Who Is Paying for the Risks of No-Liquidation DeFi Protocols?
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Who Is Paying for the Risks of No-Liquidation DeFi Protocols?
所谓的无清算本质上是将风险转移，但羊毛出在羊身上——投资者获利的同时，就得有人去承担风险。
Navigating Web3 tides with focused insightsAuthor: PSE Trading Analyst @Daniel Hua
Since the inception of blockchain technology, the DeFi sector has matured the most, with lending being one of its core components. During bull markets, lending often acts as the engine driving market momentum—investors typically collateralize BTC to borrow USDT and then use those funds to purchase more BTC, amplifying both price appreciation and their own returns. However, as the crypto market cools down and BTC prices fall, this leverage can trigger cascading liquidations, pushing BTC prices into a downward spiral.
To achieve the so-called "eternal bull market," various "no-liquidation" protocols have emerged, promising investors high returns without the risk of liquidation. This article reviews several common types of such "no-liquidation" protocols. The key takeaway: these models do not eliminate risk—they merely shift it. As the saying goes, “the wool comes from the sheep”—someone must bear the cost when others profit.
1. Differences Among No-Liquidation Protocols
1.1 Preemptive Liquidation Using Alternative Collateral Assets
Thorchain is a representative example. As a cross-chain protocol, Thorchain establishes asset pools across multiple chains, such as BTC/RUNE (where Rune is the platform token). When users want to swap assets, they must convert BTC on Arbitrum into Rune, then Rune into ETH on Optimism. In the lending process: BTC is first swapped for Rune; Rune is burned to mint synthetic ThorBTC; ThorBTC is converted into ThorTOR (the official stablecoin); ThorTOR is burned to mint Rune again; finally, Rune is swapped for USDT. Throughout this cycle, Rune is gradually deflationary due to continuous burning to generate USDT. Additionally, users pay swap fees to liquidity providers (LPs), so no interest is charged on loans. Unlike traditional lending protocols, users effectively "collateralize" USDT to borrow USDT—thus, they are indifferent to BTC price movements and face no liquidation risk, or rather, liquidation has already occurred preemptively through the system’s design.
If a protocol offers no liquidation and no interest, borrowers could theoretically never repay their loans. However, an extreme scenario arises during bull markets: as BTC prices rise, borrowers may rush to repay loans to reclaim their original BTC at higher value. The repayment flow: USDT → Rune → burn Rune to mint ThorTOR → ThorTOR → ThorBTC → burn ThorBTC to get Rune → Rune → BTC. In this process, Rune becomes the key variable. To retrieve collateralized BTC, new Rune must be minted. If too many users repay simultaneously, unlimited Rune could be created, leading to hyperinflation and potential collapse.
To prevent this, Thorchain sets a maximum minting cap—its debt ceiling. Currently set at 500M, with only 485M native Rune in circulation, this allows a maximum of 15M additional Rune to be minted. The Lending Level parameter determines how much Rune can be burned, which translates into the total loanable USDT value based on current Rune price.
Moreover, the ratio between Rune and BTC prices is critical to the protocol's sustainability. As shown in the next two figures, if both BTC and Rune prices increase by 20%, repaying loans would mint 301 additional Rune compared to the amount burned during borrowing. But if Rune’s price rises by 30%, no new Rune is minted—the protocol remains deflationary. Conversely, if BTC appreciates far faster than Rune, significantly more Rune will be minted, risking systemic collapse. Once the minting cap approaches its limit, the protocol increases the collateral ratio up to 500%, discouraging further borrowing. If the 500M Rune cap is reached, all borrowing and repayment functions halt until BTC prices drop sufficiently to avoid further Rune issuance.
Clearly, the protocol thrives only under continuous borrowing (Rune deflation), but cannot withstand mass repayments (Rune inflation). Thus, Thorchain's model is inherently limited in scale—any attempt to grow risks repeating the Luna 2.0 tragedy. Furthermore, because it relies on collateral ratios to control loan volume, the platform maintains CR levels of 200%-500%, significantly higher than AAVE’s 120%-150%. This results in low capital efficiency, making it unsuitable for mature lending markets.
