$RUNE is crashing. What is the consequence for Defi?

24 de jan.

This idea focuses more on DeFi and Web3 as a whole rather than the specific case of RUNE.

What is happening to RUNE can happen to any other DeFi protocol, so it’s crucial to analyze how these protocols work, identify the risks, and explore how to mitigate them.

### How DeFi Protocols Work

RUNE, like many other protocols, is powered by smart contracts. These are small programs that execute tasks like lending, swapping, and other DeFi functions automatically and without human intervention. Investors love these protocols for their decentralized nature and trustless execution, enabled by blockchain technology.

RUNE gained popularity because its decentralized protocol allowed its price to be tied to factors like its total value locked (TVL) and fee earnings. The more people staked, provided liquidity, or used its lending services, the more RUNE’s price increased. For instance, we saw RUNE rise from $3 to $12 last year as people used the protocol to loan BTC and ETH during their price surges.

### The Mechanism Behind RUNE

DeFi protocols like RUNE rely on the token itself as collateral. For example:
- When users send BTC or ETH to the protocol, it automatically buys and sells RUNE, which drives its price up.
- Conversely, when users withdraw BTC or ETH, the protocol sells RUNE to repay those users, which puts downward pressure on its price.

This mechanism can create vulnerabilities, as we’ve seen with RUNE.

### What Went Wrong?

While all altcoins were losing value, BTC outperformed to the point where the total value of BTC being staked and loaned on the protocol exceeded the total value of RUNE. In simple terms, if everyone requested their BTC and ETH back, the protocol would not have enough RUNE to sell and repay them. This is known as **insolvency**.

Last year, when authorities paused Rune Swap for a week to investigate criminal activity, RUNE’s price plummeted from $2.2 to $1.3 as smart contracts automatically compensated for reduced earnings and people redeemed their staked assets, forcing the protocol to sell RUNE.

### The Catastrophic Validator Decision

This month, with the price of BTC surging, some inverstors decided to cash out from RUNE and that is when they realized that the price of RUNE was so underperforming BTC that the protocol might be insolvent. They createed a "bank run" and an avalanche of investors lost their trust and asked their coins back.

To prevent a complete collapse, validators—who are essential for running the blockchain—used a private key to manually stop the protocol. This halted the smart contracts from continuing to sell RUNE. However, this move backfired.

Observers saw the protocol being manually interfered with, highlighting its insolvency and raising serious concerns. This decision led to even more fear, uncertainty, and doubt (FUD). It became clear that DeFi’s lack of flexibility and inability to adapt to emergencies can create destructive outcomes.

### Broader Implications for DeFi Protocols

This exposes a significant vulnerability in all DeFi protocols. Many rely on their own coin as collateral, but if BTC continues to rise in value and users decide to withdraw their BTC, the protocols could face the same insolvency issue. In some cases, the amount required to repay users may exceed the protocol’s total collateral—or even the market cap of the altcoin itself.

### The Potential Domino Effect

If platforms like Uniswap, PancakeSwap, Hyperliquid, and others fail to address this issue, we could see a domino effect:
- Investors may withdraw their funds from DeFi protocols, leading to a collapse of the entire DeFi ecosystem.
- Such an event would have dire consequences for the broader altcoin market.

### The Solution

If BTC continues its bull run alone, DeFi platforms may need to reconsider their reliance on BTC and stop lending/staking and swapping to BTC. Failure to adapt could render many protocols insolvent, triggering unprecedented FUD and potentially causing the crypto market to crash.

### Conclusion

The current situation with RUNE is a cautionary tale for the entire DeFi industry. Without proactive measures, the very mechanisms that make DeFi appealing—decentralization and automation—could become its greatest weaknesses.

1 de fev.

Trade ativo

A new proposal to upgrade RUNE has been published. This will hopefully fix the system. One of the strong new decision is to lower the replicators revenues by 52%. If it is voted, it will be a significant step toward the recovery. Here is the proposal: x.com/1984_is_today/status/1884352174316286200

1 de fev.

Trade fechado: objetivo atingido

**RUNE is insolvent.** They owe over $200 million, and their total market capitalization, currently at $1.4, stands at $450 million. This means that to repay their debt, they would need to sell 50% of the total supply at the current price, which is practically impossible.

The new proposal, which imposes a significant drop in revenues for the replicators, has been poorly received.

How did they get to this point without foreseeing it? I feel sorry for this coin and all the investors who held onto it. I started trading RUNE when it was $1.5, and today it’s worth less than that. It’s truly unbelievable. I hope it can somehow survive this crisis.

Since the 10th Dec 2024, RUN has been falling down +82%

2 de fev.

Nota

Check the Thorchain team talking about new proposal: x.com/i/spaces/1OwxWNeoNlRJQ

2 de fev.

Nota

**Ok, I joined the 1-hour Twitter Space, and here are my first impressions.**

**The Bad:**
The team in charge is essentially sitting in a burning house. The token is down **-82% in one month** due to a flaw in its design, yet all they did was complain about how tired they are, how hard it is to solve the problem, and how they aren’t sleeping. Boo-hoo. Crying baby millionaires. It was honestly awful.

They failed to answer basic questions like:
1. **How will you tackle the massive inflation caused by nearly doubling the supply to fix the issue?** Any plans for a buyback mechanism? *Cue awkward noises: “um, hmm, brrr, no answer.”*
2. **How will you fix the protocol to ensure this doesn’t happen again?** Same vague noises: “um, hmm, brrr, no answer.”

**Their Proposal:**
Mint enough RUNE to sell on the market in exchange for USDT, then use the USDT to repay the debt!

Why not just pay the debt directly in RUNE? Because they don’t care about us retail investors. They’re only looking out for themselves and their inner circle, who profit massively from the protocol. They’re fine with 100% inflation or more—effectively doubling the RUNE supply—and think that’s acceptable.

And what kind of “sacrifices” are they personally making after years of earning millions from RUNE?
*Drumroll please:* They propose allocating **10% of collected fees to repay the debt**.

Really? So they think keeping 90% for themselves qualifies as a sacrifice? Oh, and by the way, **10% of zero is still zero!**

**For Retail Investors:**
From the perspective of a simple investor, this team is **not up to the task**:
- They’re too slow to react.
- They don’t seem to grasp the severity of the situation.
- Their proposal is weak and doesn’t adequately address the problem.

**A Broken Protocol:**
You know how fractional banking is criticized for only keeping a fraction of their loans in reserve to avoid bank runs?
Well, Thorchain has invented something even worse: **the “no-reserve-at-all” protocol**, where the token price is the only collateral.

This is not looking good at all.