TL;DR
THORChain is a decentralized liquidity protocol that allows users to swap assets in a permissionless setting. It enables the exchange of native layer-1 assets like BTC by acting as a vault manager. To secure its network, THORChain uses Tendermint and Cosmos-SDK. It also utilizes Threshold Signature Schemes (TSS) for its leaderless primary vault.
Introduction
THORChain was conceptualized in 2018 by a team participating in a Binance Dexathon (decentralized exchange coding competition). THORChain facilitates cross-chain liquidity and reduce the need for centralized exchanges and third parties within the DeFi space. It enables cross-chain swaps and yield generation on crypto-assets like Bitcoin and Ethereum.
How does THORChain work?
THORChain is a layer-1 network based on the Cosmos SDK and Tendermint. THORChain works as a cross-chain permissionless Decentralized Exchange (DEX). It also uses Threshold Signature Schemes (TSS) to secure its leaderless asset vault. Tendermint and TSS provide a layered Byzantine Fault Tolerance (BFT) consensus mechanism, and a two-thirds majority consensus is required for funds to enter and exit the primary TSS vault.
There are four key types of users in the THORChain ecosystem:
- Swappers who use liquidity pools to swap assets.
- Liquidity providers who add liquidity to pools and earn rewards.
- Node operators who provide bonds and are paid to secure the system.
- Traders who monitor and rebalance pools with the intention of making profits.
Unlike other cross-chain protocols, THORChain doesn’t wrap assets before swapping. Instead, it uses native assets on THORChain to perform autonomous, transparent asset swaps.
Asset swaps are enabled by liquidity pools. These pools are made up of assets contributed by Liquidity Providers and are secured by a network of node operators. Liquidity providers deposit their assets in THORChain’s liquidity pools to earn yield, made of swap fees and system rewards. Anyone can add liquidity to an existing pool, making THORChain permissionless. In addition, THORChain is non-custodial because only the original depositor can withdraw the assets that they have deposited in the pool. Liquidity providers can also propose new asset pools, provided these assets are tokens of a supported chain in the ecosystem.
Node operators, called THORNodes, are independent and communicate with each other to form a cross-chain swapping network. In exchange for securing the network, they will receive rewards in the form of fees for every swap made. Before becoming a node operator, a user has to provide a bond of RUNE. These bonds are held as collateral to ensure that node operators behave in the best interest of THORChain. The total bonded needs to be twice as big as the RUNE pooled.
During an asset swap, swappers will send their assets to THORChain and receive another asset. For instance, when swapping BTC to ETH, swappers will send their BTC to THORChain. When BTC enters the network, there will be a BTC to RUNE swap and then a RUNE to ETH swap. ETH will then be sent to the swapper from a THORChain vault. This process allows THORChain to perform native swaps without wrapping assets.
Market prices on THORChain are regulated by arbitrage traders, which in turn defines the value of asset swaps. These traders look for assets that are mispriced between markets to make profits from the price differences. This mechanism allows THORChain market prices to be regulated naturally, without the need for oracles.
With this liquidity pool model, THORChain is able to determine how much any asset is worth in any other asset simply by using pool balances. In effect, THORChain acts as a vault manager that monitors deposits and withdrawals while using pool ratios to price assets. This helps create decentralized liquidity, removing centralized intermediaries.
What makes THORChain unique?
THORChain is a DEX that doesn’t require wrapping for asset swaps. Other benefits of THORChain include:
Swappers and traders
- Have the ability to swap layer-1 native assets across multiple blockchains.
- Are not required to be registered – anyone can send a transaction and THORChain will execute the swap.
- Do not need to wrap their assets – THORChain uses its vaults of native assets to perform swaps.
- Can access transparent, fair prices without relying on centralized third parties or oracles.
- Enjoy liquidity on demand at any time.
Liquidity providers
- Earn yield on idle assets like native BTC, ETH, BNB, and LUNA.
- Enjoy impermanent loss (IL) protection of up to 100% after they have been in the pool for 100 days.
- Not subjected to lock-in periods.
- Not required to be registered.
- Do not have to deal with third-parties.
Node operators
- Earn rewards when they secure the network.
- Encouraged to remain anonymous to increase decentralization.
- Not required to be registered.
What is RUNE?
RUNE is the native coin of THORChain. Within the network, it acts as a base pair for users to swap RUNE for any other supported asset. It has a supply of 500 million and 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. A 1:1 ratio of RUNE:ASSET is required for each pool. For example, a pool with $100,000 in BTC will need to hold $100,000 worth of RUNE.
RUNE for security
To ensure security, node operators have to bond twice as many RUNE as the amount they added to a pool. The RUNE bonds are held as collateral to ensure that the node operators behave in the best interest of the network.
RUNE for governance
RUNE token holders can choose which asset or chain they want to give priority to. They do so by voting with their liquidity. For instance, a pool that has the most RUNE committed will enjoy higher priority.
RUNE for incentives
Block rewards and swap fees are paid to liquidity providers and node operators in RUNE on a set emission schedule. RUNE can also be used to pay for gas fees.
The smallest denomination of RUNE, called a Tor, is eight decimal points. RUNE aims to move towards a predictable deterministic value. By design, RUNE’s market cap should be minimally three times the total value of non-RUNE assets in the ecosystem’s liquidity pools.
Closing thoughts
As a cross-chain DEX in DeFi, THORChain is paving the way for autonomous asset swaps. The design of RUNE as a settlement, security asset, governance, and incentive tool allows THORChain’s native swap model to be used in a decentralized environment and across multiple blockchains.
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