THORChain Liquidation Scare and Problems

On January 23, 2025, THORChain, faced significant financial challenges leading to critical operational decisions. The protocol suspended withdraws from its lending and savers programs for Bitcoin and Ethereum to prevent an insolvency crisis and restructure its debts.

Reports indicated that THORChain's liabilities included approximately $97 million in loans and $102 million in synthetic assets and savings, totaling around $199 million. In contrast, the protocol held about $107 million in external liquidity, highlighting a substantial shortfall.

The suspension of these services was approved by the network's node operators, aiming to safeguard liquidity providers and maintain network stability. During this 90-day pause, the community plans to develop strategies to stabilize operations. Notably, THORChain's core decentralized exchange functionality remained operational, allowing liquidity providers to continue deposits and withdrawals without interruption.

How Withdraws cause $RUNE price to go lower

THORChain's lending and savers programs encountered significant financial difficulties due to the protocol's inherent design and market dynamics. In these programs, user deposits of assets like Bitcoin and Ethereum were converted into THORChain's native token, RUNE, which was then burned.

Upon withdrawal, new RUNE tokens were minted to repurchase the original assets from the market. This mechanism effectively positioned the protocol in a leveraged long position on RUNE against BTC and ETH. Consequently, when RUNE's value declined relative to these assets, the protocol was compelled to mint an increasing amount of RUNE to fulfill its obligations, leading to inflationary pressures and a devaluation of RUNE.

This cycle resulted in a significant mismatch between the protocol's assets and liabilities, culminating in an insolvency risk.

THORChain Primary Swapping is still Operational

THORChain's core decentralized exchange functionality remained operational, allowing liquidity providers to continue deposits and withdrawals without interruption. The DEX continues to generate swap fees, which are critical for maintaining operational expenses and future recovery efforts. This revenue can be used to address some of the financial imbalances caused by the issues in the lending and savings programs.

High Volatility Before Price Crash

The news of Donald Trump taking office on January 20^th took attention away from the early signals THORChain was experiencing. Its clear significant withdrawals started occurring in early January:

Liquidation and Financial Concerns

Part of this story remains incomplete, particularly regarding the fate of the “Lending and Savers Programs.” How exactly did a $90 million shortfall arise? Are comparisons to Terra Luna valid? Can THORChain's revenue from its primary swapping activities cover the deficit? These are the pressing questions.

With less than 90 days to stabilize its financial situation, THORChain faces a critical juncture. In the short term, some experts suggest it may be best to avoid THORChain until it successfully navigates its way out of this financial quagmire.

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