In a recent development, THORChain (RUNE), the liquidity network, has revealed its lending feature, which allows users to use their own Layer-1 (L1) assets, such as Bitcoin (BTC) and Ethereum (ETH), to secure loans denominated in TOR, a USD-equivalent stablecoin.
According to the announcement, this move opens new avenues for financial participation, allowing users to borrow money without the “burden” of interest, liquidations or maturity.
THORChain introduces interest-free loans
The borrowing process is designed to be user-friendly and ‘simple’ with an emphasis on minimizing cognitive load.
Depending on prevailing market conditions, borrowers can pledge their assets within a range of collateral ratios (CR), ranging from 200% to 500%. The CR determines the amount of debt borrowers can receive relative to their collateral.
One of the crucial advantages of THORChain’s lending protocol is the absence of interest charges. By eliminating interest, the protocol encourages borrowers to hold on to their loans for longer periods, increasing the equity value of the protocol.
This approach aims to align borrowers’ interests with the protocol itself, fostering a mutually beneficial ecosystem.
In addition, THORChain’s loan system does not involve liquidations. In traditional lending models, borrowers run the risk of having their collateral forcibly sold if its value falls below a certain threshold. However, THORChain’s design eliminates this risk by treating the collateral as equity (RUNE IOU).
Therefore, if the collateral falls below the debt value, this is not a problem, as the stored equity acts as a liability. According to the report, this approach creates a more user-friendly experience and eliminates the need for borrowers to constantly monitor asset prices.
The loans issued through THORChain’s lending feature have a minimum term of 30 days, giving borrowers flexibility.
Repayment can be made anytime after the initial 30-day period, allowing borrowers to manage their debts according to their circumstances. Partial repayments are also possible, although the collateral will only be released once the debt has been fully repaid.
THORChain’s circuit breaker system
To increase security and protect against inflation, THORChain has implemented a circuit breaker mechanism.
In the event of a drastic fall in RUNE’s price native token of the THORchain network against collateral assets such as BTC and ETH, which could lead to a net inflation of RUNE, the system will pause new lending and disable the lending function.
At this point, no further inflation of RUNE can take place, and the protocol’s reserve will cover the remaining collateral disbursements.
Initially, the lending feature will support BTC and ETH collateral, with plans to expand to other Layer 1 gas assets, including Binance Coin (BNB), Litecoin (LTC), Avalanche (AVAX), and DOGE.
According to the announcement, this expansion will further diversify lending opportunities, accommodating a wider range of users and assets.
Overall, with the introduction of the credit function, THORChain takes an important step towards expanding the financial capabilities within its liquidity network.
As of the latest update, THORChain’s native token, RUNE, has experienced a drop of almost 8% in the last 24 hours and is currently trading at $1,694 despite the anticipation surrounding the announcement of the new lending protocol.
Nevertheless, the token has successfully made substantial gains of 20% and 80% respectively over the past seven and 14 days, attributed to a simultaneous increase in the social volume of the THORChain cryptocurrency.
Featured image from iStock, chart from TradingView.com