On Jan. 24, THORChain announced it had paused its network due to excessive debt and leverage issues impacting its ecosystem. The blockchain owes nearly $200 million.
Financial instability of THORChain
In DeFi, ecosystem debt occurs when a blockchain owes more tokens than it holds, as seen with THORChain. This often results from overambitious promises or mismanagement, leading to financial imbalances. Leverage risks arise when users leverage their crypto assets as collateral. These risks can magnify profits but also result in substantial losses if the market performs poorly.
Restructuring plan
THORChain's native token RUNE has encountered price volatility, dropping over 40% in the last 24 hours as of Jan 24. Consequently, THORChain validators are voting on a restructuring plan. A quote from a core investor in THORChain, TCB: "There is no risk of death spiral, the features have been suspended." These steps aim to stabilize the system and mitigate risk to the ecosystem.
Risks of DeFi lending
While many within the crypto community earn passive income through DeFi lending, they are not without risks. In March 2020, MakerDAO faced an ecosystem debt of $6.65 million. The platform had to mint and sell MKR tokens to cover more than $4.5 million as part of its debt repayment strategy. Overcomplicated features like excessive leverage can destabilize protocols, emphasizing the need for streamlined designs and effective risk management systems.
THORChain's restructuring plan aims to stabilize the system and regain user trust. Efforts include wallet integrations and liquidity provision.
