It's been quite an exciting, dramatic few weeks for THORChain!
Protocol changes, feature halts, massive price drops, and talk of insolvency and complete collapse of the very best of the cross-chain swapping protocols. And now an agreed-upon plan
There's tons of material and details for the THORChain nerds to go consume on this subject. That's not what this is.
I'm here to explain for the people in the rest of crypto who have been loosely watching the craziness from the outside, and feel completely lost as to what happened or why. I'll keep things as simple as I can, because we're dealing with very intricate financial systems.
First, let's introduce the important players:
THORChain
THORChain is a blockchain that basically lets you swap different cryptos for others. Think of it as a big automated virtual currency exchange desk: you swap one money for another for a small fee, people who run parts of the machine or lend out their money as liquidity for trades get a piece of that.
Maya Protocol
The Maya Protocol is a fork of THORChain, basically a copy of the design, except with a few tweaks to how it works internally, and different currencies supported.
What Happened?
Basically, THORChain became insolvent, and there was a bank run of sorts from people panicking to get their money out. A recovery idea has been figured out and agreed upon that, in my opinion, will make THORChain stronger than before.
THORFi
THORChain had a series of features loosely called "THORFi". These included features like Savers (deposit any asset and earn interest on that asset) and Lending (deposit collateral, get a 0% interest loan, get your exact collateral back when you pay the dollar value of the loan back).
These features put pressure on the price of THORChain's native token RUNE, and basically were debts that the network as a whole owed to users, that eventually they were unable to pay back.
FUD
Fear, Uncertainty, and Doubt (FUD) played a big role. The THORFi issues for investors started to compound a while back. But as dissatisfaction over the situation started to grow, a few high-profile people started to talk about how the network was insolvent. It wasn't, yet, but enough negative sentiment and it trended more in that direction.
Then, the THORChain founder impulsively (in my opinion) used an emergency off switch for the THORFi features, trapping people's money in there and causing a panic. This was reversed by the node operators (stakeholders in the network), but the damage was done.
Spiral
This caused a death spiral: users fled, the RUNE price crashed, and the insolvency became real. THORFi users had more owed back to them than the network could afford to pay.
Why Did It Happen?
The real question is, why did this collapse happen? Again, super complex, but simply put, for the following reason:
THORFi's guarantees were unsustainable
This is the big one, the whole reason (the following reasons were just the matches that started the fire): THORChain made guarantees to users that it wasn't able to make good on in the end.
Basically, with Lending and Savers etc., the users were guaranteed to be able to get another asset out, let's say Bitcoin. But once they deposited Bitcoin, it became more than just Bitcoin in the back-end. It became a 50/50 mix of Bitcoin and RUNE, constantly rebalanced to keep that split. So if the RUNE price did great, then great, plenty of money to pay back the users' Bitcoin. But if not, then it doesn't matter, users were still owed the same amount of Bitcoin.
Think of it like depositing dollars into a bank and getting interest, but the bank immediately sells for yen. They could theoretically have a very profitable business, but if the yen does poorly against the dollar, they could end up in a nasty situation where they've made good money, yet still can't pay back their depositors. It would be much safer to just keep it all in dollars from the beginning so they could more easily pay back their depositors with the profit they made from lending our their money.
As a side note, it's my opinion that any external guarantees are a bad idea for a crypto. Every crypto network should run on its one token, denominate all things in that token, accept that token for fees, pay rewards in that token. Guaranteeing a fixed amount in another token is literally making a bet that one token will be more valuable than another. And if you lose that bet, you staked the whole network on it!
Let individual speculative traders make bets on what coin prices will do, and let them take all the profit and all the risk.
Unhappy RUNE token holders
THORChain was making tens of millions in revenue every year, but this value wasn't going back to investors in the RUNE token (because of the THORFi guarantees described above). So they got upset over time, even though the protocol was otherwise doing amazing.
No matter how well THORChain did otherwise, its core group of investors, who essentially kept the lights on, was unhappy, and with good reason.
Overly decisive, yet confusing, leadership
Not much to say on this, other than the stewardship over THORChain wasn't always clear, and impulsive (in my opinion) actions to launch all these new THORFi features, and then arbitrarily shutter them through executive action, causes uncertainty and confusion.
What's the Solution?
This is where the Maya Protocol comes back in. Its founder proposed a recovery plan for THORChain that drew inspiration from its own tokenomic differences. There were several recovery plans, but this is the one voted in, so it'll likely be the path the network takes.
You can read through the whole plan, but let me simplify with a recap.
Stop the bleeding
First thing is to end THORFi. Basically, they're getting rid of all the features that make external guarantees to users, so this situation can't happen again.
Pay back users
The next part is to pay back people who had their money in various THORFi products. The debt is being "dollarified" (i.e. if you had $878 worth of Bitcoin in there, you wouldn't get a set amount of Bitcoin back, but $878 worth of it, which of course you could then immediately buy Bitcoin with) and paid back with a new token, one token for every dollar of debt.
This basically gets rid of THORChain's debt all in one go, putting the problems behind the network, letting it move forward on day one.
New investment token
This new $TCY token is an investment token. Holders of the 200 million TCY will automatically get 10% of all the money the protocol makes from swapping (its core business). The Maya Protocol has the $MAYA token which essentially does the exact same thing. In legacy finance, this would be the equivalent of a company paying back debt obligations with equity/shares.
This fixes a few problems:
- It gets rid of debts immediately and pays in something valuable that didn't exist before (so no need to sell other assets or add new guarantees)
- It creates something valuable that isn't dependent on external guarantees (only pays with what the network can promise)
- It adds an investment token so that investors can immediately receive the profits from the network and cash out as they go (they don't have to hold a volatile token and pray the volatility is positive over time, like they were doing before)
I wrote an article on crypto tokenomics inspired by this whole situation. Read it if you want to go deeper.
@thedessertlinux/stop-hoarding-gas-tokens-crypto-investing-for-the-modern-age-8ga
There's also something in the recovery plan on liquidity bonded nodes, but that's too in the weeds to bring up here.
Big Lessons to Learn
Everything seems to be on track again. But what did we learn from this whole crazy episode?
DO NOT MAKE PRICE GUARANTEES/BETS!
It's a monumentally bad idea to make guarantees of repayment in some sort of token or asset that you don't have. This includes things like algorithmic or over-collateralized stablecoins. Any time you make price guarantees, you're gambling. And when you gamble, you can lose.
Listen, it's fine to gamble, but always assume whatever money you gamble will be lost. To stake a whole economic network with thousands of users on a bet is absolute madness. Make bets with money you are prepared to lose.
Fix your tokenomics
The tokenomic model of whatever you make should just work. If the network does well, everyone should be happy.
If you find that you're doing great, providing value, getting lots of users, and so on, but some of your stakeholders are unhappy and losing money, it's probably a sign of a tokenomic defect.
THORChain was one of the very best, most successful cryptocurrencies in existence! It solved a real problem, did it beautifully, had thousands of users, made boatloads of money, yet almost died because of tokenomic issues. Fix them before you ruin a good thing.
Work together (anti-maximalism)
And finally, none of this would be possible without the cryptocurrency world working together.
The Maya Protocol is a fork of THORChain and heavily borrows from its expertise and codebase. It also intentionally integrates chains that THORChain doesn't support in order to maximize the value of the whole ecosystem rather than just their project. And in the end, Maya's experimentation into different tokenomic tweaks, as well as its founder doing lots of hard work, saved THORChain.
So that's it. THORChain almost died, but it seems to be saved for now. We're All Gonna Make It.