On January 24, Thorchain announced via X that it had shut down its network due to excessive debt and leverage issues impacting its ecosystem. The platform owes nearly $200 million in ecosystem debt.
In Defi, ecosystem debt occurs when a blockchain owes more tokens than it holds, as demonstrated by Thorchain’s current situation. This often results from overly ambitious promises or mismanagement, leading to financial imbalances.
On the other hand, leverage risk arises when users use their crypto assets as collateral to borrow to improve their positions. Leverage risks can magnify profits, but also with massive losses if the market is short, possibly leading to liquidations.
According to Blockbeats, Thorchain has $97 million in borrowing liabilities and $102 million in deposit and synthetic asset liabilities. This financial imbalance has pushed blockchain to the brink of bankruptcy.
What is Thorchain doing to solve the problem?
These risks have, in turn, affected Thorchain’s native token Rune (Rune), leading to price volatility where the token has increased over 40% in the last 24 hours, as of January 24. This situation has also led to a loss of trust in the protocol and Thorchain validators are currently voting on a restructuring plan.
This restructuring plan will help stabilize the system and avoid more risks to the ecosystem. According to Thorchain Core investor TCB, risky lending and leverage features such as Thorfi were highlighted as the main cause of instability and were subsequently removed from the blockchain.
Additionally, the restructuring plan also includes efforts to regain user trust. Currently, integrations with wallets such as Trust Wallet and Coinbase allow users to connect to Thorchain, and liquidity providers would ensure liquidity, helping the blockchain get back on its feet.
Risks associated with Defi loans
While many within the crypto community earn passive income through Defi loans, they are not without risks. In March 2020, Makerdao entered into ecosystem debt of $6.65 million. The platform had to front and sell MKR tokens to cover over $4.5 million as part of its debt repayment strategy.
Over-the-top features such as too much leverage can destabilize protocols, highlighting the need for streamlined designs. Additionally, effective risk management systems must also be in place to avoid ecosystem debt and protect user funds.
