Terra: THORChain, my valiant successor, behold the last of my Hamon

LBank Labs
13 min readDec 5, 2023
Within the hallowed memesphere where JoJo stands immortal, Chinese subtitles aren’t just text — they’re the very essence of the meme. It’s akin to the soul of crypto: intangible yet invaluable, like a rare, first-edition Bitcoin.

Today, we chronicle the chronicles of THORChain and Terra, not as mere code on the blockchain but as epic avatars of power in a celestial saga. THORChain emerges, empowered by the Hamon of Terra, ready to conquer the crypto cosmos where Terra’s luminescence once shone bright before its supernova moment.

In the lore of ledger and token, let’s remember — each action is as pivotal as the final pulse of Hamon, a beacon across generations. With great memes comes great responsibility. So let the power of Terra ripple through the veins of THORChain, and may the saga continue…

Thorchain: Not a Day of Peace Since My Genesis Block

Let’s get something straight: Thorchain isn’t some fresh-off-the-mint newbie. Tracing back to its 2018 hackathon days with Binance, Thorchain is a seasoned vet, clocking in nearly 5 years of uptime in this digital colosseum. Though it stepped into the limelight in 2020, by that count, it’s been a stalwart in the scene for over 3 years. It’s had its share of bugs and blunders, especially during the cross-chain calamity in June and July of ‘21 — three hacks in a month, talk about a hard fork in the road! We’ve seen its TVL double-up in glory days and its token price tumble from a high of $20 to the shadowy depths of $3. But hey, in ’22 it caught the Terra wave, integrating with the then-trendy assets, and the community went bananas. Overnight, RUNE’s value skyrocketed by 70%+, and trading volumes tripled. The real kicker? In April ’22, its TVL hit an unprecedented near $600 million — until LUNA’s cataclysmic crash…

Post-that saga, Thorchain’s thunder seemed to wane, fading from the crypto crowd’s eye. Many might’ve forgotten the promises made in Thorchain’s heyday, or its ambitions of a liquidation-free lending platform. But the team’s spirit? Unyielding. They couldn’t shake off the madness of the Terra model, nor forget the final revelation LUNA left them with…

The Terra Apocalypse: Alchemy of Air, Ponzi to Pinnacle

Talking about a narrative that’s straight fire in the last couple of years, with a Ponzi-like prowess and a hefty hype train, Terra’s been a front-runner. The old switcheroo — staking LUNA to mint the so-called stable UST, playing referee in its own game, plus Anchor’s 20% APR to keep UST from losing its grip. They spun a project, ripe with systemic risk and a ticking time bomb, into a behemoth with a market cap over 10b. It wasn’t just a win for big shots like Hashed but a showcase of “Korean power.” With DK and LFG stirring up the pot, all eyes — and inevitably, predators of the dark forest — were on this glaringly vulnerable project. Its downfall, almost poetic in its inevitability, toppled empires overnight, turning rags-to-riches dreams to dust, along with the hunters usually on the prowl, leaving a trail of mockery in its wake. Yet, regardless of its end, LUNA’s tale is inked indelibly in crypto history, teaching us:

  • Pure economic mechanisms can outplay so-called technical innovators, taking a spot among the top chains.
  • But remember, LUNA’s rise hinged on its critical infrastructure: Anchor. No Anchor, no Terra.
  • And it reminded us: Any project riddled with systemic risk will see it unleashed.

That’s the crux, the very essence of Thorchain’s contemplation. After a year and a half of quiet introspection, the eureka moment struck. Thorchain bellowed: I have achieved enlightenment!

Enter ThorFi, a new chapter begins. Now, let’s reintroduce ourselves to Thorchain.

ThorFi: I’ve caught the final Hamon, farewell Luna

RUNE was primed to capture maximal value from the get-go

In the cosmos ecosystem, Thorchain stands as an application chain that can’t be ignored, boasting seamless transactions of native assets across various chains, including Ethereum, Bitcoin, Avalanche C-chain, and more. It saw Bancor’s mechanism as the theoretically best solution for liquidity fragmentation issues — limited only by Bancor’s DApp status, unable to unleash its full potential. So, Thorchain transformed Bancor’s swap mechanism into a blockchain with unique features, such as:

  • All assets are settled using its native RUNE token, akin to Bancor. This means if you’re swapping BTC for ETH, you’re actually going through BTC-RUNE and RUNE-ETH, significantly upping the chances for RUNE to capture value.
  • RUNE tokens double as gas for transactions and as node fees for maintaining network security. Thorchain mandates that the total value staked in RUNE by nodes must equal the total value in the liquidity pools, maintaining a 3:1 ratio of RUNE to non-RUNE assets to ensure financial risk is always proportional to network security.

