THORChain official interpretation: "No interest, no forced liquidation, no maturity date" lending agreement
At this stage, Lending will support ETH and BTC as collateral. In the future, Lending will be open to all Layer 1 assets supported by THORChain (BNB, BCH, LTC, ATOM, AVAX, DOGE).Source: THORChain Blog
Compiled by: 0x711, BlockBeats
The decentralized cross-chain trading protocol THORChain has launched its lending protocol, Lending, today. The official claim states that this lending protocol has "no interest, no forced liquidation, and no expiration date." How the Lending protocol achieves these features is detailed in the official blog by the THORChain team, and this article summarizes and translates that information.
THORChain has activated lending functionality. Users can lend native Layer 1 assets - BTC and ETH to THORChain and borrow a dollar-denominated debt with no liquidation, no interest, and no expiration date.
Loan Terms:
- No interest
- No forced liquidation
- No expiration date
Loans are issued based on a collateralization ratio (CR), which determines the ratio of debt a borrower receives to their collateral. The CR can range from 200% to 500%, depending on market conditions.
Debts are denominated in TOR, a dollar-equivalent stablecoin. Debts can be repaid using any asset supported by THORChain, including stablecoins.
The minimum loan term is 30 days. Borrowers can repay their debts and reclaim their collateral at any time after 30 days. Partial repayments are allowed, but collateral will only be released once the debt is fully repaid.
Currently, Lending will support ETH and BTC as collateral. In the future, Lending will be open to all Layer 1 assets supported by THORChain (BNB, BCH, LTC, ATOM, AVAX, DOGE).
Where to open, repay, and manage loans:
Dashboards
More interfaces and dashboards will be gradually added.
Understanding Lending Design
Design Goals:
The main design goals of lending are:
Minimal cognitive load - Pursuing the simplest user experience for collateral, debt, and loan terms.
Scalable security - Collateral should always be secured.
Controlled risk - The speed of new debt accumulation should be limited, and the risk of existing debt exceeding system liquidity should be mitigated through transparent circuit breakers.
Basic Explanation:
THORChain issues dollar-denominated debt using Layer 1 asset collateral, holding the collateral as equity. The more collateral relative to pool depth, the higher the collateralization ratio. A higher collateralization ratio means a more secure system. With no liquidation or interest, users have no incentive to repay loans, enhancing the equity value of the protocol. By removing RUNE from the pool for loans, THORChain can increase its total locked value (TVL), enhancing liquidity and security.
Community Resources:
In addition to the lending documentation, the THORChain community has created numerous resources to better understand the mechanisms and risks behind the lending protocol. Some aspects of the design have been adjusted since the initial proposal in September 2022 - please be aware of older resources as they may reference outdated designs.
Internal Price Oracle - TOR Stablecoin
THORChain does not use any third-party pricing data or rely on any third parties. To avoid dependence on any single external stablecoin denomination, a dollar-equivalent stablecoin named "TOR" will serve as the internal pricing tool for the lending protocol.
TOR cannot currently be held or traded. Its market cap is 0. It is only used as a pricing tool for debt in the lending protocol. The price of TOR is derived from the median price of all stablecoins on THORChain, such as USDC, USDT, BUSD, LUSD, GUSD, USDP, DAI, etc. Even if one or more stablecoins lose value or collapse, TOR can still be accurately priced as long as there is one available stablecoin pool to maintain accurate pricing.
To prevent manipulation of the protocol, the depth of the TOR virtual pool will change with volatility. When stablecoins are volatile, TOR will maintain appropriate pricing, but its virtual pool depth will contract to protect THORChain, meaning that if a borrower attempts to open or repay a loan, the slippage will be significant. For optimal results, users are advised to open and repay loans when THORChain is less volatile.
Securely Scaling Lending - Loan Limits
The lending limit is based on the real-time supply of RUNE, which has a hard cap of 500 million RUNE. However, approximately 15 million RUNE have already been burned due to BEP-2 or ERC-20 RUNE assets not being upgraded. This gap provides a buffer for initial lending. To ensure safe expansion, only 1/3 of the burned RUNE (approximately 5 million) can be used for loans. This ensures that if the price of RUNE depreciates 3 times relative to its liabilities and all outstanding loans are repaid, it will not breach the hard cap of 500 million. As more RUNE is burned and the gap widens, more loans can be created. When loans are opened/closed under favorable conditions, RUNE will be burned, thus the gap (actual supply vs. theoretical total supply) should continue to increase.
Risks
Block Science conducted a comprehensive report on the risks of the THORChain lending protocol and performed economic simulations. Block Science also proposed initial lending parameters to provide a safe experience for users and the protocol itself.
The team and community have made every effort to ensure the safety of the lending protocol for borrowers and the protocol itself. The team and community are committed to providing revolutionary lending products without compromising the protocol, over-leveraging, or taking on unfair risks.
