Hash Rate - Ep 111 - $TCY and THORchain's Amazing Comeback

This episode unpacks the remarkable rescue of THORChain from insolvency, detailing the innovative TCY token solution that offers a new blueprint for decentralized finance (DeFi) crisis management and recovery, a crucial case study for crypto investors and researchers.

Episode Introduction

This episode of Hash Rate delves into the critical insolvency crisis faced by THORChain's ThorFi lending program and the ingenious solution, the TCY token, engineered by guest Alix, offering profound insights into decentralized crisis resolution and its implications for crypto investors.

1. The THORChain Crisis Unfolds

• Mark Jeffrey introduces Alix, lauded as the individual who "saved THORChain," setting the stage for a discussion on the recent ThorFi lending program's insolvency.
• The crisis period was described as "extreme" and "stressful," with Alix working intensely to devise a solution within a few weeks.
• THORChain is a decentralized exchange (DEX) – a peer-to-peer marketplace where cryptocurrency transactions occur directly between crypto traders – known for its permissionless nature and significant market share, even being utilized by some centralized exchanges for liquidity.
• Rune is the native token of THORChain. Transactions between different blockchains via THORChain involve converting assets into Rune internally, then to the target asset on the destination chain.

2. Genesis of the ThorFi Lending Problem

• THORChain launched ThorFi, an adventurous lending program, allowing users to take out collateralized loans (e.g., against Bitcoin) with no repayment time horizon or interest.
• Mark Jeffrey explains the mechanism: "you put your Bitcoin into the system where it's immediately sold for Rune tokens... So the Bitcoin's gone, right? Like they don't have it somewhere anymore. It's just in Rune inside the system."
• The system's stability depended on Rune's value increasing faster than the collateral (e.g., Bitcoin).
• Crisis struck when Bitcoin's price surged significantly while Rune's value did not keep pace, or even declined. This meant the system would have to print excessive amounts of Rune to cover the collateral owed to lenders if they chose to repay their loans, leading to potential insolvency.
• Alix adds that THORChain's design philosophy was always "adventurous" and risks were generally communicated. The drive to scale liquidity through products like Savers and Lending was a key factor.
• Streaming Swaps, a feature that allows large swaps to be broken into smaller parts over time to reduce price impact, achieved product-market fit, boosting revenue and volume. However, the momentum behind Savers and Lenders was already significant.
• The core problem: a decline in Rune's price eroded the exogenous assets (assets like Bitcoin or ETH held in THORChain vaults) relative to the debt, risking THORChain's ability to process swaps and pay back users. This led to the controversial decision to halt ThorFi.

3. The Halt of ThorFi and the Search for Solutions

• The ThorFi program was halted, then briefly resumed, then halted again, creating a "governance crisis of sorts." Some users managed to close loans or exit Savers, while others were trapped.
• THORChain was declared insolvent regarding ThorFi. Alix, co-founder of Maya Protocol (a THORChain fork), became involved in finding a solution, driven by a mission to ensure redundancy in the cross-chain ecosystem.
• Mark Jeffrey notes the debt was initially denominated in Bitcoin. When ThorFi halted, his Bitcoin collateral had effectively doubled in value. The debt was then "dollarized" at approximately $206 million.
• Alix clarifies the $206 million figure was a reference point, not a strict dollarization. He became deeply involved on February 2nd, writing and publishing his proposal the same day amidst personal chaos (his sister giving birth).
• The critical issue with paying back in-kind (e.g., Bitcoin) was that if Bitcoin's price continued to rise faster than THORChain's revenue growth, the debt would become a "never-ending payback."
• Conversely, dollarizing the debt was also problematic: if crypto markets crashed, the dollar-denominated debt would become an even larger burden relative to THORChain's diminished revenues.

4. Alix's Innovative Proposal: The TCY Token

• Alix's solution drew inspiration from traditional finance's Chapter 11 bankruptcy, where a viable business is restructured rather than liquidated (like in Chapter 7). Chapter 7 applies when a business is no longer viable (e.g., Blockbuster in the age of Netflix). Chapter 11 is for viable businesses burdened by debt that can be restructured.
• The core idea was converting debt into equity. Alix: "Let's give shares of the company away from the owners and to the debt holders. Now they... have now equity in the business and we already established this business is viable."
• This led to the creation of the TCY (THORChain Yield) token. TCY holders are entitled to 10% of THORChain's swap fee revenue in perpetuity.
• The 10% figure was chosen as a sustainable "profit" share, avoiding encroachment on operational costs (payments to nodes and liquidity providers) that could shrink the business if set too high.
• A key strategic insight for investors: This model avoids direct protocol bailouts for distressed users. Instead, "new buyers" provide liquidity by purchasing TCY from those wishing to exit, allowing individuals to choose their own exit point and haircut.

