— VerifyYourBrain

As the guy from the images 😂 I agree with all your points, and this can have the same end as the LUNA UST fiasco, especially since the system kinda reminds me of the mechanisms that made LUNA ruin. There are a few more things that might prevent that:

The protocol has a loan caps in order to limit the exposure of the system to it.

The Collaterization Rate is flexible to make people take more or less loans in order to reduce the exposure.

With this said, the last line of the "unwind path" is a scary:

Like you said, I would never have any money in it long-term, and especially during a bear market.

The only safe space during a bear market is your own Ledger, I learned this the hard way in Celsius... Thankfully I had the risk sensitivity to not have my entire money in Celsius.

It's going to be interesting to see what will happen to ThorSwap Loan's and to $RUNE long-term... If it's going to end up as LUNA or not.

In case people want to read more:

https://gitlab.com/thorchain/thornode/-/blob/develop/docs/architecture/adr-011-lending.md

https://docs.thorchain.org/thorchain-finance/lending

Interestingly enough I think a protocol like this might actually perform well during a bear market.
I can't imagine people scrambling to pay back their loans as price declines and the market is in denial.
"Buy the dip" as they say.

It's probable that during a bear market many would actually want to use this feature even more because there are no liquidations. I think the real threat comes after the bear market is over. Once bear ends it becomes financially worth it to pay back the loans (example: paying back $1000 to get $1500 worth of collateral). This would put constant downward pressure on RUNE that could make it underperform against all forms of collateral.

It's safe to say that many would not want their collateral back in this situation unless they planned on dumping all of it for USD, which again helps RUNE because it lowers the collateral value that ThorChain is shorting. Will be interesting to see how all that plays out from the sidelines.