Protection Against Inflation - Circuit Breaker
If the price of RUNE sharply declines relative to most of its collateral assets (BTC, ETH), a net inflation of RUNE may occur when users begin to repay loans, exceeding the historically burned RUNE collateral. This inflation could reach the issuance cap of 500 million RUNE. At this point, the system will pause new loans and disable lending functionality (note that all other functions of TC will continue to operate normally).
At this time, RUNE will not further inflate, and the issuance will be controlled. RESERVE will bear the remaining collateral payments. If the loan program has ended, a potential exit path will be listed in the ADR. Relevant panels will monitor the above situation.
Why No Interest, No Liquidation, and No Expiration Date?
At first glance, offering these features seems to pose significant risks to the protocol. However, it is essential to understand that the collateral for loans is held as equity (RUNE IOU), and the debt is fully repaid at the time of issuance (converted into stablecoins), ideally meaning that loans are never repaid.
The demand for lending drives up the collateralization ratio, increasing the ratio of stored equity to issued debt. Borrowers then incur the opportunity cost of the fair value of the collateralization ratio to limit the demand for lending. Therefore, the protocol aims to convert as much external capital into equity as possible, provided by the market.
Frequently Asked Questions
Can I partially repay a loan?
Yes, you can partially repay the debt, but the borrower can only reclaim the collateral once the debt is fully repaid.
What if I over-repay the debt?
The excess amount will be credited towards the borrower's next loan.
Is there an optimal time to open or repay a loan?
Yes, it is best to open and repay loans during periods of lower volatility. To prevent the network from being subject to price manipulation, the virtual pool depth will contract during increased volatility, meaning liquidity costs may rise significantly. Managing loans during lower volatility on THORChain will yield the best results. Patient borrowers incur the lowest fees.
Will I always be able to reclaim the full collateral?
Users can reclaim the full collateral when repaying the debt, minus liquidity fees based on slippage incurred during the opening and closing of the loan. Fees are lower during periods of lower volatility. During high volatility, fees will be higher due to the contraction of the virtual pool depth. Patient borrowers incur the lowest fees.
When will there be more collateral options?
The lending protocol initially supports BTC and ETH. Lending functionality for all Layer 1 assets supported by THORChain is available as soon as validators enable it through mimir.
What assets can I use to repay the debt?
Debts can be repaid using any asset supported by THORChain. The assets used for repayment will be sold and converted into TOR to repay the debt, as the debt is denominated in TOR.
Will lending use streaming swaps?
There are currently no plans to use streaming swaps in the lending protocol.
Why is there no liquidation?
In this design, it is not an issue if the collateral falls below the debt value because the collateral (stored as RUNE equity) is the liability. Liabilities only grow when the RUNE-asset price drops and the loan is repaid. Liquidating collateral would introduce risks for individual loans, harm user experience, and require users to monitor RUNE's price, contradicting the design goals. Instead of liquidation, the protocol can tolerate a slight increase in RUNE supply (approximately 15 million or 3%) and then activate the circuit breaker to pause lending functionality. Since RESERVE bears the remaining collateral payments and loan terms remain unchanged after the circuit breaker, the likelihood of a shock exit is minimized.
Why is there no interest?
Interest rates generate income on collateral but make users more likely to repay loans. THORChain's design works best when users choose long-term loans or never repay loans. A 0% interest rate is highly attractive, meaning users are unlikely to repay loans as the principal remains unchanged. Users will pay slippage-based fees when entering or exiting positions, increasing the earnings of network participants and permanently burning RUNE.
Why is there no expiration date?
The protocol aims to attract as much external capital (such as Layer 1 assets like BTC and ETH) as possible, as it converts them into equity (RUNE IOU). For example, storing $1 billion in collateral means purchasing $1 billion in RUNE, minus the collateralization ratio (if totaling 300%), the amount of RUNE sold (approximately $300 million), resulting in a net buying pressure of $700 million. This $700 million in stored equity is the liability, and THORChain does not want this liability to be demanded for repayment, as it would have to sell RUNE. Therefore, there is no expiration date.
How does Lending help THORChain scale?
THORChain has strict rules for economic security. The value deposits of validators must always exceed the value of assets stored in the treasury, measured in RUNE. Due to the liquidity and savers owned by the protocol, the network can maximize pooled RUNE and send all profits to nodes. The protocol stops expanding until RUNE can be added to the public debt module, but this takes time. The lending design buys and burns RUNE from the pool, directly affecting the relationship between liquidity and security. When loans are opened, it net reduces RUNE in the pool, allowing more TVL to enter. It also buys RUNE, allowing security to increase, so the network can safely store more external capital.
Who is the counterparty for the loans?
The THORChain protocol and all RUNE holders are the counterparties for each loan. The RUNE burn/mint mechanism means that when loans are opened and closed, there is a RUNE concentration/dilution effect for all RUNE holders. Liquidity providers and savers do not directly lend assets to borrowers. The pool merely serves as a medium for the exchange between collateral and debt. Savers and liquidity providers also directly benefit from the liquidity fees generated from these exchanges.
