On January 24, Thorchain announced through X that it had stopped his network due to excessive debts and lifting tree problems that had an impact on his ecosystem. The platform owes nearly $ 200 million in ecosystem debts.
In Defi there is ecosystem debt when a blockchain more tokens owes than it owns, as is apparent from the current situation of Thorchain. This is often the result of too ambitious promises or mismanagement, which leads to financial imbalances.
On the other hand, a leverage risk arises when users use their crypto assets as collateral to borrow to improve their positions. Leverage risks can increase the profit, but can also entail enormous losses if the market falls short, which may lead to liquidations.
The Thorchain network temporarily stops the activities to tackle financial instability and to implement a restructuring plan. Coming from X by crypto.news
According to Blockbeats, Thorchain has $ 97 million in loan obligations and $ 102 million in obligations of deposits and synthetic assets. This financial imbalance has brought the blockchain to the edge of an bankruptcy.
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What does Thorchain do to solve the problem?
These risks, in turn, had an influence on the original token of the Thorchain Rune (Rune) token, which resulted in price volatility whereby in the last 24 hours, from January 24, fell more than 40%. This situation has also led to a loss of trust in the protocol, and the Thorchain validators are currently voting on a restructuring plan.
There is no risk of a death spiral, the functions have been suspended.
The majority of the sales volume consists of shortsellers who speculate that a reflective negative cycle is going on. The functions that could steer it in a downward reflective spiral are eliminated and will …
– TCB (@1984_is_today) January 24, 2025
This restructuring plan will help stabilize the system and prevent more risk to the ecosystem. According to a core investor of Thorchain, TCB, risky loans and leverage functions such as Thorfi were emphasized as the main cause of instability and then removed from the blockchain.
Without the functions of Thorfi, @thorchain would probably be a top 10 protocol.
Since the launch of streaming Swaps there has been a series of good news that was not even noticed; It was a non-investable property and smart capital could not even match it because of the complexity.
– TCB (@1984_is_today) January 24, 2025
Moreover, the restructuring plan also includes efforts to regain the trust of users. From now on, integrations with purses such as Trust Wallet and Coinbase ensure that users can connect to Thorchain, and liquidity providers would guarantee the liquidity, causing the blockchain to get back on track.
Risks associated with Defi loans
Although many within the crypto community earn a passive income through Defi loans, they are not without risks. In March 2020, Makerdao started an ecosystem debt of $ 6.65 million. The platform had to hit and sell MKR tokens to cover more than $ 4.5 million as part of his debt repayment strategy.
Protocols can destabilize too complicated functions, such as too much leverage, which emphasizes the need for streamlined designs. Furthermore, effective risk management systems must also be present to prevent ecosystem debts and to protect the funds of users.
Read more: Makerdao introduces Spark protocol for Defi loans