Leveraging these two traits, Thorchain spins its fundamental flywheel: the more cross-chain transactions there are, the deeper the liquidity needed, and hence, the more RUNE must be staked.

source from: multicoin

With this core mechanism in mind, let’s dive into the recently buzzed-about products: Thorchain Lending and ThorSavings.

Thorchain Lending: On the Surface, a CDP; In Essence, Half a Luna

Diving into the core, Thorchain Lending advertises three key features:

  • Zero interest
  • No liquidation
  • No time limit (though there’s actually a minimum loan period of 30 days, but for the sake of long-term perspective, we can consider it unlimited)

To understand how it achieves these and why it’s dubbed “half a LUNA,” let’s delve into its mechanics.

source from:https://www.youtube.com/watch?v=AaqHG00RJks&t=922s

We’ll use the example of collateralizing BTC at a Collateralization Ratio (CR) of 200% to borrow USDT and walk through the lending process:

  1. Alice deposits 2 BTC into Thorchain Lend (the frontend for interaction could be Thorchain Swap or Lend; don’t ask why native BTC can be collateralized, it just supports linking various wallets).
  2. These 2 BTC are swapped for a corresponding amount of RUNE in the BTC/RUNE pool (recall the basic mechanism mentioned earlier). This swap incurs a transaction fee paid to LPs, thus deepening the pool’s liquidity. Hence, the RUNE obtained isn’t exactly equal in value to the original 2 BTC.
  3. The obtained RUNE enters a synthetic asset pool, minting an equivalent thor.BTC. RUNE used for minting and transaction fees are burnt. Here’s the key: the underlying asset for thor.BTC isn’t BTC but a liquidity pair made of 50% BTC and 50% RUNE due to the AMM mechanism, which incurs slippage and transaction fees.
  4. The minted thor.BTC is then sent to the lending module, which has a dynamic CR that increases with the volume of loans against the same collateral until it hits a cap and then resets (for simplicity, let’s say the borrower’s CR here is 200%).
  5. Next, the crucial step: the lending module creates debt for the borrower based on the CR, but the debt isn’t calculated in the actual borrowed asset. Instead, it uses a virtual accounting unit, Tor, pegged to a basket of stablecoins, including USDC, USDT, DAI. Tor’s value is the median of this basket’s values.
  6. TOR is burnt to mint a corresponding amount of RUNE in a virtual pool.
  7. This RUNE is swapped in the USDT/RUNE pool for USDT, incurring transaction fees for LPs. The final borrowed USDT value is approximately 0.996 BTC. The repayment process is the reverse, taking another cut for transaction fees, leaving the user with 1.996 BTC in the end.
https://www.youtube.com/watch?v=AaqHG00RJks&t=922s

Here we see that both borrowing and repayment involve four transactions with fees, hence why Thorchain Lend can offer the first two features:

  • Zero interest: Because the fees are taken upfront. And since thor.tokens are collateralized as LP, the borrower essentially forgoes LP income, which subsidizes the protocol. Of course, this reveals the loan providers: LPs.
  • No liquidation: The various transaction losses already account for partial liquidation of collateral. There’s no custody issue with Thorchain Lend, as all assets are sold/minted into synthetic assets, and repayment is the protocol repurchasing the corresponding assets from the liquidity pool to return to the user. The remaining question is the lack of a repayment timeline. Or to put it another way, isn’t Thorchain afraid of bad debt? Interestingly, it’s not; in fact, it prefers that loans aren’t repaid. This involves the lending gamble. We know lending is like giving borrowers a call option on collateral and a put option on the borrowed asset. Typical lending protocols prompt repayment when collateral value drops to avoid liquidation. However, Thorchain Lend differs significantly because it covertly swaps the collateralized native asset for an LP asset backed by native asset + RUNE (here comes the Luna vibe: collateralize LUNA, mint UST). Borrowing burns RUNE, and repayment mints RUNE. Considering a minimum CR of 200% plus transaction losses, RUNE is deflationary when loans are made but inflationary upon repayment (echoes of Luna’s downfall). The lending process becomes a bet between RUNE HOLDERS/protocol and borrowers. For example:
  • If BTC = $2000, a borrower collateralizes 1 BTC for about $1000 USDT. More than $2000 worth of RUNE is burnt, reducing liquidity and causing RUNE deflation.
  • If BTC rises to $4000 the next year, the borrower can redeem their 1 BTC collateral with $1000 USDT. Nearly $4000 worth of RUNE must be minted to maintain the price, inflating RUNE and potentially devaluing it; borrowers are likely to redeem and exercise their option.
  • If BTC falls to $900, the borrower opts not to repay. The protocol sees collateral devaluation, meaning less RUNE is needed to match the threshold (controlled by the protocol), leading to further RUNE burning and value increase. From the protocol’s perspective, it’s not keen on repayments.