1.2 Transferring Liquidation Risk to Lenders
Cruise.Fi is a collateralized lending platform where stETH serves as collateral. It outsources liquidation risk to lenders—if there are always users willing to “take over” positions, the system theoretically avoids liquidation. For borrowers: reduced liquidation risk means greater ability to hold through volatility. For lenders: they gain enhanced returns (base lending yield + additional ETH rewards).
Borrowing flow: After depositing stETH, users receive USDx, which can be swapped for USDC via Curve pools. The stETH staking yield is passed on to lenders. Two mechanisms maintain USDx price stability:
1. When USDx trades above par, part of the stETH yield is redirected to borrowers to offset high borrowing costs. 2. When USDx trades below par, part of the stETH position is used to subsidize lenders’ borrowing costs.
How does the protocol achieve "no liquidation"? Assume staked ETH is valued at $1,500 with a liquidation price of $1,000. Upon nearing liquidation, the platform locks the stETH collateral and uses its staking yield to preserve part of the borrower’s position. Positions exceeding what the yield can cover are paused. However, as ETH staking rates fluctuate, the available yield—and thus the size of retainable positions—can shrink.
For positions that would otherwise be liquidated, the platform issues Price Recovery Tokens (PRT). When ETH rebounds above the liquidation threshold, lenders can redeem PRT 1:1 for ETH. Compared to traditional platforms, this offers lenders exposure to future ETH upside beyond mere interest income. Alternatively, if lenders doubt ETH will recover above $1,000, they can sell PRT on secondary markets. Given the project is still early—with incomplete data and underdeveloped secondary markets—we speculate that borrowers might eventually buy back their PRT at a discount, reclaiming their positions while still capturing future ETH gains—more efficiently than topping up collateral.
However, the model has drawbacks. It depends heavily on bullish sentiment—even after corrections, “believers” in ETH must provide liquidity. In a prolonged bear market, sentiment could collapse, drying up liquidity and threatening the platform. Moreover, few users may be willing to act as lenders, since the protocol fully transfers liquidation risk onto them.
1.3 Interest Revenue Covers Borrowing Costs
The Federal Reserve's rate hikes have fueled a wave of RWA-based "no-liquidation" protocols. The most notable and largest is T Protocol. STBT is a tokenized U.S. Treasury bond issued by institutional platform MatrixDock, pegged 1:1 to actual Treasury yields. TBT is T Protocol’s wrapped version of STBT, distributing yield via rebase mechanics. Users simply deposit USDC to mint TBT and begin earning Treasury yields.
The key innovation: platform fees are always lower than Treasury yields. For example, if Treasuries yield 5%, the platform pays lenders ~4.5%, keeping 0.5% as fee. This enables MatrixDock to borrow stably without paying interest. But how is liquidation avoided? Fundamentally, the platform operates on a "collateralize USD to borrow USD" model, insulated from volatile assets like BTC. Current LTV is 100%—depositing $1M in Treasuries allows borrowing $1M in stablecoins. When users request redemption, MatrixDock sells equivalent Treasuries to repay them, with large withdrawals taking up to three business days.
Still, risks exist. If MatrixDock misuses borrowed funds for risky investments, users face default risk. Trust hinges entirely on the platform and underlying institutions, creating regulatory blind spots and opacity. Consequently, T Protocol’s efforts to partner with other Treasury issuers progress slowly, limiting scalability. Additionally, as macro policy turns dovish and Treasury yields decline, the yield advantage shrinks, reducing user incentive to deposit here versus other lending platforms.
2. Conclusion and Reflection
In the author’s view, most current "no-liquidation" protocols are “pseudo-no-liquidation.” They don’t eliminate risk—they redistribute it. Thorchain shifts risk to the protocol and Rune holders; Cruise.Fi passes it to lenders; T Protocol relies on opaque regulatory oversight.
A common flaw emerges: these protocols struggle to achieve scale. Borrowing inherently creates imbalance—short-term “high” returns come at someone else’s expense, making them unsustainable and unstable for users. Ultimately, users will return to traditional platforms like AAVE, accepting liquidation in exchange for fairness and transparency.
Liquidation exists because insolvency is inevitable when assets fluctuate. There is no such thing as risk-free investment. Traditional finance has evolved for centuries without achieving perfect safety—how could the highly volatile crypto world succeed where it failed? “No-liquidation” protocols may reappear in seemingly “stable” forms, but remember: the wool comes from the sheep. Someone will always pay the price.
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