UPDATE:
THORChain lending has been sunset. Existing loans are not affected, but new loans cannot be established. Redeeming loans can be done through ShapeShift or THORSwap.
In the future, the lending feature will be outsourced to the app layer, meaning it will be built on top of the THORChain blockchain, rather than being a native part of the blockchain. This helps protect the THORChain blockchain and reduces its risks.
Features
THORChain only allows lending to two assets: Bitcoin and Ethereum. And they max the limits at 200% collateral, so if you deposit $1k USD, you can only receive $500 USD as a loan.
Now for the good stuff that has the potential to be revolutionary:
No liquidation, no expiration, and no interest! That is right, you are borrowing at a rate of 0.0% with no expiration and no possibility of getting liquidated. If Bitcoin is trading at $50k USD, you can take out $25k USD for free (just pay transaction fees, which may contain some slippage). To get your Bitcoin back, you have to pay back that $25k at a later date with any asset, as long as the value is higher than the debt. Loans can’t be partially repaid and you must wait 30 days after starting the loan to close it.
You also have the option of receiving a different crypto back in return, such as USDC, THORChain’s own token, RUNE, or ETH. If the token you receive back goes up in value, you could repay your loan (after the 30 day wait period before you can pay it back) with the proceeds and keep whatever is extra. Doing so is effectively placing a leveraged bet on that crypto. However, the downside is possible too–if the crypto you receive back goes down in value and you wanted your collateral back, you would have to cover the difference between the value of the crypto you received back and how much debt you need to pay to get your BTC/ETH back.
We realize this sounds too good to be true, and you may want to wait some time before jumping in as this is a new feature as of last year. But the early returns are promising and they continue to scale the project slowly to try and contain risk.
How it works:
We will try to give a non technical description here, but if you want to review the technical aspects, visit THORChain’s website here.
In our example, we will assume a loan beginning with a Bitcoin price of $50k, and a RUNE price of $5.
Step 1: Deposit BTC
Step 2: The program immediately swaps your BTC for THORChain’s RUNE token. So $50k worth of BTC becomes $50k worth of RUNE.
Step 3: Half of this RUNE is burnt (removed from circulation)
Step 4: The other half is then used to swap into the asset you receive back, let’s say USDC. Since THORChain can loan 50% of what you deposit, you will receive 50% of your $50k worth of Bitcoin, or $25k USDC. You are now free to do whatever you wish with that $25k.
FAQs
So who has my Bitcoin?
No one. Your Bitcoin was used to keep the Liquidity Pools healthy and functioning and was swapped to RUNE during your deposit. Half of that RUNE was burnt, or taken out of circulation.
What happens if Bitcoin drops by 60% in value?
If Bitcoin goes from $50k to say $20k, nothing happens to your loan. Since no one is holding the collateral, THORChain does not care and is not at risk.
So who is it at risk?
Potentially RUNE holders/investors. Remember how we mentioned half of the RUNE is burnt at the beginning of our example during the start of a loan? Well the opposite is true at the closing of a loan. When someone pays off a loan, THORChain has to create new RUNE (called minting) in order to buy back that 1 Bitcoin. This could cause a decrease in the value of RUNE due to more RUNE being added to circulation and needing to be sold to the market. This leads us to the next part of our example: closing the loan.
Let’s say 2 years later, Bitcoin is now worth $100k and RUNE is worth $10. You want to pay back your $25k USD loan and get back your Bitcoin worth $100k. To do so, you will deposit your $25k worth of your supported crypto of choice and we will use USDC again. Your $25k loan repay again immediately gets swapped for RUNE, and since RUNE is now worth $10, that means 2,500 RUNE ($25k divided by $10 RUNE). But this isn’t enough RUNE to buy back my 1 Bitcoin. THORChain will then need to come up with the difference of $75k USD. This is done by minting 7,500 RUNE worth $75k, to combine with your $25k loan repay. This $100k is now used to buy back your 1 BTC and deliver it back to your wallet.
How do I get my BTC back?