Besides offering interest-free and liquidation-free loans, Thorchain imposes restrictions to discourage repayment, like a minimum loan period of 30 days and early repayment fees (e.g., 1% on day 99, 10% on day 90). As CR is dynamic, fewer loans against the same asset lower the CR, hence encouraging more borrowing when repayments occur.

These measures control outflows but don’t fundamentally solve potential liquidity issues (insufficient pool depth for collateral, increasing borrowing friction). That’s where Thorchain’s other strategy comes in: ThorSavings.

ThorSavings: No Joke, It’s Really All About That High Yield : )

There’s a line from the ThorSavings proposal that I’m particularly fond of:

“BTC maxis want to earn more BTC with their BTC, without touching RUNE.”

We’re all clued in that providing liquidity usually involves supplying both assets in a pair to get LP tokens, which represent your share of the pool, and the transaction fees you earn are split according to both assets in that pair. Like, if you’re in the ETH/USDC pool, your fees come in both ETH and USDC. Now, this is even more pronounced in Thorchain, where all assets must pair 1:1 with RUNE. So, if you’re an LP, you’re also buying a ticket to the RUNE risk roller coaster. But what about those who just want to stack more BTC or ETH and dodge the RUNE risk? That’s where ThorSavings comes in, ready to save the day.

Its principle is pretty much the synthetic asset jazz we saw in lending: you deposit a single native asset and mint a synthetic asset backed by LP. And when you want out, the process flips in reverse.

https://crypto-university.medium.com/under-the-hood-single-sided-yield-protocol-owned-liquidity-a5ef725a5d7a

After acquiring synthetic assets, users have the option to stake them in the corresponding vault to earn swap fees, which are set at 50% of the regular LP fees. Here’s where you might spot an issue: the native assets you’ve deposited still exist as part of a dual-asset LP. It’s touted as low-risk and capable of providing returns in the asset’s native denomination because arbitrageurs are expected to step in. However, this system shares a shadow with the Luna debacle: if RUNE’s value plummets, will there still be arbitrageurs bold enough to bridge the gap? Despite this risk, Thorchain has shown restraint in its approach, capping thorsaving assets at 60% of liquidity, with the Protocol’s Own Liquidity (POL) making adjustments to keep saving assets between 40–50% of the LP.

Thus, Thorchain wields both lend and saving mechanisms to hedge bets with borrowers, managing inflows and outflows with a dual strategy. Nevertheless, the specter of Luna’s fate lingers behind its mechanisms, a silent caveat in the rune-lit halls of Thorchain.

The Mistakes of Luna, Thorchain Aims Not to Repeat in This Lifetime (As Much As Possible)

Now that we’ve got a grip on ThorFi’s mechanism, it’s high time we ponder whether Thorchain could face a Terra-like collapse. The key question is, why did Luna crash? You got it, it was the mechanism. And the biggest flaw? Was it Anchor’s unsustainable high rates? That’s a part of it. But even if Anchor’s rates were adjusted to 10% or even 5%, would Luna have been spared? I suspect it still would’ve met its demise. So, where did the real issue lie? From my vantage point, Luna’s catastrophic failure stemmed from: users’ direct exposure to the protocol’s debt unit, UST.

