THORChain has officially launched its innovative Lending protocol, offering users a decentralized borrowing experience characterized by no interest, no forced liquidations, and no maturity dates. This groundbreaking system allows users to lend native Layer 1 assets like BTC and ETH to THORChain and borrow against them with a dollar-denominated debt. Below, we break down how it works and what makes it unique.
How Does THORChain Lending Work?
The Lending protocol enables users to deposit cryptocurrencies as collateral and borrow against it without traditional loan constraints. Key features include:
- No Interest: Borrowers are not charged interest on their loans.
- No Forced Liquidations: Unlike many DeFi lending platforms, there is no risk of automatic liquidation due to price fluctuations.
- No Maturity Dates: Loans do not have a fixed repayment date, providing flexibility for the borrower.
Loans are issued based on a collateralization ratio (CR), which determines the amount of debt a user can receive relative to their deposited collateral. This ratio can range from 200% to 500%, depending on prevailing market conditions.
The debt itself is denominated in TOR, a virtual USD-equivalent stablecoin used solely as an internal accounting unit within the protocol. Debt can be repaid using any asset supported by THORChain.
A minimum loan term of 30 days is enforced. After this period, borrowers can repay their debt and reclaim their collateral at any time. Partial repayments are permitted, but the full collateral is only released once the entire debt is settled.
Initially, the protocol supports ETH and BTC as collateral, with plans to expand support to all THORChain-compatible Layer 1 assets, such as BNB, BCH, LTC, ATOM, AVAX, and DOGE.
Where to Manage Loans
Users can open, close, and manage their loans through various interfaces, including:
- THORSwap
- Lends
- THORChain.net dashboard
- Nine Realms Lending dashboard
The ecosystem of supported interfaces and dashboards is expected to grow over time.
Core Design Principles of the Lending Protocol
The development of the Lending protocol was guided by three primary design goals:
- Minimal Cognitive Burden: To create the simplest possible user experience concerning collateral, debt, and loan terms.
- Scalable Security: To ensure that user collateral is always secure.
- Controlled Risk: To limit the risks associated with rapid debt expansion and to cap existing debt exposure relative to system liquidity through transparent circuit breakers.
Understanding the Mechanism
THORChain issues USD-denominated debt against Layer 1 collateral, which is held as synthetic equity within the system. A higher collateralization ratio indicates a larger buffer of collateral relative to the pool depth, making the entire system more secure.
The absence of interest or liquidation pressures means users have less incentive to repay loans quickly. This dynamic enhances the value of the protocol's synthetic equity. By removing RUNE from liquidity pools to back loans, THORChain can increase its Total Value Locked (TVL), thereby enhancing overall network liquidity and security.
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The TOR Stablecoin: An Internal Price Oracle
THORChain does not rely on any third-party pricing data or oracles. Instead, it uses an internal dollar-equivalent unit of account called TOR for the lending protocol.
- TOR is not a tradable or holdable asset; its market capitalization is zero.
- It serves exclusively as a debt pricing tool within lending.
- The value of TOR is derived from the median price of all stablecoin pools on THORChain (e.g., USDC, USDT, BUSD).
- This design ensures robust pricing even if one or more stablecoins depeg, as long as at least one stablecoin pool remains functional.
To protect the protocol from manipulation, the depth of TOR's virtual pool adjusts based on market volatility. During high volatility, the virtual pool depth contracts, resulting in higher slippage for users opening or closing loans. For the best results, users are advised to manage their loans during periods of low network volatility.
Safely Scaling the Lending Capacity
The lending capacity is capped based on the live RUNE supply, which has a hard cap of 500 million tokens. A buffer exists from previously burned RUNE (approximately 15 million tokens from unupgraded BEP-2/ERC-20 assets).
To ensure safe expansion, only one-third of this burned RUNE buffer (about 5 million tokens) is initially allocated for lending. This ensures the system can withstand a scenario where the RUNE price depreciates by 3x against its liabilities without breaching the hard cap. As more RUNE is burned over time, the lending capacity can safely increase.
