Javier Garibay presents the restructuring of Thorchain as an unprecedented debt-for-equity exchange executed entirely in code, without courts or contracts, highlighting its speed and alignment of incentives, but warning of risks due to lack of safeguards.
Between 2022 and 2024, Thorchain – a decentralized cross-chain liquidity protocol – launched a suite of savings and lending products under the brand “ThorFi.” These offerings attracted significant user deposits but collapsed in 2024 due to undercollateralization, poor risk controls, and adverse market conditions. As a result, users were left with approximately $200 million in unpaid obligations. Unlike traditional financial institutions, Thorchain is not a corporation and cannot file for bankruptcy. It has no board, no legal domicile, and no ability to initiate formal insolvency proceedings. In response to this crisis, the protocol implemented a novel, fully automated restructuring: it created a fixed supply of new tokens ($TCY) and distributed them to affected users, granting them rights to a portion of future transaction fees. The entire process was carried out via decentralized code – without courts, contracts, or negotiations.
This article introduces Thorchain’s restructuring as a case study in decentralized insolvency, situating it within U.S. bankruptcy law and regulatory frameworks to assess its legal and functional implications.
The rise of decentralized finance (DeFi) has brought powerful technological disruption to traditional financial markets, but it has also exposed a widening gap between economic activity and legal accountability. Built on public blockchains and governed by code rather than corporate entities, DeFi protocols typically lack legal personality, fiduciaries, or access to courts. Yet as these systems mature, they encounter the same financial risks that burden traditional firms: excessive leverage, user defaults, and cascading liquidations. Unlike centralized companies, however, DeFi protocols cannot seek Chapter 11 protection, initiate formal workouts, or designate representatives to negotiate with creditors. Following the collapse of its ThorFi product line, which had exposed users to undercollateralized lending risks, Thorchain implemented a novel token-based recovery mechanism that substituted court-supervised restructuring with automated decentralized code distributions. This article contends that Thorchain’s restructuring, while innovative, challenges the fundamental principles of insolvency jurisprudence. It achieves debt extinguishment and incentive alignment, but at the cost of due process, transparency, and enforceability. By replicating the economic structure of a Chapter 11 debt-for-equity swap in a DeFi environment, the plan reveals both the promise and peril of tokenized reorganization. This article continues in five parts.
Part I outlines Thorchain’s restructuring, incorporating updates as of May 2025.
Part II compares the plan to Chapter 11 mechanisms, emphasizing the absence of procedural protections.
Part III explores securities law and enforceability risks, including the applicability of the Howey test and the limits of pseudonymous governance.
Part IV evaluates the merits and vulnerabilities of Thorchain’s model, including recent liquidity challenges and market volatility.
Part V proposes a policy framework to regulate DeFi restructurings– suggesting legal reforms that could bring DeFi-based insolvency resolution into closer alignment with the values of fairness, legitimacy, and systemic stability.
Between 2022 and 2024, Thorchain – a decentralized cross-chain liquidity protocol – launched a suite of savings and lending products under the brand “ThorFi.” These offerings attracted significant user deposits but collapsed in 2024 due to undercollateralization, poor risk controls, and adverse market conditions. As a result, users were left with approximately $200 million in unpaid obligations. Unlike traditional financial institutions, Thorchain is not a corporation and cannot file for bankruptcy. It has no board, no legal domicile, and no ability to initiate formal insolvency proceedings. In response to this crisis, the protocol implemented a novel, fully automated restructuring: it created a fixed supply of new tokens ($TCY) and distributed them to affected users, granting them rights to a portion of future transaction fees. The entire process was carried out via decentralized code – without courts, contracts, or negotiations.
This article introduces Thorchain’s restructuring as a case study in decentralized insolvency, situating it within U.S. bankruptcy law and regulatory frameworks to assess its legal and functional implications.
The rise of decentralized finance (DeFi) has brought powerful technological disruption to traditional financial markets, but it has also exposed a widening gap between economic activity and legal accountability. Built on public blockchains and governed by code rather than corporate entities, DeFi protocols typically lack legal personality, fiduciaries, or access to courts. Yet as these systems mature, they encounter the same financial risks that burden traditional firms: excessive leverage, user defaults, and cascading liquidations. Unlike centralized companies, however, DeFi protocols cannot seek Chapter 11 protection, initiate formal workouts, or designate representatives to negotiate with creditors. Following the collapse of its ThorFi product line, which had exposed users to undercollateralized lending risks, Thorchain implemented a novel token-based recovery mechanism that substituted court-supervised restructuring with automated decentralized code distributions. This article contends that Thorchain’s restructuring, while innovative, challenges the fundamental principles of insolvency jurisprudence. It achieves debt extinguishment and incentive alignment, but at the cost of due process, transparency, and enforceability. By replicating the economic structure of a Chapter 11 debt-for-equity swap in a DeFi environment, the plan reveals both the promise and peril of tokenized reorganization. This article continues in five parts.
Part I outlines Thorchain’s restructuring, incorporating updates as of May 2025.
Part II compares the plan to Chapter 11 mechanisms, emphasizing the absence of procedural protections.
Part III explores securities law and enforceability risks, including the applicability of the Howey test and the limits of pseudonymous governance.
Part IV evaluates the merits and vulnerabilities of Thorchain’s model, including recent liquidity challenges and market volatility.
Part V proposes a policy framework to regulate DeFi restructurings– suggesting legal reforms that could bring DeFi-based insolvency resolution into closer alignment with the values of fairness, legitimacy, and systemic stability.
