Trust in decentralised finance (DeFi) has taken another hit, with savers and lenders on Thorchain staring at an uncertain future. The protocol, which promised a seamless, decentralised financial ecosystem, is now scrambling to clean up a debt mess that threatens its survival. The latest proposal attempts to restructure the debt, but for many, the damage is already done.
Thorchain is trying to dollarize and tokenize its debt while unwinding lenders, savers, and protocol-owned liquidity (POL) in an ‘orderly’ fashion. The plan hinges on growing the protocol’s revenue and repurchasing debt claims in a way that maintains some level of stability in the market. But stability is a distant dream for those who deposited assets expecting fair returns, only to be left in limbo.
The numbers paint a grim picture. Since its inception, Thorchain has not generated $100 million in total revenue, yet it has promised to repay up to 200% of the protocol’s owned debt. The plan is to allocate 10% of revenues toward repurchasing claims in a secondary market. This creates an incentive structure that encourages speculation rather than financial security. The reality is that Thorchain needs to not only survive but significantly scale up to make any meaningful repayment possible.
The Nine Realms development team has assessed the technical feasibility of the proposal, and key ecosystem participants have voiced their support. However, even the most optimistic supporters acknowledge that this is a best-effort attempt rather than a guaranteed resolution. One of the primary concerns is the antiquated liquidity pool design, which has failed to deliver profits to long-term liquidity providers. Many early participants are already down over 75% on their initial capital.
For Thorchain to have any chance of recovery, it must keep providing the best pricing and user experience in the market. The ecosystem is competitive, and if the protocol fails to maintain its edge, it will struggle to attract users and capital. There is a balancing act between generating revenue and not squeezing liquidity providers to the point of exit.
The economic model has been flawed from the outset. The system relied on new liquidity to create the illusion of sustainability, a structure that echoes the pitfalls of other failed DeFi projects. Thorchain is different in that it does generate revenue, but the lingering question is whether it is enough to cover the obligations it has taken on. The complexity of the protocol has made it difficult to assess profitability, but the removal of ThorFi may provide much-needed clarity.
The proposal outlines the main expense categories:
Liquidity incentives take up 65% of the system’s income. Historically, this has been subsidised by participants.
Development costs account for 5% of revenue.
Security costs take up 30%, which includes infrastructure and administrative costs, roughly $500,000 a month.
With these costs in mind, the plan suggests pausing revenue-burning mechanisms until the protocol is financially sustainable. Liquidity providers have yet to see profits, and that must change for Thorchain to thrive in the long term.
The restructuring effort suggests that all outstanding debt be converted into a dollar-pegged asset. A new token, $TUSD, will be issued at a 1:1 ratio to outstanding claims. The plan is for Thorchain to market buy and burn these tokens using 10% of its revenue. If successful, claimants may receive up to twice the value of their original debt. However, this plan hinges on market conditions and the protocol’s ability to generate enough revenue to fulfil its commitments.
A secondary market for $TUSD will allow creditors to sell their claims at a discount. The expectation is that speculators will enter the market, buying debt at a fraction of its value with the hope that repayments materialise. This introduces another risk—those desperate for liquidity may have to sell at steep discounts, while more patient investors could benefit if Thorchain succeeds in stabilising itself.
The proposal also aims to retire ThorFi and rework the liquidity pool design to improve capital efficiency. One of the biggest criticisms of ThorFi has been its complexity, which made financial modelling nearly impossible. By simplifying the system, the hope is that a more sustainable economic model can emerge. This will involve shutting down saver products, removing synthetic assets, and permanently locking the protocol-owned liquidity in the pools.
For many creditors, the biggest issue is that their original assets may never be returned in kind. Bitcoin and Ethereum lenders, for example, are now being told their claims will be repaid in a new dollar-pegged token. This means that if Bitcoin soars to $200,000 in the future, claimants will receive far less in real terms than what they originally deposited. The disappointment is evident in the community. PriceXBT summed it up bluntly:
“Damn, was really hoping to get in kind back. I don’t care for the $ amount, I want Bitcoin back. I understand if it has to be done but wow. If I get back my $ collateral when BTC is $200k I get essentially half the Bitcoin back..?”
While the team behind the proposal acknowledges the frustration, they argue that dollarizing the debt is the only viable path forward. Uncertainty discourages institutional investors, and without fresh capital, Thorchain’s liquidity pools will struggle to regain stability. The proposal’s author, TCB, defended the plan:
“If you have a better suggestion that’s feasible, I’m all ears. I’m just trying to help mitigate things in a realistic manner, I didn’t create the problem.”
A claim process will be set up for creditors to redeem their $TUSD, and an order book will be introduced to facilitate trading of these claims. Thorchain itself will be an active buyer, using revenue to purchase claims at predetermined intervals. The plan is to retire the debt mechanism once $1 million in claims remain unredeemed for over a month. At that point, the associated code will be permanently removed from the protocol.
The restructuring effort is an attempt to keep the project alive while honouring debts as best as possible. However, the reality is that not everyone will be made whole. The expectation is that the market will dictate the price of these claims, and many participants will have to accept losses in exchange for liquidity.
Thorchain’s situation is yet another cautionary tale for DeFi participants. The promise of high yields and decentralised finance often comes with hidden risks, and when things go wrong, there is no central entity to hold accountable. The protocol’s future depends on whether it can execute this plan without collapsing under its own weight.
Crypto influencer Ran Neuner weighed in on the situation:
“The Thorchain situation is unfortunate but we are where we are, and this is the best way forward in my opinion.”
It is a bitter pill for lenders and savers who thought they were participating in a safe and innovative financial system. Now, they are forced to navigate an uncertain path, hoping that the restructuring will offer some form of relief. Whether Thorchain can truly bounce back remains to be seen, but for those left waiting, the faith in decentralised finance has been severely tested once again.
