Preface

This article provides an in-depth analysis of THORChain’s unique lending model, examining its features such as interest-free, liquidation-free, and no maturity terms, and how these characteristics offer a competitive advantage in the blockchain lending sector.

Lending Process and Parameters

The processes of establishing and closing a debt involve multiple transactions and steps of minting and burning RUNE. The process of taking out a loan using BTC as collateral is outlined as follows.

• Deposit of BTC Collateral: The user deposits BTC as collateral, which is exchanged for RUNE in the BTC Pool.
• Conversion and Destruction: The RUNE obtained is destroyed in the virtual BTC pool, and THOR.BTC is minted.
• Collateral in the Lending Module: THOR.BTC is used as collateral in the lending module.
• Generation of TOR: TOR is generated based on the collateral ratio.
• Debt Representation: The amount of TOR represents the debt denominated in USD. This debt is fixed and does not change in subsequent steps until repayment.
• Destruction and Minting of TOR: TOR is destroyed in the virtual TOR pool, and RUNE is minted.
• Exchange for Desired Assets: The minted RUNE is exchanged for the desired assets in other pools. For instance, if USDT is needed, RUNE is exchanged for USDT in the USDT pool.

The repayment process is essentially the reverse of the borrowing process.

• Repayment with Supported Assets: The user repays the loan with any supported asset, which the system converts into RUNE.
• Destruction and Minting of TOR: The RUNE obtained is destroyed in the virtual TOR pool, and TOR is minted.
• Debt Repayment: TOR is destroyed to repay the debt. Upon complete repayment, THOR.BTC is redeemed.
• Destruction and Minting of THOR.BTC: THOR.BTC is destroyed, and RUNE is minted.
• Conversion to BTC: The minted RUNE is exchanged for BTC in the BTC Pool and sent to the user.

The design of the lending module is inspired by Luna’s flywheel mechanism. When users take out loans, RUNE is burned, increasing RUNE’s price. The burning of RUNE and its price increase raise the loan limit, allowing the system to accommodate more collateral and issue more loans. Due to the high loan demand in bull markets and support for native BTC, THORChain’s non-liquidation lending will be highly competitive.

Conversely, when the market declines and users repay loans, the opposite occurs. The repayment of large loans results in the minting of RUNE to purchase collateral, causing RUNE’s price to drop. The minting and price decrease of RUNE compress the lending space.

Since the system ultimately bears the risk of the entire loan process, a maximum loan limit is set to prevent a death spiral. Additionally, a minimum loan term of 30 days is established to prevent users from frequently borrowing and repaying, which could exacerbate system volatility.

According to the project’s official documentation, the total loan limit is related to the amount of RUNE burned：

Max RUNE Supply: The maximum supply of RUNE is set at 500 million.

Current RUNE Supply: The current circulating supply of RUNE is approximately 418.4 million, after considering previous burns due to migration, the recent burn of 60 million reserve RUNE by the officials, and the RUNE burned during the lending process.

RUNE Burned: Thus, runeBurnt = 0.816 billion (500 million - 418.4 million).

and

The system parameter lending lever, which is used to adjust the loan limit, is currently set to 3333. This results in approximately:

1/3 ×0.82 billion=27.2 million RUNE

This is the amount of RUNE available for lending.

Currently, the only acceptable collaterals are BTC and ETH. The loan limits for these collaterals are related to the depth of their respective pools.

BTC Pool Depth: 169.1 million

ETH Pool Depth: 95.7 million

The RUNE amount available for loans using BTC as collateral is calculated as follows:

(169.1/(169.1+95.7)) * 2720 = 17.37 million RUNE

Similarly, ETH can be used as collateral. The number of RUNE corresponding to the loan of this product is 9.83 million.

Data source: THORSwap

Data Analysis

Since the launch of the lending module, there have been 1,700 borrowing users, most of whom joined after the team burned 60 million reserve RUNE. The number of daily borrowing users ranges between 80-100.

Data source: flipside

The current system has received a total of $131 million in collateral and issued $60 million in loans. It can be seen that the daily loan volume is approximately US$3 million-5 million.

Data source: flipside

Since the loans recently initiated have not yet reached the minimum 30-day borrowing period, there is currently no repayment data available. This metric is crucial for assessing system security. A large number of repayments in a short period could stress the system. However, due to the variation in loan durations and conditions, coupled with the high leverage demand during a bull market, it is predicted that there will not be a massive repayment wave once loans reach their repayment dates.

The lending module is currently in a state of net RUNE destruction. To date, 11 million RUNE have been burned due to loans, while 3.3 million RUNE have been minted due to repayments, resulting in a net RUNE burn of 7.7 million. The ongoing borrowing activity maintains a daily RUNE burn rate of 300,000-500,000 RUNE.

Data source: flipside

The Net Mint/Burn indicator effectively measures the security of the lending module. This metric simulates the scenario where all loans are repaid and collateral is withdrawn, calculating the difference between RUNE burned during the loan process and RUNE minted during the repayment process (excluding the impact of RUNE price fluctuations from the minting process). A negative value indicates net RUNE destruction, signifying a safe system, while a positive value indicates net RUNE minting, suggesting some risk. As shown in the graph below, the current Net Mint/Burn amount for the network is approximately -2 million RUNE.

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

Currently, BTC is the predominant form of collateral, with a total value of $74 million, followed by ETH collateral valued at $56 million. This is likely due to the abundance of lending protocols available on the ETH chain compared to fewer options for native BTC lending protocols.

Data source: flipside

Data source: flipside

Summary

1. The THORChain lending module offers certain advantages over platforms like AAVE and Compound due to its features of no liquidation, no interest, and no maturity date, along with the ability to support native BTC lending.
2. The module’s flywheel design is similar to the Luna-UST model. In a bull market, due to high borrowing demand, it could generate a strong upward effect. However, the system has set a borrowing limit to prevent an infinite spiral.
3. The module essentially transfers risk to RUNE token holders, so continuous monitoring of project-related metrics is necessary.
4. Borrowers will not face liquidation, but in extreme situations, such as when RUNE minting reaches the limit of 500 million tokens, the system will suspend the lending module. This could result in risks such as borrowers being unable to withdraw their collateral (see more potential risks in Reference Article 3).

Reference article

https://docs.thorchain.org/thorchain-finance/lending

https://www.panewslab.com/zh/articledetails/nrb4a708.html

https://hackmd.io/@blockscience/H1Q-erh_n/%2FTjH7cuoNQTy6I91wpgP1Dw%23Risk-%255BR1%255D

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