We know Terra allowed for the minting of UST by staking LUNA, with UST itself pegged to $1, coupled with LUNA’s inflationary redemption mechanism. Once UST significantly de-pegged, Luna’s death spiral was all but certain. Now, do you see how Thorchain differs from Terra? To boil it down, the most crucial differences include:

  • Thorchain’s accounting unit, TOR, isn’t user-accessible. It’s minted for accounting and then immediately swapped for RUNE. Think of it as a TOR/RUNE pool, where TOR’s total market cap reflects Thorchain’s total debt, making it the deepest pool by necessity. But it’s critical to understand this pool doesn’t truly exist.
  • Mimicking Luna’s UST minting (alchemy of the air, in Thorchain’s case, including LPs with RUNE), Thorchain creates various thor.tokens instead of the accounting unit TOR. Since these blue-chip assets’ collaterals are dynamically generated LPs and normal lending processes don’t involve direct handling of thor.tokens, the odds of these thor.tokens de-pegging are low — short selling them would be futile.
  • A common point raised: Thorchain isn’t as reckless as Luna, which had zero collateral backing. Thorchain has at least 50% real collateral, which significantly lowers the chances of a catastrophic failure when token/RUNE liquidity is properly managed.
  • Lastly, unlike Terra, which relied on Anchor’s substantial subsidies for stability, Thorchain opts for a zero-interest approach to borrowing.

Beyond these measures, Thorchain has set a debt ceiling for itself: 500 million RUNE is the limit. Upon reaching this cap, lending halts, awaiting official intervention. The minimum 30-day loan lock also mitigates the potential for quick, short-term dumps. Worst case scenario? The liquidity cap is reached, officials can’t salvage the situation, and we hit the direst form of Nash Equilibrium :). But usually, in a bull market, leverage is heavy, and a large-scale bank run is unlikely even if collateral values rise due to strong borrowing demand. In a bear market, however, if everyone rushes to reclaim their blue-chip collaterals, a debt ceiling breach could occur. But that’s a bridge to cross when we get there — who knows, officials might have more tricks up their sleeve.

500M? Where Does Thorchain Stand Now?

Where does Thorchain currently stand? Let’s take a look at the dashboard:

https://dashboards.ninerealms.com/#lending

One intriguing metric is the ‘Lending RUNE Burned.’ The high burn rate shortly after launch might raise some eyebrows. It’s important to note that of this, 15 million RUNE were not burned during normal protocol operations but rather were tokens on BSC and ETH that didn’t upgrade and were thus burned upon the mainnet launch.

Thorchain has cleverly utilized these burned RUNE through a buffer mechanism. Initially, lending should not exceed one-third of the burned RUNE. This ensures that even if the collateral price triples or RUNE’s price drops by a third, the 500 million RUNE debt ceiling won’t be breached. As more RUNE gets burned, the lending leverage increases, keeping Thorchain’s financial risks within manageable limits. However, it’s worth noting that different assets have varying loan limits, though the total remains capped.

https://www.youtube.com/watch?v=AaqHG00RJks&t=922s

Another critical metric is the ‘Collateral Value,’ now at 1.8 million. Without considering slippage and dynamic CR adjustments, this debt is close to reaching the lending lever, at about 92%.

As for RUNE’s current state, it’s deflationary. But overall, the current debt level is about one-tenth of its cap, so there’s room to breathe. Yet, looking at basic data on Thorswap, one might wonder: Is this the next Anchor?

https://dashboards.ninerealms.com/#lending

Finally, let’s consider a scenario analysis regarding the collateral/RUNE price changes and their impact on RUNE’s inflation/deflation:

  • If Only the RUNE Token Price Rises:
  • Assume a 10% increase in RUNE, with BTC (the collateral) price constant. Asset ratio decreases, resulting in a net -595 RUNE minted.
  • If RUNE’s Price Rise Equals the Collateral’s Rise:
  • Assume both RUNE and BTC increase by 10%. Asset ratio stays the same, resulting in a net 587 RUNE minted.
  • If RUNE’s Price Rise is Double the Collateral’s Rise:
  • Assume RUNE rises 20% and BTC 10%. Asset ratio decreases, leading to a net -7 RUNE minted.

Theoretically, the net minting should be zero, but due to the CR causing a gradual decrease in borrowing utilization, there’s some slippage. When factoring in transaction fees, these figures could vary.

Summary

Thorchain is earnestly trying to mitigate its systemic risk. However, the current volumes of Thorchain lend and saving are not substantial, and the sustainability of this mechanism warrants continuous observation. Personally, this product, reminiscent of Luna but distinctly different, merits close attention. In the realm of chains sustained purely by token mechanisms, apart from LUNA, Thorchain stands out.

Reference

Thorchain doc:

Disclaimer: This article is provided for informational purposes only and should not be considered as financial advice. The cryptocurrency market is highly volatile and unpredictable. Always conduct thorough your own research and consult with a qualified financial professional before making any investment decisions.

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