THORChain: interest-free borrowing on DeFi is real

Using decentralized finance to take on USD-denominated debt without paying any interest seems like a pie-in-the-sky concept, but it appears that at least one such decentralized lending mechanism already exists. 

Recently activated on the THORChain protocol, the tool even reportedly averts liquidations and expirations — a novelty in crypto’s high-risk, high-reward DeFi sector.

The service enables interest-free lending against user collateral posted in native layer-1 assets including bitcoin (BTC) and ether (ETH), with plans to add more.

A basic explanation of how the system works is laid out on the company blog. On the 0xResearch podcast (Spotify/Apple), THORChain’s technical lead, Chad Barraford, dives into the details of the lending protocol and the market it aims to address. 

Barraford says that lending in DeFi is usually a “horrible experience,” adding, “anybody who’s taken out a loan on ‘insert-a-DeFi-protocol-here’ knows how stressful it is and how much it sucks.”

“The vast majority have variable rate interest rates that could balloon up to 20, 30% in any given moment — and that’s stressful as all hell.”

Barraford says that so many DeFi borrowers are under stress due to the precarious state of their collateral and the ever-present possibility of liquidation. “They’re just constantly checking their phone for the price of ETH or the price of whatever,” fearing they might suffer major losses at any given moment, he says.

Barraford explains that the real value of THORChain’s lending mechanism is that it’s the “first stressless lending protocol.”

“You know what the interest rates are going to be. It’s zero percent,” he says. “And you know that you’re not going to get liquidated. So you can come back in 30 years if you want to, and get back your ETH or get back your bitcoin.”

Barraford anticipates crypto holders to use the protocol to “buy a car, or buy a house, go on vacation,” or doing something “real” with their assets to “improve quality of life in one form or another.”

It appeals to a different kind of user than the average “degen” DeFi user, Barraford says, who presents a much riskier profile. He expects to see long-term holders using the service as opposed to “somebody looking to leverage themselves up over the next two weeks.”

Starting small

While THORChain’s initial design focused strictly on swapping assets in a decentralized environment, Barraford expects more use cases to be developed that diversify the protocol’s services. 

“In the early days, it made sense to use it for swapping. It was the most immediate use case,” he says. “When the internet first was invented, the most immediate use case of the internet was email — sending little digital letters to people across a series of tubes.”

“That was the original use case for the internet, but it doesn’t mean that that’s the only use case for the internet.”

Barraford points to technical advantages of THORChain including its cross-chain capabilities, the lack of MEV exploitation and a “slip-based fee model,” which he says is “revolutionary, in terms of how it works.” 

“It would be a shame to take such advanced technology and just apply it to one particular use case when it’s so possible to do so many other things.”

“The important thing,” Barraford says, “is that when you’re trying something new, you do it on a small scale to start with. Validate that everything works the way you think it’s going to work and scale things up with your confidence.”

---

Get the news in your inbox. Explore Blockworks newsletters:

• Blockworks Daily: Unpacking crypto and the markets.
• Empire: Crypto news and analysis to start your day.
• Forward Guidance: The intersection of crypto, macro and policy.
• 0xResearch: Alpha directly in your inbox.
• Lightspeed: All things Solana.
• The Drop: Apps, games, memes and more.
• Supply Shock: Bitcoin, bitcoin, bitcoin.