THORFi's Unlimited Liability

Loans issued through THORFi represent a growing liability denominated in BTC and ETH, hedged with a balance of RUNE in the Reserve Module. As the market price of RUNE has underperformed the BTC and ETH-denominated liabilities, THORChain’s ability to hedge this liability has diminished.

RUNE/BTC & RUNE/ETH

On THORChain, LPs are required to match each $1 of non-native assets with $1 of RUNE, and the incentive pendulum targets an optimal state where the value of RUNE bonded by nodes is 2x the value of non-native assets in the liquidity pools. This leads to the concept of the Deterministic Price, where the value of RUNE held between LPs and nodes is 3x the value of non-native assets held in liquidity on the protocol.

While RUNE has historically traded at a consistent 3x multiple to the Deterministic Price, this multiple has fallen in recent months amidst redemption flows through THORFi and net RUNE sell pressure to cover the liability. RUNE’s multiple to its deterministic price has been in a downtrend, falling from a recent high of 3.4, to 2.8 now. 

Should this trend continue, coupled with ongoing redemption flows, THORChain will continue to be forced to sell RUNE at increasingly unfavorable prices to meet redemptions and cover the liability. This represents a growing solvency risk for the protocol. Amidst the recent decline in the RUNE price, the Health Factor for THORFi (total burned in RUNE/ collateral value in RUNE) has fallen from 190% to 150% over the past day.