THORChain Launching New Exciting Lending Feature

Updated: 01 June 2023

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THORChain, a thriving decentralized exchange and liquid decentralized finance protocol by measure of total value locked, intends to launch a feature called “Lending” later this year. The decentralized exchange envisions this feature as the missing piece that will round off their THORFi ecosystem. The excitement around this development has yet to bolster the value of RUNE, the ecosystem’s utility token, which as of May 30 has seen a decrease of 32% from its April 2023 high.

What is THORChain and How to Earn Money on its Network?

THORChain is a decentralized cross-chain liquidity protocol that allows users to swap assets between blockchain networks. It is a settlement layer that facilitates swaps between 8 chains: Bitcoin, Ethereum, Binance Chain, Avalanche, Cosmos Hub, Dogecoin, Litecoin, and Bitcoin Cash.

Anyone can use THORChain to swap native assets between any supported chains. What is unique about it is that it doesn’t involve synthetic assets, or “wrapped tokens” as they are sometimes called, such as wBTC, wETH, etc. Almost all other existing solutions to this problem of swapping between different chains have the major weakness that they rely on wrapped tokens.

Using wrapped assets breaks decentralization, as these are usually issued and held by centralized exchanges and, in addition, exposes the user to many security issues. For example, when popular exchange FTX went out of business, users that relied on wrapped assets issued by the exchange lost it all.

THORChain is a non-profit organization and its team doesn’t keep any of the RUNE funds used for fees on the protocol but instead distributes all RUNE spent on fees to network participants.

THORChain is fully non-custodial, in that users who swap always maintain self-custody of their funds, so they are always in control, including directly from a hardware wallet. Also, the Liquidity Providers funds are always solvent, visible, and verifiable on the blockchain, which is secured by the open source code.

We have previously mentioned that there are many ways to earn money on THORChain, such being a Liquidity Provider, being an Arbitrageur, or through Savers Vaults. Here will focus on the latest innovation from the network: THORChain Lending.

How THORChain Lending Will Work

Functioning in a manner reminiscent of other decentralized money markets such as Ethereum-based MakerDAO, one of the pioneers in this space, THORChain Lending provides borrowers the possibility to deposit collateral, including any token or coin already supported by the platform. Moreover, it enables them to secure loans with no interest, liquidation, or expiration attached.

The unique aspect of this setup is that the borrower can carry a loan without the risk of liquidation, regardless of the volatility of the collateral. This stands in stark contrast to traditional decentralized money markets, which typically require over-collateralization due to the inherent volatility of cryptocurrencies. THORChain even suggests that users could short the USD while going long on various crypto assets, including Bitcoin.

In this innovative model, borrowers will deposit collateral and incur debt at a market-determined collateralization ratio (CR). Unlike other platforms, THORChain clarifies that debt will be denominated in TOR, a stablecoin that tracks USD value regardless of the type of collateral. It’s important to note that TOR will not be transferable. Constraints on collateral and risk management strategies, such as “slip-based fees when initiating and settling loans, dynamic CR, and a circuit breaker on RUNE supply”, will be implemented.

THORChain emphasizes that loans can be repaid anytime and in any supported asset, with all repayments converted into TOR.

RUNE, the utility token of the THORChain ecosystem, allows users to pay for gas and secure the network. It also plays a crucial role in maintaining the platform’s decentralization and its resilience against threats from malicious actors. The new lending feature is anticipated to have a deflationary effect on RUNE with every loan initiation, although loan repayment is likely to have an inflationary impact.

The net effect on RUNE will be neutral if the collateral price remains stable in relation to the RUNE price from loan initiation to closure. However, an increase in the collateral price against RUNE in this period may lead to an inflationary effect, which could depress the token price, especially if many positions that satisfy these conditions are opened.

Despite the impending launch of THORChain Lending, RUNE has been trading sideways in the final week of May 2023.

Nonetheless, it has seen a recovery of 7% from its May 2023 low. As of the end of May 2023, DeFi activity is still struggling to rebound. DeFiLlama’s data shows a TVL stagnation below $50 billion over the past five months. The space has been ruled by Uniswap, a well-known multi-chain DEX, and Curve, a stablecoin DEX. With a TVL of $106 million, the majority of THORChain’s liquidity comes from tokenized Bitcoin.

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