Cross-chain swap protocol THORChain has paused its THORFi services as it faces financial uncertainties with allegations of insolvency swirling around.
The move is part of a 90-day "restructuring" plan to reduce the issues associated with "Savers and Lending" programs, which appear to have accumulated a lot of unserviceable debt.
Although trading functionalities like swaps remain active, lending operations under THORFi are on hold. A 90-day restructuring initiative has been enforced via validator nodes to address issues. Meanwhile, the price of Thorchain's native token, Rune, has dropped 30% over the past 24 hours, according to The Block's price page.
The pause aims to prevent a rush to the exit scenario, which could further destabilize the platform. Haseeb Qureshi, Dragonfly's managing partner, likened the situation to a “bankruptcy freeze,” indicating a severe liquidity crunch.
Rune's price | Source: The Block
Concerns have emerged regarding THORChain’s capacity to fulfill its obligations to creditors if there are widespread redemptions, stemming from an apparent shortage of bitcoin reserves in THORFi lending pools.
This issue originated from substantial bitcoin borrowings at a time when prices were considerably lower than they are currently, needing the minting of additional Rune to cover these obligations. Compounded by a lack of liquidations within the protocol, there are concerns that this could potentially trigger a large drop in Rune’s value and diminish THORChain’s purchasing power, potentially mirroring the Terra/Luna collapse of 2022.
Thorchain-based synthetic assets, or synths, derivative tokens that mirror the value of cryptocurrencies like bitcoin and ether, are also under scrutiny. These assets are 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. As a result, community members have alleged 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 alleged.
Meanwhile, the community, including validators, is evaluating proposals for an economic redesign to stabilize the network. The founder suggested that the network would be all right after restructuring.
“The protocol makes a ton of money and can service the debt — once restructured,” said Thorchain founder John-Paul Thorbjornsen.
Thorchain has also experienced multiple protocol hacks in the past.
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