Look at the latest development of THORChain from both sides: streaming exchange and lending

Author: Sleeping in the rain

$RUNE is a token that has received a lot of attention recently. It rose because @THORChain released two good news, and became a gathering place for the air force because of the good news.

Today I want to analyze these two updates to the protocol from both Bullish and Bearish perspectives: Modes, Flywheels and Risks???

Bullish

The first update is “Streaming Swap”. The simple understanding is to execute cross-chain by dividing large orders into small orders, and the user’s exchange experience (price) is more friendly-small slippage. In fact, this function does not have a direct impact on the currency price, and there will be a transmission process brought about by the rise of data.

I can see this data change in the figure below, which will be more intuitive - after the launch of the streaming exchange, Thorswap data has a significant increase, but after a short period of increase, the transaction volume began to drop significantly. Whether the impact of Streaming Swap will last remains to be verified by time.

Another important function is Lending, but the Lending function is more complicated, and I will spend a relatively long article to simplify the logic. (Personal understanding, if the understanding is wrong, welcome to correct)

Simplify the mode of Lending, we can understand it like this⬇️

If we deposit $10 in $BTC as collateral, Thor will convert it into Tor.BTC, the path is like this, BTC—>RUNE—>destroy RUNE to mint Tor.BTC. If the LTV is 30%, then we can lend 3 TOR (accounting unit, 1 TOR=1u). If we want to borrow 3u ETH, the protocol will mint 3u $RUNE and exchange it for $ETH to the user. The repayment is calculated in US dollars at the time of borrowing, not in the currency standard.

Next, let’s introduce one of its most important concepts: no liquidation, no interest rate, and no maturity date.

Why would Thor dare to do this? Because it turns your collateral into $RUNE. Of course, it does not require you to repay the money, and its purpose is to minimize your desire to repay the money - it has replaced all your core assets with $RUNE.

When you withdraw the collateral, if the value of $BTC/ $RUNE remains unchanged, no other redundant operations are required. But if the price of $BTC increases relative to $RUNE, Thor needs to mint additional $RUNE to make up the difference.

For example, if the $BTC of 10u doubles and becomes 20U, and the price of $RUNE remains unchanged, then it needs to mint an additional 10U (inflation).

Therefore, it actually does not want you to take away the collateral. If you don’t pay back the money, it can keep destroying $RUNE. (loans take a minimum of 30 days to repay)

This is a little flywheel that Thor built.

Of course, in fact, Tor.BTC is not completely supported by $RUNE, but by 50% $RUNE+50% $BTC, which means that the risk exposure of the protocol becomes lower. In other words, if the collateral increases in value, Then it only needs to mint half of $RUNE to repay the collateral.

This is the fundamental motivation of no liquidation, no interest rate, and no expiration date as I understand it—to exchange your core assets for the original Token of the protocol. From a bullish point of view, the two new products (Streaming Swap increases user transaction volume, and Lending involves multiple token conversions will also increase transaction volume) will both increase ThorSwap’s transaction volume, and the destruction of $RUNE must be Bullish.

Currently, protocol lending only supports $BTC and $ETH, and support for more Layer1 assets will be added in the future. Lending is also a DeFi Lego of Tor.Asset. In the future, Thor may launch new products adapted to Tor.Asset to increase the capital utilization rate of ThorSwap LP.

Bearish

Since Bullish’s justification was deflationary, Bearish’s primary justification was the potential risk that lending products bring to the protocol. Although the agreement can control the debt scale through the circuit breaker, it may also cause excessive inflation of $RUNE during the rising process, especially when the performance of $RUNE is not as good as that of mortgageable assets (up to 15 million pieces, and the upper limit is 500 million).

If the upper limit is reached, it will be impolite to increase the mortgageable assets (mainly depending on the ratio of Asset/ $RUNE), and there will be more risks—bad debts. The agreement can only solve the problem of bad debts with money from the treasury.

Essentially, Thor’s Lending module transfers the risk to the protocol itself and $RUNE holders. Moreover, because Thor’s product needs to go through several Swaps, the wear and tear of loans will be relatively large, and the user experience is not friendly.

At the same time, the agreement controls the loan amount to 500 $RUNE (now about 7-8 million US dollars), and the loan amount of the agreement will only increase as the amount of $RUNE destroyed increases. With the expansion of the loan scale, there is a high probability that the upper limit of $RUNE of 15 million pieces will not be able to meet the occurrence of a run.

Although Thor has an upward flywheel, it will also plant the risk of a death spiral for itself-if the additional 15 million $RUNE and treasury funds cannot meet the requirements of the run, then Thor will enter the death spiral.

Therefore, we can also understand why Thor’s collateral ratio is set at 200%-500%, so as not to give users the opportunity to open high leverage, and why the agreement should reduce the LTV of borrowing as the collateral increases. But a lower LTV lowers product adoption, preventing the upward flywheel from spinning.

Therefore, Lending has become a relatively weak product, that is, the improvement of its own protocol is not that great, and it is a pity to discard it if it is tasteless. What else can you do without Bearish.

After reading this analysis, what would your choice be? The red pill, or the blue pill?