Let’s say 2 years later, Bitcoin is now worth $100k and RUNE is worth $10. You want to pay back your $25k USD loan and get back your Bitcoin worth $100k. To do so, you will deposit your $25k worth of your supported crypto of choice and we will use USDC in our example again. Your $25k loan repay again immediately gets swapped for RUNE, and since RUNE is now worth $10, that means 2,500 RUNE ($25k divided by $10 RUNE). But this isn’t enough RUNE to buy back my 1 Bitcoin! THORChain will then need to come up with the difference of $75k USD to buy it back. This is done by minting 7,500 RUNE worth $75k, to combine with your $25k loan repay. This $100k is now used to buy back your 1 BTC and deliver it back to your wallet.
What are the risks?
That is the debate. The major risk is the minting of RUNE, which can significantly dilute the RUNE in the marketplace and decrease in value. If this happens, THORChain will have to mint more and more to buy your collateral back, which also causes the price of RUNE to further decrease, which means when someone else closes their loan, THORChain would have to mint more RUNE than when the price was higher.
However, this is the reason for the slow rollout and scaling of the program. If more and more loans are taken out while others are being repaid, they could net each other out or ideally, have more RUNE getting burnt than minted. Additionally, if the price of BTC drops in value, it is more unlikely that the loan will be paid back at that time, which means less new RUNE getting minted.
If all borrowers close their loans at the same time, that could mean there might be a problem. But again, with the scaling and lending caps in place, THORChain is working to build this out for the long run.
What happens if most or all loans are closed out at the same time?
THORChain built in a circuit breaker to contain risk. If loan closings require the total supply of RUNE to exceed 500 million RUNE coins, THORChain reserves step in to help instead of minting more RUNE. This would officially end the lending program for the future.
When do you I need to repay the loan?
Never. If your collateral that you took out a loan (BTC or ETH) on goes to zero, it doesn’t matter. If the value of the collateral doubles and you want to get your BTC or ETH back, repay the dollar amount that you borrowed, with no interest, and you’ll receive your collateral back.
Lending integrations and access
There are currently 3 platforms that utilize THORChain’s lending program:
- THORSwap– users will not incur fees to go into and out of Lending outside of the blockchain transaction fees.
- ShapeShift
- Lends
All of them are incredibly easy to use, and see our step-by-step guide below.
Step-by-step guide
If you are lucky enough to find this when there is room in THORChain for additional loans (they hit their caps pretty quickly as you can imagine, there are a lot of people interested in 0 interest loans!), here is how you access it:
You currently have three platforms that support Lending: THORSwap, ShapeShift, and Lends. We will use ShapeShift in this example:
- Head over to ShapeShift’s website, and connect the wallet of the crypto you are wanting to lend against, either BTC or ETH. We are using ETH in the video demo below.
- Once connected and inside the application, click Lending towards the top left corner.
- Select the crypto you are depositing to loan against (BTC and ETH are the options), and in our video example will show us using ETH.
- On right right hand side under Borrow, the top portion with say Deposit ETH (or BTC if you are using that).
- Then select the asset you want to receive in return, which we search for and select USDC on Ethereum.
- If the asset you are receiving back is also on Ethereum, you may not need to enter the receiving address. If you choose to receive back Bitcoin, you will need to enter your Bitcoin address in the recipient section as the address differs from your ETH address.
- The amount you can borrow auto fills in, which works out to 50% of what you are depositing.
- Here you will be able to see the total fees incurred for this loan and the approximate time it will take for the loan to process, aka for the USDC to end up back at your wallet.
- Select Borrow, and in the next screen review the transaction one more time before hitting Confirm and Borrow.
- This will send a notification to your wallet to review the transaction and finally submit it for the official transfer. If you are using a hardware Ledger wallet, you will have to scroll through the screens until you get to the Approve screen, then click both buttons at the same time to approve the transaction.
- Watch the transaction to completion, and your new crypto should arrive to your wallet around the estimated wait time shown in Step 6.
Video demo of a ShapeShift loan:
