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Why You Should Redeem Your Bitcoin From THORChain's Lending Service


Why You Should Redeem Your Bitcoin From THORChain's Lending Service

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Two days ago, the atebites X account pointed out that THORChain’s lending service currently has nowhere near enough bitcoin to repay its creditors.

As of the time of the post, the total amount of bitcoin to be repaid to depositors was 1,604, while the lending pool only had 592 bitcoin in it.

As Lava founder Shehzan Maredia explained in a post on X, when you borrow on THORChain, they sell the bitcoin you put up as collateral for their own token, RUNE. When you repay your loan, they sell the RUNE for bitcoin to give you back your collateral.

The actual mechanics of how this works are a bit more complex and are detailed on THORChain’s website. See screenshots from the website below:

The primary issue in this scenario is that half of the value borrowed in U.S. dollar denominations was borrowed when bitcoin traded significantly lower prices than that at which bitcoin trades today, according to atebites.

This means that for THORChain to meet its current demands, it will need to mint upwards of 24 million RUNE (as of January 8). While this would only be about 8% of the circulating supply of RUNE, it would lead to a reduction in the price of the asset, which would give THORChain even less purchasing power as they try to buy bitcoin back on behalf of their creditors.

If traders were to start shorting RUNE on top of this, THORChain’s ability to purchase the required amount of bitcoin to redeem its creditors would diminish even further.

This could lead to something akin to the Terra/Luna death spiral we saw in 2022.

Therefore, even though it isn’t a given that this situation will end in disaster, you may want to redeem the bitcoin you’ve put up as collateral via THORChain’s lending service just in case.

This article is a Take. Opinions expressed are entirely the author's and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Read the article at Bitcoin Magazine

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$ 63.94K

+1.11%

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$ 0.102

+3.00%

$ 0.000161


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