Lending on THORChain

Published in

THORChain

8 min readAug 21, 2023

Lending has been activated on THORChain. Users can lend their native Layer 1 assets — BTC and ETH — to THORChain and borrow a USD-denominated debt with no liquidations, no interest, and no expiration.

Loan Terms:

No interest
No liquidations
No expiration

Loans are issued with a collateralization ratio (CR) that determines how much debt the borrower receives in proportion to their collateral. CR can range from 200% to 500% depending on market conditions.

Debt is denominated in TOR, a USD equivalent. Debt can be repaid in any THORChain-supported asset, including stablecoins.

Loans have a minimum period of 30 days. Borrowers can repay their debt at any time after 30 days and receive their collateral back. Partial repayments are possible, however the collateral is not released until debt is fully repaid.

Lending will initially be available for ETH and BTC collateral. Lending will soon be opened to all Layer 1 gas assets supported on THORChain (BNB, BCH, LTC, ATOM, AVAX, DOGE)

Where to open, close, and manage loans

Dashboards

More interfaces and dashboards will be added as they become available

Understanding the Lending Design

Design goals:

The primary lending design goals are:

Minimal Cognitive Burden — The simplest UX around collateral, debt, and loan terms were pursued.
Scalable Security — The collateral should always be secured.
Contained Risk — The risk of new debt being opened too fast should be throttled, and the risk of existing debt exceeding the liquidity of the system should be contained by a transparent circuit breaker.

Basic Explanation:

THORChain uses Layer 1 asset collateral to issue dollar-based debt, holding the collateral as equity. The more collateral added compared to pool depths, the higher the collateralization ratio, making early participation preferable. A higher collateralization ratio means a safer system. Since there’s no liquidation or interest, users are less inclined to repay loans, boosting the protocol’s equity value. By removing RUNE from the pools for loans, THORChain can increase its total value locked (TVL), enhancing liquidity and security.

Community Resources:

In addition to the Lending documentation, the THORChain community has created a plethora of resources to better understand the mechanics behind the lending protocol and its risks. Aspects of the design have been tweaked since the initial proposal in September 2022 — beware old resources as they could be referencing outdated proposed designs.

Lending Explanation Video by GrassRoots Crypto

Internal Price Oracle — TOR Stablecoin

As a rule, THORChain does not consume any 3rd party pricing data from oracles and has no 3rd party dependencies. A USD equivalent stablecoin coined “TOR” was created as an internal pricing oracle for the lending protocol, so as not to rely on any one external stablecoin unit of account.

TOR cannot be held or traded at this time. Its market cap is $0. It is only used as the pricing instrument for debt in the lending protocol. The price of TOR is derived from the median price of all the stablecoins on THORChain, such as USDC, USDT, BUSD, LUSD, GUSD, USDP, DAI, etc. Even in the event of one or more stablecoin de-peg or collapse, TOR remains properly priced, and it can remain correctly priced with just one working stablecoin pool.

To protect the protocol from manipulation, the depth of the virtual TOR pool contracts with volatility. In times of stablecoin volatility, TOR will remain properly priced, but its virtual pooln depth will contract to protect THORChain, resulting in high slippage if a borrower attempts to open or close a loan. For best results, open and close loans in times of decreased volatility.

Safely Scaling Lending — Loan Caps

Lending is capped based on the outstanding RUNE supply, which has a hard limit of 500m RUNE. About 15m RUNE is already burned due to BEP-2 or ERC-20 RUNE assets that were never upgraded. This gap creates a buffer to support initial lending. To ensure safe scaling, only 1/3rd of the burnt RUNE (~5m) will be available for loans. This ensures that if RUNE price collapses by 3x compared to its liabilities and all outstanding loans repaid, the 500m supply cap will not be breached. As more RUNE is burned and the gap grows, additional loans can be created. RUNE is burnt when loans are opened/closed in favorable conditions and the internal swap fees across loans permanently burn RUNE, so the gap should continually increase.

Risk

Block Science performed a comprehensive report on the risks of THORChain’s lending protocol, complete with economic simulations. Block Science also provided recommendations for the initial parameters of lending to provide a safe experience to the users and to the protocol.

Great care has been taken to ensure the safety of the lending protocol for both borrowers and the protocol itself. The team and community is committed to delivering a revolutionary lending product, without compromising the protocol, over-leveraging, or taking unjust risks.

Protection against inflation — Circuit Breaker

If the RUNE price drops drastically against the majority of its collateral assets (BTC, ETH), then net inflation of RUNE will occur if users start paying back their loans, and it exceeds the margin of RUNE already historically burnt. This inflation could hit the 500m RUNE supply cap. At this point the system will pause new loans and sunsets (disables) lending (note, all other features of TC still function). At this point, no further inflation of RUNE can occur and the supply is arrested. The RESERVE will cover the remaining collateral payouts. A potential unwind path is laid out in the ADR if the lending program is sunset. Dashboards have been created to proactively monitor this.

