I will be recommending to every node I delegate with to Pause Lending via Node Mimir."

This tweet essentially affirmed everyone's scare of the "Death Spiral" happening. I think it would have been a better approach for all TC Nodes to come together in private and decide that they needed to pause withdrawals while everything got sorted out. Then perhaps introduce some kind of cap to daily withdrawals so that a death spiral couldn't happen.

It's not a good thing. It's not a fun thing. But it would have prevented what happened next:

RUNE crashed to sub $2 and lending/savers withdrawals got paused. I firmly believe that if they didn't get paused, RUNE could have deathspiraled to near $0 and Thorchain would have been toast. A fork would have likely emerged and people would have moved to that over time but over $1.5B (RUNE's Market Cap) was at risk of vanishing.. literally overnight.

I was driving back when this was all going down. I had futures long positions and I also hold a large bag of spot RUNE.

Needless to say, my massive futures position got liquidated. My spot RUNE is worth half of what it was worth just a few days ago.

The Savers/Lending situation is not a good one.

Light at the End of the Liquidity Pool

There is light at the end of the tunnel. Thorchain is still an INCREDIBLY AMAZING protocol. My vision for Thorchain has always been that it would overtake all CEXes and DEXes and become the #1 asset exchange in all of crypto in terms of total yearly trading volume.

The protocol absolutely prints money. It still does... even today after all of this bullshit.

In 2024, Thorchain generated:

"⚡️ $56b swap volume
⚡️ $30.6m in liquidity fees
⚡️ $24.6m earned by affiliates
⚡️ Ledger, OKX, Bitget, Zengo, LiFi integrations"

$50B+ in trading volume is no joke. That is a fuck ton of money. We're talking about a protocol that is worth $1.5B and is generating over $50M in total fee revenue (between liquidity fees & affiliate fees).

The light at the end of the tunnel is that Thorchain is a massively profitable ecosystem that can repay this ~$200M+ in debt.

How I Think Thorchain Wins

Thorchain needs to do a handful of things in order to dig its way out of this hole, make all debt obligations whole and continue to thrive & grow in the future to its rightful place as the #1 Decentralized Asset Exchange in the world.

Thorchain needs to take a % of all yearly income and deploy it to a pool where debt can be serviced. There are a few different ways that this can look and I have been saying that they should do this for months now. ThorchainBull posted a proposed solution on X that I think is the best path forward for Thorchain.

You can read it here. I will give you the TLDR;

1. Freeze all savers and lending (already done)
2. Take a snapshot of all the debt
3. Tokenize all the claims (create a new token that represents each debtor's position in their wallet)
4. Divert 10% of all system income to the "claim pool" where debtor's can get paid bck
5. Create an auction system where tokenized debt holdrs can sell their claim at any time for whatever available liquidity is in the claim pool. Selling your claim means burning your claim token until all outstanding claim tokens reach 0
6. Create a secondary market for P2P debt claim trading (this will allow impatient debtors to take a market-priced loss for quicker withdrawals and allow patient investors to buy up debt claims and hodl them for a spread)

If this happens, I believe Thorchain will get back to thriving. The debt will slowly get paid off in the background and the Thorchain / 9r teams who develop the protocol can and SHOULD get back to focusing on the core business.

It's time to tighten up. Thorchain is incredibly good at what it does: allowing users to permissionlessly swap assets across different blockchains.

In my opinion, Thorchain core should only be doing the following:

1. Focus on integrating more assets and chains
2. Focus on anything that increases trading volume and thus, accretive fees for the protocol

Time to get rid of the experimentation. If you want to experiment, make a sandbox and create an App Layer (this is already in progress by a separation of the TC Core team).

So Do We Buy RUNE?

The eternal question. I have been a huge proponent and holder of RUNE. I think the fundamental economics of the platform are unmatched. I believe the value proposition that Thorchain brings to the world is unmatched. I believe that the swap volume growth and other KPI (Key Performance Indicator) growth has been phenomenal.

The experimentation is what almost killed Thorchain. Now that the lesson has been learned, can Thorchain get back to focusing on the fundamentals of the core business? (swap volume, trading fees, exchanging assets across blockchains without Centralized Exchanges).

If you believe the answer is yes, then buying RUNE when there is blood in the streets is probably a very good idea.

If you believe the answer is no, then selling all your RUNE and shorting the protocol for an inevitable death spiral is probably a good idea.

I am on the yes side. Thorchain has been "dead" many times before. So have many of the top coins like BTC and ETH. If you bought those when people were maximally depressed, you would have made a killing.

I'm a contrarian investor and I buy assets that have fundamentally sound value propositions. Thorchain's value proposition has not changed because of these events. If it survives, it will come out of this stronger than ever.

Posted Using INLEO