Today we are diving into the following topics: Summary: THORChain, a decentralized cross-chain liquidity protocol, saw its market cap crash from $3.5B to $500M
THORChain, a decentralized cross-chain liquidity protocol, saw its market cap reduce drastically from $3.5B to $500M. This was largely due to risky financial engineering employed in its lending and savings programs.
One key aspect of THORChain's design is the use of its native token, RUNE, as the primary collateral asset in its lending and savings programs, known as THORFi.
When users deposit their assets into THORFi to earn yield, they can borrow up to 75% of their deposited assets in other supported cryptocurrencies, such as BTC, ETH, or BNB.
Upon loan issuance, a price-dependent debt spiral was created, as RUNE tokens were burned, decreasing the total supply, and new TCY tokens were minted.
As liabilities grew to $200M in the protocol, the unsustainable nature of this mechanism became evident, leading to a sell-off pressure on RUNE, further decreasing its price and increasing the debt ratio of users.
Ultimately, the project had to be bailed out by a group of users who stepped in to cover the remaining bad debt, which was then burned, decreasing the total RUNE supply.
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