Why No Interest, No Liquidations, and No Expiry?

On first glance, it may seem that offering these features creates a large risk for the protocol. However, understanding that the collateral supplied for loans is held as equity (RUNE IOU), and that the debt is fully paid on origination (cashed out as a stablecoin), the best possible scenario is that loans are never repaid. The more demand for lending drives up the collateralization ratio, which increases the amount of stored equity vs issued debt. The demand to open loans is then metered by borrower’s tolerance of the collateralization ratio, since holding a loan in the protocol creates opportunity cost for the collateral. The protocol thus wants as much exogenous capital converted to equity as possible, and this provided by the market.

FAQs

Can I partially repay my loan?

Debt can be partially repaid, but a borrower will only receive their collateral back when the debt is paid in full.

What happens if I overpay my debt?

Overpayments are credited towards the next loan the borrower opens.

Is there a best time to open or close a loan?

Yes, it is best to open and close loans during times of low volatility. To protect the network from price manipulation, virtual pool depths for lending shrink during times of increased volatility, meaning liquidity fees can greatly increase. Managing loans during times of low price volatility on THORChain will yield the most desirable results. Patient borrowers pay the least fees.

Will I always receive my full collateral back?

You will receive your full collateral back upon repayment minus slip-based liquidity fees incurred from the loan opening and closing process. During low volatility periods, fees will be lower. During times of high volatility, fees will be higher due to the constricting virtual pool depth. Patient borrowers pay the least fees.

When will lending be available for more collateral options?

The lending protocol is initially supporting BTC and ETH. The functionality to support lending on all Layer 1 gas assets on THORChain — BNB, LTC, BCH, ATOM, AVAX, and DOGE — is already available and simply needs to be turned on by the validators through mimir.

Which assets can I use to pay down my debt?

Debt can be repaid with any THORChain-supported asset. Assets used to repay loans will be sold for TOR to repay the debt, since debt is denominated in TOR.

Will streaming swaps be used for lending?

Streaming swaps are not yet available for lending, but will be implemented soon

Why are there no liquidations?

In this design, if collateral falls below the debt value, it’s not problematic since the collateral, stored as equity (RUNE), is the liability. Liability grows only when the RUNE-ASSET price drops and the loan is repaid. Liquidating collateral poses individual loan risks, worsens user experience, and makes users monitor RUNE’s price, conflicting with design objectives. Rather than liquidations, the protocol can bear a slight rise in RUNE supply (around 15m or 3%) before activating a circuit breaker, pausing the lending feature. With the RESERVE covering remaining collateral payouts and unchanging loan terms post-circuit breaker, a rush-exit becomes less probable.

Why is there no interest?

Interest rates generate income on collateral but make users more likely to repay loans. THORChain’s design thrives when users opt for long-term loans or never repay. A 0% interest rate, being highly attractive, means users seldom repay as their principal remains intact. Users incur slip-based fees upon entering or exiting positions, which boosts yield for network participants and permanently burns RUNE.

Why is there no expiry?

The protocol wants to attract as much exogenous capital as possible (L1 assets like BTC and ETH) since it converts them to equity (RUNE IOUs). Eg, $1bn in collateral stored means $1bn in bought RUNE, minus the amount of sold RUNE to debt at the collateralization ratio, (if it’s an aggregate 300%, then around $300m has been sold), with a total net buy pressure of $700m. This $700m in stored equity is the liability, and THORChain does not want to be called on this liability, since it would have to sell RUNE. Thus there is no expiry.

How does lending help THORChain scale?

THORChain has strict rules on economic security. Value at stake by the validators must always be greater than the value of the assets in the vaults, measured in RUNE. Due to Protocol-Owned-Liquidity and Savers, the network is likely to max out pooled RUNE and send all yield to nodes. The protocol stops scaling until RUNE can be added to the bond module, but this takes time. The lending design buys and burns RUNE from the pools, directly affecting the relationship between liquidity and security. Whilst the loan was opened, it creates a net reduction in RUNE in the pools, allowing more TVL to enter. It also bids on RUNE, allowing security to increase, so the network can securely store more exogenous capital.

Who is the counterparty to the loans?

The THORChain protocol and all RUNE holders are the counterparty to each loan. The RUNE burn/mint mechanism means RUNE concentration/dilution effects (among all RUNE holders) as loans are opened and closed. Liquidity providers and Savers are not directly lending their assets to borrowers. The pools are just the conduit to swap between collateral and debt. Savers and LPs also benefit directly from liquidity fees generated from these swaps.

Additional Resources:

Community

To keep up to date, please monitor community channels, particularly Telegram and Twitter: