Original Author: 1984 is today, core member of Thorchain Original Translation: zhouzhou, BlockBeats
The following is the original content (reorganized for better readability):
THORChain is facing bankruptcy. If there are large debt redemptions or if depositors and synthetic assets de-leverage, TC will be unable to fulfill its debts denominated in Bitcoin and Ethereum.
Validators have decided to pause the network, during which they will vote on a restructuring plan. I won’t beat around the bush or pretend everything is fine, because that is not the case.
Thorchain's Liabilities:
- $97 million in borrowing liabilities (ETH BTC)
- Approximately $102 million in depositor and synthetic asset liabilities (ETH BTC)
Thorchain's assets consist of $107 million in external liquidity injected into liquidity pools. In the event of panic, LPs can withdraw these assets at any time, or RUNE holders can sell them. Borrowing obligations are met by minting RUNE and selling it into the liquidity pool, which makes the design highly backward, and the situation is worse than it appears. After repaying $4 million in RUNE liabilities yesterday, the protocol still owes several million RUNE.
From a design perspective, the protocol is shorting Bitcoin and Ethereum. Since I joined this community (starting from ILP), I have been warning about the dangers of hidden leverage. Since the launch of streaming swaps, I have advocated for de-leveraging, as the protocol requires less capital to fill, since the currently active liquidity can participate in filling them.
I am not happy writing this article; please do not blame the messenger. I am speaking out because Thorchain has become so complex that only a few people can fully understand how leverage characteristics and liquidity interact and affect the underlying assets. If no action is taken, this will turn into a race to the exit, and the entire value of the protocol will disappear.
Thorchain has two options:
Let things continue to develop, about 5-7% of the value will be extracted first by a few people, RUNE will enter a downward spiral, and THORChain will be destroyed.
Default, declare bankruptcy, salvage the valuable parts, and try to develop them to repay debts while not affecting the viability of the protocol.
Option 1: The first $75 million to exit will be fully repaid, and $1.5 billion in value will be wiped out.
Option 2: The value of the network will be preserved, and everyone will work together to restore that $200 million in capital.
To make option 2 possible, we need to be guided by the principle of saving the network and increasing its value. This starts with the partners, which I will elaborate on later. I just hope the partners read this content and understand that if this proposal is accepted, they will once again become the priority class.
Thorchain is valuable; it generated over $30 million in fees last year and is currently running at a higher speed, fully capable of emerging from this predicament. I have been working with a few people who truly understand Thorchain's economic design to propose this plan. Steve will post it on the developer Discord; he writes better than I do.
The current proposal is equivalent to Chapter 11 bankruptcy protection. Bitfinex has done something similar and ultimately succeeded in fully compensating users.
There are two types of liquidity in the ecosystem that are necessary for the exchange to continue:
- The first to be protected are the LPs.
- Arbitrageurs using trading accounts are not affected by this freeze.
Thorchain is too complex and must return to basic principles to grow. Until then, no smart capital will buy RUNE or LPs because the risks are too high. A public massive debt will become a bait for liquidation, as we have seen multiple times in DEFI.
This is what we believe Thorchain needs to do if it is to survive this crisis and thrive afterward:
- All borrowing and depositor positions will be permanently frozen.
- Take a snapshot of debts (the value of depositors, the BTC/ETH debts of borrowers).
Tokenize all debts of borrowers and depositors.
- Create a "deactivation module" that will automatically receive 10% of the system's revenue.
- Create an auction determined by buyers, where tokenized debt holders can sell their debts to the available liquidity in the deactivation module at any time, and any seller who receives that liquidity will burn their debts.
- Create a secondary market for P2P trading of tokenized debts.
- Implement a kill switch and incentivize the withdrawal of RUNE pools, shutting down the RUNE pool within a month.
- Destroy all POL wallet keys to prevent central planners from further interference with POL.
Thorchain's value has been suppressed because it has long been unavailable for purchase. Smart capital will not participate in LPs; once they analyze its complexity, they find problems. The product itself is not only successfully operating but even thriving, generating about $200,000 in fees daily.
If Thorchain is to grow and have a chance to fully compensate users, it needs a fresh start. Any unsustainable debt burden must be eliminated.
Mitch Will from CRV once had what seemed to be a relatively reasonable leverage, but despite gaining adoption, CRV's price fell until he was liquidated. I believe we are very close to reaching a similar consensus regarding Thorchain.
In the case of Thorchain, the debt is at the protocol level and is more backward than CRV because the protocol is shorting Bitcoin and selling uncirculated RUNE. The "collateral" displayed on the dashboard is backed by uncirculated RUNE, not liquidity.
Not only will loan redemptions mechanically sell RUNE, but the protocol is also effectively shorting $175 million in BTC/ETH/other assets. For borrowers, these collaterals have been exchanged for RUNE to reduce the supply of RUNE.
Upon exit, Thorchain must mint RUNE and sell it as BTC/ETH for repayment. Due to price fluctuations since the loans began, we are facing a shortage of 30 million RUNE from loan activities, and if all redemptions occur chaotically, it could trigger the kill switch. At that point, the price of RUNE will fall below $1. Depositors still have $100 million in redemption demand.
This future selling pressure will enter increasingly illiquid pools. And as market reactions spread, we cannot risk letting the price of RUNE collapse and be unable to repay these people.
Again, Thorchain's lifeline is the over $30 million in exchange fees generated annually and the continuously growing revenue velocity. It still has an excellent business; it just needs to rid itself of toxic debt on its balance sheet. ThorFI needs to be seen as a mistake, and we need to return to Thorchain's original philosophy: back to basics.
The situation can still be corrected, and we can clear all issues within the next week. If market panic spreads and everyone rushes to sell RUNE and redeem assets, it will lead to bankruptcy. Every day is crucial; in this case, once the market understands and falls into panic, it will be too late.
This will serve to bring Thorchain back to basic principles: LPs and trading accounts will provide liquidity for the exchange. There is no scenario where everyone can immediately receive full repayment. This plan retains those who are crucial for the safe operation of the protocol, ensuring that the protocol can continue to operate safely.
The goal of all these incentives is to grow liquidity to irrational levels. The liquidity in the liquidity pool needs to be based on basic principles. It is a factor of yield and expected volatility. The trading volume of each pool is related to debt/fees, and liquidity pools will naturally attract more liquidity. All these incentives create additional impermanent loss, and LPs are therefore treated the worst. They have been in the worst position. From now on, they will be in the best position.
The original founding team designed and pushed for the implementation of these backward leverage characteristics; please do not blame the messenger or the current development team, who are cleaning up the mess. The two founders are no longer involved in daily operations.
After all this is completed, I will propose the establishment of an economic design committee to help ensure Thorchain's success, specifically as follows:
- Improve capital efficiency
- Never build leverage characteristics into it again
- Ensure that Rujira does not jeopardize the L1 ecosystem
I already have three candidates, who are the smartest minds in the DEFI space.
I have written some content on optimizing capital efficiency, but I will reserve that for another ADR. This is important because if we are to allocate a certain percentage of revenue to debt, LPs still need to overcome impermanent loss. We need to do more with fewer resources.
This is the worst situation I have been involved in with other developers, some of whom are about to vomit. If there were any other way, I would suggest it. This is a life-and-death situation. I have always opposed borrowing/depositors/ILP/POL. Throughout the process, I have advised my constituents to vote against these, and some did, but it was not enough.
If the only lesson I learned is that sometimes it is better to start an internal war when foreseeing a certain outcome than to stand by and watch. I am sorry that things have developed this way; I have hardly slept in the past few days, knowing that this outcome is inevitable. The $12 million loan redemption accelerated this timeline.
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