Original title: THORChain
Original author: FIRoute 2 FI
Original source: https://substack.com/
Compiled by: Mars Finance, Daisy
Hey friends!
Today I’m taking a deep dive into THORChain, a project I’m invested in.
By the way, they have a pretty decentralized community, be sure to follow them on Twitter as well:
THORChain
introduce
The cryptocurrency space is full of cross-chain bridge vulnerabilities, crashes, and centralized exchange closures due to trust issues. However, there is an on-chain version that allows you to exchange and earn yield on native tokens through your wallet without taking on the risk of cross-chain bridges. That’s THORChain. Before we dive into THORChain and its history, why is it so important to exchange native assets?
Currently, the only other way to exchange native assets is through centralized exchanges. This means you need to do KYC (identity verification) and rely on trust in these exchanges. After the FTX debacle, people’s trust in centralized exchanges has almost disappeared.
Some of you may think that you can use the BTC bridge on Uniswap or SushiSwap to get wBTC through Ethereum, Polygon, or even Ren Protocol. The problem is: Wrapped Bitcoin (wBTC), for example, is a centralized Bitcoin managed by BITGO. BITGO is a company, and if they choose to shut down or the government seizes their assets, your wBTC will also disappear. This applies to any wrapped tokens because they are created and managed by centralized custodians.
History of THORChain
The concept of THORChain was first proposed by a team participating in Binance Dexathon in 2018. THORChain facilitates cross-chain liquidity and reduces the need for centralized exchanges and third parties in the DeFi space. Today we know that JPThor is one of the founders.
How it works
THORChain is a layer 1 network based on Cosmos SDK and Tendermint. It operates as a cross-chain permissionless decentralized exchange (DEX) and protects its leaderless asset treasury through a threshold signature scheme (TSS). Tendermint and TSS provide a hierarchical Byzantine Fault Tolerant (BFT) consensus mechanism, and funds entering and exiting the main TSS treasury require a two-thirds majority consensus.
THORChain allows users to exchange native assets between multiple chains without using wrapped or anchored assets. It ensures transparent and fair prices without relying on centralized third parties. The protocol has continuous liquidity pools to maximize efficiency. THORChain manages funds directly in vaults on the chain and protects these funds with economic security without anchoring or wrapping assets. It can be described as a "cross-chain automated market maker (AMM)" similar to Uniswap.
There are four key types of users in the THORChain ecosystem:
Asset Swappers: Exchange assets using liquidity pools.
Liquidity Provider: Add liquidity to the pool and earn rewards.
Node operators: provide security deposits and get paid to ensure the security of the system.
Arbitrage traders: monitor and rebalance the pool for profit.
Asset exchange is achieved through liquidity pools, which are composed of assets contributed by liquidity providers and protected by a group of node operators. Liquidity providers deposit their assets in THORChain's liquidity pools to earn returns, which are composed of exchange fees and system rewards. Anyone can add liquidity to existing pools, making THORChain permissionless. In addition, liquidity providers can propose new asset pools, provided that these assets are tokens supporting chains in the ecosystem.
Node operators, called THORNodes, are independent and communicate with each other to form a cross-chain exchange network. In return for securing the exchange network, they receive a fee for each exchange as a reward. Before becoming a node operator, users must provide RUNE as a deposit, which acts as collateral to ensure that the node operator acts in the best interest of THORChain. The total amount of RUNE staked must be twice the amount of RUNE in the liquidity pool.
During an asset swap, the swapper sends their asset to THORChain and receives another asset in return. For example, when swapping BTC for ETH, the swapper sends BTC to THORChain. Once the BTC enters the network, a BTC to RUNE swap takes place, followed by a RUNE to ETH swap. ETH is then sent from THORChain's vault to the swapper. This process allows THORChain to perform native asset swaps without the need for wrapped assets.
THORChain’s market price is regulated by arbitrage traders who profit from price differences between different markets. This mechanism allows THORChain’s market price to be regulated naturally without the use of oracles.
RUNE Pool
RUNE is the native token of THORChain. In the network, it acts as a base pair for users to redeem RUNE for any other supported asset. It has a supply of 500 million tokens and has four main use cases: settlement, security, governance, and incentives.
RUNE as a settlement asset
RUNE is the settlement asset for all liquidity pools, facilitating swaps between two pools. Each pool requires a 1:1 RUNE:ASSET ratio. For example, a pool with $100,000 in BTC would need to hold $100,000 worth of RUNE.
RUNE helps ensure safety
To ensure security, node operators must bond an amount equal to twice the amount of RUNE they add to the pool. RUNE bonds serve as collateral to ensure that node operators act in the best interest of the network.
RUNE for governance
RUNE token holders can choose which assets or chains they want to prioritize. They do this by voting with their liquidity.
RUNE Incentive Mechanism
Block rewards and exchange fees are paid in RUNE to liquidity providers and node operators according to a set issuance schedule. RUNE can also be used to pay gas fees.
Token Economics
The initial pre-minted supply is 1 billion RUNE tokens, distributed through sales, rewards for providing liquidity, and direct allocations to early contributors.
In October 2019, THORChain chose to destroy all “unused” reserve RUNE, which is about 50% of the supply (500 million tokens)
The price of RUNE is determined by two main factors:
1. Deterministic value based on liquidity within the network
2. Speculative Premium: For every $1 of non-RUNE assets on the network, the network is incentivized to lock up $3 of RUNE.
As of early 2022, all tokens have been unlocked for investors, team, and operational reserves.
The remaining issuance (~40% of supply) is used for liquidity incentives and THORNode rewards. No one will abandon you, and the MC:FDV ratio is quite moderate at 0.828.
Rune Pool
When you deposit RUNE into the RUNE pool, it is allocated to multiple blue-chip asset pools, including BTC, ETH, BNB, AVAX, ATOM, BCH, LTC, DOGE, USDC, USDT, and other major assets on the network. This diversification helps mitigate the impact of impermanent loss while providing stable returns.
How the RUNE pool works
The RUNE pool works in conjunction with THORChain's protocol-owned liquidity (POL). When you enter the RUNE pool, you are actually buying liquidity from POL, which provides additional deposit capacity for POL. This system exposes your position to price fluctuations in multiple asset pools, providing more stable and diversified returns than a single dual LP.
It is important to note that the RUNE pool has a minimum deposit (lock-up) period of 90 days, starting from the last deposit made by the user. The pool capacity is determined by the total amount of protocol-owned liquidity on the network, and a 2% fee is deducted from the profit withdrawal from the RUNE pool. If you withdraw without profit, there is no fee, and there is no fee for depositing to the RUNE pool.
in conclusion
THORChain provides liquidity to traders and provides instant finality for all operations on the network while reducing the risk of impermanent loss. Users can easily exchange top cryptocurrencies from different networks through a user-friendly interface in a decentralized environment.
THORChain provides cryptocurrency users with a non-custodial exchange service, with an expanding range of supported cryptocurrencies and a smooth user experience. With its technical capabilities and innovative technology, THORChain has the potential to become one of the leading DeFi projects.
Okay, that’s all for today.
Take care of yourself!
goodbye.
