Hey Edge readers,
THORChain (RUNE) has found itself in the spotlight after a series of financial missteps and a massive dip in its token value. The decentralized liquidity network, known for enabling cross-chain swaps, recently paused withdrawals due to overwhelming debt and leverage issues. This week, we’re diving into the THORChain debt crisis, the lessons to be learned from its situation, and DeFi risk management.
- The Exponential team
What’s happening with THORChain (RUNE)?
THORChain, an OG Layer 1 blockchain founded in 2018, first gained attention by enabling true cross-chain asset swaps through THORSwap by letting users trade native assets (e.g. BTC, ETH, BNB) without relying on centralized exchanges or wrapped tokens. Over the years, it has expanded into lending and savings products.
However, THORChain is now facing a serious risk of insolvency. In late January, the protocol halted withdrawals for its lending (ThorFi) and Savers programs, citing nearly $200M in liabilities denominated in BTC and ETH that it cannot safely repay without collapsing the value of its native token, RUNE.
The RUNE death spiral
Unlike traditional DeFi lending protocols (Aave, Compound), ThorFi operates with no interest, liquidations or expirations, and features a unique economic design. When a loan is initiated, the user collateral (BTC or ETH) is immediately sold for RUNE (through liquidity pools) and then burned. This creates a temporary deflationary effect by reducing the total RUNE supply. When the borrower repays, new RUNE is minted to repurchase the original collateral and return it to the borrower. The net effect is that RUNE is always the counterparty for loans on ThorFi.
In a bullish scenario, this reflexive model can drive demand for RUNE, as the protocol “expects” RUNE to outperform BTC and ETH. But if RUNE underperforms, the protocol must mint more RUNE at loan closure than it originally burned, introducing inflationary pressure on the token. This dynamic becomes self-reinforcing: a falling RUNE price triggers more minting, which dilutes RUNE further, pushing its price down even more.
THORChain’s Savers product further amplifies the issue. Savers offer users a way to earn yield on their native asset without exposure to impermanent loss. It achieves this through the creation of synthetic assets, which are backed by collateral consisting of a 50:50 split between native asset and RUNE. When a user deposits into a Savers vault, half of the native asset is swapped to RUNE (driving demand) and used to create a liquidity pair (e.g. BTC/RUNE). Part of the swap fees are redistributed as yield for Savers.
Savers can withdraw at any time for the underlying native asset plus accrued yield. As you can see, this can become problematic if RUNE depreciates relative to the native asset as the protocol must sell RUNE to repurchase the other half of the native asset when users withdraw. Massive withdrawals exacerbate the selling pressure on RUNE, particularly if it is already in decline.
Because both ThorFi and Savers involve converting user deposits to RUNE, any drop in RUNE’s price forces the protocol to mint/sell even more tokens to meet redemptions — making the reflexive cycle worse. Over the past few months, both ThorFi and Savers have contributed to a ballooning shortfall, with RUNE supply inflating to cover redemptions.
This puts THORChain at nearly $200M in liabilities, with a liquidity pool that’s too small to handle mass withdrawals. If borrowers or savers try to close their positions en masse, RUNE would crash to a point where the protocol can’t repay everyone.
THORChain’s response plan
Faced with mounting redemptions that would require minting vast amounts of RUNE, THORChain’s governance and node operators voted to halt withdrawals of BTC and ETH from ThorFi and Savers vaults. This maneuver aims to buy time while the community explores restructuring plans to keep THORChain afloat. In other words, to avoid a total meltdown reminiscent of the UST/LUNA collapse of 2022.
A major proposal involves converting the defaulted debt into some kind of “equity” token (TCY) that gives creditors a share in future protocol revenue, rather than repayment in BTC or ETH. By funneling a portion of THORChain’s fee revenue into this structure, the protocol hopes to gradually make depositors whole without unleashing a catastrophic wave of RUNE selling in the near term.
Lessons for the DeFi ecosystem
As difficult as the situation is, it’s also a case study in how aggressive tokenomics can create reflexive spirals. ThorFi’s core assumption — that RUNE would consistently outperform BTC and ETH — exposes depositors and the protocol itself to leveraged downside. With Savers adding further RUNE exposure, THORChain has become overextended.
At Exponential, we emphasize a robust risk framework that considers every layer of risk, from token economics to smart contract vulnerabilities and governance practices. In the end, no yield is truly “free,” and understanding these risks is the best way for investors to protect themselves.
So, is THORChain going bankrupt?
THORChain is not dead — not yet, anyway. The cross-chain swap functionality (THORSwap) remains operational, still logging a respectable trading volume and fee revenue each week. However, the lending and savings products are effectively frozen, and the chain is carrying liabilities that far exceed its available liquidity.
The protocol’s long-term viability hinges on two key factors:
- RUNE’s price stability (or recovery)
- Governance and the community’s ability to implement a restructuring that avoids a total collapse
It’s possible that a carefully executed plan, one that monetizes THORChain’s fee-generating swap business and gradually repays borrowers and savers, could put the protocol on a path to solvency. But it’s an open question whether creditors will be patient enough to ride it out, or if the negative sentiment around RUNE has pushed THORChain beyond recovery.
In the news 🗞️
- Trade wars could accelerate DeFi adoption. Bitcoin fell below $100K after Trump’s new tariffs on Canada, Mexico, and China. While trade disputes create short-term volatility, they could ultimately drive more users to DeFi. DeFi’s permissionless nature makes it an attractive hedge against increasing financial restrictions. As global trade disruptions grow, DeFi stands to benefit from a shift toward borderless financial systems.
- THORChain’s debt solution sparks debate. THORChain’s node operators approved a plan to convert $200M in debt into equity tokens, issuing 200M “TCY” tokens to affected users. Tokenholders will receive 10% of the protocol’s revenue in perpetuity, with the option to cash out via a new liquidity pool. Critics argue the plan is complex, requires renewed trust in THORChain, and could invite regulatory scrutiny.
- Ondo is putting Wall Street onchain. Ondo Finance is tokenizing stocks, bonds, and ETFs, aiming to bring over 1,000 securities from the NYSE and Nasdaq onto the blockchain. The allure is 24/7 trading, lower fees, instant transfers, and global access. Meanwhile, legacy players like Cboe are scrambling to keep up, announcing plans to extend U.S. stock trading hours. The race to modernize financial markets is heating up.