- As the number of users on blockchain networks grows, the need for cross-network liquidity likewise increases.
- Thorchain is a protocol that aims to meet this need by enabling the trading of crypto assets across various blockchains in a completely decentralized way.
The crypto market is maturing, creating more financial products, and becoming more popular, but most of the crypto assets are still isolated on their native networks. This means assets minted on a network like Ethereum can’t be used or directly traded on another crypto network, like the Bitcoin blockchain or Binance Smart Chain.
In order to trade assets across blockchains, you need middlemen, such as exchanges like Coinbase and Binance—or tokenized versions of assets, such as Wrapped Bitcoin. This means that while isolated blockchain ecosystems may be liquid, meaning there’s an active market of buyers and sellers, crypto markets in the aggregate are fragmented and hence illiquid.
What is Thorchain?
Based on Cosmos, the so-called “Internet of Blockchains,” Thorchain aims to make all crypto liquid. It seeks to accomplish this by allowing trade of non-native crypto assets, like trading Bitcoin for Ethereum, but in a decentralized way. This is similar to what Coinbase and Binance do, except that no third party can take control of the funds.
A decentralized exchange (DEX) based on Thorchain is also run on this protocol. As with Uniswap or SushiSwap, the Thorchain DEX lets users lend and trade their crypto assets by providing liquidity to asset pools and in exchange earn a return (or “yield”) on those assets.
RUNE Origins and Team Members
The team behind Thorchain is mostly anonymous. Its multichain “chaosnet” was first conceived at a hackathon in 2018 and launched in April 2021 after initial development on a few testnets.
Its team and community are focused on creating decentralized liquidity, eliminating the need for centralized parties, who can and have denied access to financial products or services to individuals for many reasons.
As the name implies, DeFi is about decentralizing access to finance. DeFi is a collection of financial products that allow users to borrow, lend, purchase, and sell crypto assets without involving third-parties. As a DEX (also known as a decentralized exchange), Thorchain belongs to that group, and it strives to push the boundaries of decentralized finance even further.
In fact, Thorchain’s team plans to completely hand over network control to the community by Summer 2022.
THORChain’s Continuous Liquidity Pools (CLP)
Thorchain uses a modified version of another DEX’s lending system, namely Bancor’s continuous lending pools, to facilitate trading. The trades involve all assets being deposited in a liquidity pool along with one other token, Thorchain’s native token RUNE.
For all trades, RUNE is exchanged against other assets. The protocol would conduct two trades when swapping asset A with asset B, swapping A for RUNE and then swapping RUNE for B. RUNE double swaps are what enable non-custodial swaps of assets across chains.
Thus far, the protocol has worked as intended, and RUNE has climbed into the top ten of DeFi tokens by market cap.
In its initial launch, Thorchain supported assets such as Bitcoin, Ethereum, Bitcoin Cash, Binance Smart Chain, and Litecoin. Additional tokens and assets are continuously being added.
How does THORChain staking work?
Thorchain is a proof-of-stake (as opposed to proof-of-work) blockchain, meaning it’s secured and maintained by node operators who bond and earn RUNE. Nodes are computers that validate swaps and create pools of assets for reward.
In the beginning, 100 validator spots are available to nodes, but the network can scale up to 300. These spots are periodically recycled in a “churning,” ensuring the network is kept competitive, giving operators anonymity, and providing an additional layer of security as nodes cannot “capture” (control) the network.
A validator spot is only available to nodes that have bonded at least 1 million RUNE. RUNE is currently worth $6 and has a market cap of over $1.3 billion.
When a swap is made, an asset is sent to the address of the pool or vault. Similar to an email address containing words and URL pointing to a person, a pool address consists of numbers and letters that point to a digital wallet. Upon two-thirds of nodes confirming the address has received coins, the other asset is returned to the user. Similarly, swaps are native, which means the LTC/RUNE vault, for example, has an address for receiving LTC.
How liquidity pools work?
Thorchain generates its prices by using the automated market maker (AMM) model, much like almost every other DEX. Prices are generated based on the respective number of each asset held in the pool and kept reflective of external prices, like those on other exchanges, by traders. By using arbitrage, they buy assets wherever the price is low and sell them wherever it is high, causing the prices to converge.
A liquidity provider deposits RUNE and one other asset into a corresponding liquidity pool. As a reward for providing liquidity, they receive a share of the trade fee plus the RUNE rewards.
In addition, validating nodes are encouraged to post double the value of assets held in vaults. The reason is:
Fees from trades swing between liquidity providers and nodes. If nodes are “under bonded,” a higher percentage of fees goes to them, which encourages more bonding. If nodes are “over bonded,” the opposite occurs. Thorchain is in its “optimal state” when 67% of its RUNE are bonded and 33% are staked.
As a result of this over-collateralized bonding system, corrupt nodes have more to lose than gain by acting dishonestly.
In addition to security, the DEX’s incentives are structured to maximize liquidity, as fees, non-custodial yield, and DeFi’s natural openness ensure trades on Thorchain typically have low slippage, meaning the difference between a quoted price and the actual trade price used is minimized.
Buy, Swap, Sell Thorchain (RUNE)
To use Thorchain, you’ll need to access an interface such as Thorswap. Then follow these steps:
- Download a wallet compatible with Thorswap. Support for hardware wallets like Ledger is still under development but Thorswap’s own Keystore wallet is already supported.
- Connect your wallet to the interface.
- Swap, deposit liquidity, or withdrawal assets.
- Alternatively, users can use a wallet integrated with Thorchain, like ShapeShift.
The native asset of Thorchain is RUNE. The Thorchain is powered by it, and it is used for governance, staking, bonding, rewards, and trading.
As a bridge between assets from different blockchains, RUNE is traded with other assets in every pool on Thorchain. Staking RUNE also earns users votes on governance proposals and fees from trading, while bonding RUNE lets nodes validate transactions and earn new RUNE generated each block.
Thorchain’s tokenomics are engineered so that RUNE’s price increases “deterministically” by providing incentives to push users to bond roughly 2x the amount of RUNE provided in liquidity pools, and also since RUNE is held in each pool. According to the team, RUNE’s price naturally increases as a multiple of any growth in liquidity on the network.
Thorchain’s tokenomics seem to be working: RUNE’s price has appreciated roughly 500% year-to-date with Total Value Locked (a metric that roughly measures the number of funds sloshing around within a given DeFi project) on the protocol hitting as high as $700 million in May 2020.
2022 Plans for the Cross-Chain Liquidity Protocol
Thorchain’s team believes its protocol of cross-chain swaps is just the beginning. They hope to build a protocol for all of DeFi, offering borrowing, lending, and even synthetics services across various blockchains.
In the near term, the team is aiming to add greater wallet support, update the main website, add pools for other assets, including Dogecoin, Zcash, and Monero, and remove protective measures currently live on the network, which will turn the chaosnet into the mainnet.
Originally published here