Protocol Risks and Protections
A comprehensive risk assessment and economic simulation of the lending protocol was conducted by Block Science. The team and community have worked to ensure the protocol is secure for both borrowers and the network itself, aiming to provide a revolutionary product without undue risk of over-leverage or protocol insolvency.
Inflation Protection: The Circuit Breaker
A critical safety mechanism is the circuit breaker. If the price of RUNE falls sharply against its core collateral assets (like BTC and ETH), repaying loans could lead to net inflation of RUNE, potentially approaching the 500 million hard cap.
Should this occur, the system will automatically pause new loan origination and disable lending functions (all other THORChain operations continue normally). This halts further inflation. The network's RESERVE module would then cover any remaining collateral obligations, and RUNE issuance would be controlled.
Why No Interest, Liquidation, or Maturity?
This design might initially seem risky, but it is fundamental to the protocol's economic model.
- No Liquidation: Since the collateral is held as a synthetic RUNE liability, a drop in collateral value below the debt value is not an immediate solvency issue. The protocol avoids the poor user experience of forced liquidations and constant price monitoring. Instead, it manages systemic risk through the circuit breaker and the RESERVE.
- No Interest: A 0% interest rate is highly attractive to borrowers and discourages early repayment. The protocol benefits when loans remain open long-term, as the locked collateral boosts network security and value. The protocol earns revenue from slippage-based fees during loan opening and closing instead of interest.
- No Maturity Date: The protocol's goal is to attract exogenous capital (like BTC and ETH) and convert it into synthetic RUNE equity. It does not want this capital to be recalled, as repaying loans would force the system to sell RUNE. Removing maturity dates encourages perpetual capital lock-in, strengthening the network.
How Lending Helps THORChain Scale
THORChain has strict rules for economic security: validator bonds must always be greater than the value of assets in its vaults (priced in RUNE). The lending design directly impacts the relationship between liquidity and security.
When a loan is opened, RUNE is effectively bought and burned from liquidity pools. This net reduction of RUNE in pools allows more external TVL to enter the ecosystem. It also creates buying pressure on RUNE, allowing the network's security to scale upwards so it can safely safeguard more capital.
Who Is the Counterparty in a Loan?
The THORChain protocol itself, and by extension all RUNE holders, are the ultimate counterparty to every loan. The RUNE burn/mint mechanism means loan activity has a concentrating or diluting effect on all RUNE holders. Liquidity providers and saviors are not directly lending their assets to borrowers; instead, pools act as a medium for swaps between collateral and debt. LPs and savers benefit directly from the liquidity fees generated by these swaps.
Frequently Asked Questions
Can I make a partial repayment on my loan?
Yes, partial repayments are allowed. However, your collateral will only be fully released once the entire debt balance is settled.
What happens if I overpay my debt?
Any amount overpaid will be credited toward your next loan or can be considered a prepayment for future borrowing.
Is there a best time to open or close a loan?
Yes, the optimal time is during periods of low network volatility. During high volatility, the virtual TOR pool depth contracts to prevent manipulation, leading to higher slippage and fees. Patient borrowers who act during calm markets will pay the lowest fees.
Will I always get my full collateral back?
You will receive your full collateral back upon full repayment of your debt, minus any liquidity fees (slippage) incurred during the loan opening and closing processes. Fees are lowest during low-volatility periods.
When will more collateral options be available?
Lending initially supports BTC and ETH. The functionality to support all THORChain Layer 1 assets is already built-in and can be enabled by validators via governance (mimir) proposals.
Which assets can I use to repay my debt?
You can repay your debt using any asset supported by THORChain. The repayment asset will be swapped for TOR (at the current exchange rate) to settle your debt, as it is denominated in TOR.
Will the lending protocol use streaming swaps?
There are currently no plans to implement streaming swaps for the lending protocol.