THORChain was insolvent: THORFi services were suspended and Rune tokens plummeted 30%

The non-custodial cross-chain liquidity protocol THORChain was revealed this morning to be suspending its THORFi service due to financial difficulties, and has initiated a 90-day restructuring plan to address its debt issues and stabilize the platform. Its token $Rune quickly plummeted 30% in price upon the news, indicating the market's significant concern about its ability to effectively manage the liquidity crisis.

(Unable to withstand the continued token redemption and money laundering by the FTX hacker, THORSwap has announced that it is entering maintenance mode)

THORChain Announces Suspension of THORFi Services

X social media user TCB pointed out that in order to resolve the unsustainable debt accumulated in its "savings and lending" service, THORChain will suspend its THORFi service and initiate a 90-day restructuring plan, with only the basic cross-chain transaction function remaining operational.

THORChain Incident Review: Insufficient Reserves and Poor Design

Current Situation: Nearly $100 Million in Debt

TCB first revealed that THORChain is currently facing a total debt of nearly $199 million, including:

• Loans and Liabilities: $97 million (calculated in ETH and BTC)
• Reserve Assets: Approximately $102 million (calculated in ETH and BTC)

The platform's total assets are around $107 million, mainly from funds in external liquidity pools, but these funds can be withdrawn or sold at any time, further destabilizing the platform.

Root Cause of the Incident: Flaws in Protocol Design

• Minting $RUNE to Repay Debt: The platform supports repaying debt by minting $RUNE, leading to token value dilution.
• Leverage Risk: The platform's borrowing and lending activities have driven excessive leverage usage, causing the platform to bear too much pressure in market fluctuations, and further price declines could trigger liquidations and liquidity crises.

Handling Approach: Non-Intervention or Restructuring

To address this crisis, THORChain has proposed two options:

1. Non-Intervention

   • In the short term, some investors may withdraw their assets early, leading to an outflow of about $75 million.
   • The long-term impact is that the entire ecosystem may collapse, resulting in a loss of over $1.5 billion.

2. Bankruptcy Restructuring

   • Adopt a restructuring plan similar to bankruptcy proceedings, including:
     • Freezing Loans and Funds: Temporarily suspend all related asset operations to prevent further losses.
     • Tokenization of Debt: Expect to convert all debt into tokens, allowing users to trade on the secondary market.
     • Establishing a Liquidation Module: 10% of system revenue will automatically flow into the liquidation module to gradually repay the debt.
     • Suspending Liquidity Mining: Shut down the liquidity pools to prevent fund movements.

The goal of this plan is to gradually repay the debt through continuous revenue inflows while preserving the platform's value.

Future Recommendations

TCB also provided a few suggestions for THORChain, hoping that the platform will not repeat the same mistakes after its recovery:

• Refocus on Basic Services: Refocus on providing the core function of cross-chain transactions.
• Establish a Protocol Design Advisory Committee: Prevent high-leverage risk situations in the future and improve capital efficiency.
• Financial Transparency Mechanism: Ensure the platform's finances are transparent and clear to rebuild user confidence.

Rune Price Plunges 30%

Upon the news release, THORChain's native token $Rune suffered a severe blow, plummeting 30% in price during the day, with the market panic sentiment spreading, and concerns about a repeat of the 2022 Terra/Luna incident.

(Terra Incident Review | UST Rebounds, LUNA Continues to Plummet, US Lawmakers: Market Needs Failures to Learn What Can Run Effectively)

Therefore, to resolve the current crisis, THORChain has initiated a 90-day restructuring plan through its node validators, aiming to address the structural issues in its "savings and lending" service and stabilize the platform's liquidity situation, with more details on the restructuring plan yet to be publicly disclosed.

The challenges facing THORChain highlight the potential risks in the rapidly growing DeFi sector, and the protocol's future prospects depend on its ability to effectively resolve debt issues and restore investor confidence.