5. TCY Tokenomics and Market Reception

• At the time of the crisis, there were approximately $60 million in exogenous assets (like Bitcoin) in the protocol, against roughly $300 million in debt (including lenders and dual LPs). This implied a ~20 cents on the dollar recovery in a Chapter 7 liquidation scenario.
• The TCY token was designed to be an attractive instrument, not a "crappy little debt coupon."
• If TCY reaches $1 in value (plus accumulated payouts), all original debt holders would be made 100% whole.
• Alix: "For reference, we touched 54 cents on launch day and it's been sitting pretty consistently around 30 to 33 cents since then."
• This meant an ETH saver/lender could have been made whole within three months if they sold at the peak, a stark contrast to lengthy traditional bankruptcies like Celsius.
• The TCY solution offers users choice and certainty, allowing them to exit at the current market price or hold for potential future appreciation and yield.
• Mark Jeffrey highlights the potential upside: if THORChain achieved Binance-level revenues, 250,000 TCY tokens could yield approximately $60,000 per month.

6. The Uniqueness of the THORChain Solution

• Alix attributes his insight partly to discussions with his brother-in-law, a bankruptcy lawyer, and his experience with Maya Protocol, which had a similar 10% success fee tokenized as its own "equity."
• The TCY token is presented as a "take two," a superior version of this equity concept.
• A significant aspect was the community's willingness to adopt the TCY plan, even if it was against some individual short-term interests. Alix: "I just find it so nice and so heartwarming that everybody pulled through together and looked out for each other... It goes to show how free sovereign humans, we do the right thing."
• The entire resolution, from proposal to TCY launch, took just over three months (February 2nd to May 5th), with no legal fees for users.
• Actionable insight for researchers: This case demonstrates a rapid, decentralized, and community-driven approach to resolving insolvency, offering a powerful alternative to traditional, often protracted and costly, legal processes in crypto.

7. TCY Adoption and Future Outlook with Rujira

• Approximately 66% of eligible creditors have claimed their TCY tokens, with most choosing to stake them, indicating continued belief in the THORChain ecosystem.
• The discussion shifts to Rujira (formerly Kujira), a project building an application layer on THORChain. Kujira itself had faced bankruptcy (related to its origins on the Terra blockchain) and was effectively acquired and restructured by JP, a prominent THORChain community member, into the Rujira initiative.
• Rujira aims to bring various DeFi primitives (smart contracts, order books, collateralized lending, auto-compounding) onto THORChain, potentially increasing transaction volume and, consequently, TCY holder revenue.
• Alix emphasizes that Rujira is designed to be safer, with the app layer compartmentalized to prevent it from minting Rune or directly risking base layer assets, unlike the previous ThorFi structure.
• Mark Jeffrey notes Rujira's potential to create a "decentralized Binance" experience, offering advanced trading features without KYC, which could significantly drive volume to THORChain.
• Strategic consideration for investors: The success of Rujira and similar app-layer developments on THORChain is directly tied to the future value and yield of TCY tokens. Monitoring this ecosystem's growth is key.

8. Final Thoughts and Call to Action

• Alix encourages listeners to get involved and check the TCY dashboard on thorchain.net for stats. The protocol itself is actively buying back TCY, creating buy pressure.
• He offers an apology on behalf of THORChain for the ThorFi issues, acknowledging that while risks were communicated, the protocol bears partial responsibility.
• Alix's perspective, as someone who was initially a "competitor" with Maya Protocol, lends credibility to his efforts and belief in the collaborative recovery.

Reflective and Strategic Conclusion

THORChain's TCY token solution represents a landmark in DeFi crisis management, offering a rapid, equitable, and community-driven recovery model. Crypto AI investors and researchers should study this case for its innovative financial engineering and decentralized governance, anticipating similar mechanisms in future protocol restructurings.