$RUNE


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.