DeFi is the future of cryptocurrency and users want to be able to access the full range of financial services without using traditional banking institutions or third parties that are mired in red tape and bureaucracy.
However, currently each individual cryptocurrency is marooned on their own blockchain – unable to trade without an intermediary. THORChain has facilitated decentralized cross-chain trading and helped expand the DeFi landscape.
What is THORChain?
THORChain is a liquidity-focused blockchain built on the Cosmos network. It is designed to enable cross-chain swaps without an intermediary and provide liquidity to the cryptocurrency market. Like Cosmos, interoperability is a primary focus of the platform.
Currently, most blockchains cannot interact and trade with each other. Each independent blockchain can be seen as an isolated ecosystem unable to communicate with others. Swapping or trading tokens with non-connected blockchains usually requires the use of an intermediary such as a centralized exchange (for example, Coinbase or Kraken).
These centralized exchanges often have a large reserve of their own tokens to facilitate these trades. They can have high fees and trust issues which may make users hesitant to trade using the platforms.
Often, these exchanges require users to provide a proof of identity which is at odds with the privacy and anonymity at the core of cryptocurrencies. Many passionate proponents of the decentralized benefits of cryptocurrency do not wish to conduct business using these centralized intermediaries.
THORChain provides a decentralized exchange (DEX) and facilitates cross-chain exchanges without third-party involvement. Users of the exchange can stake tokens to provide liquidity to the network and the underlying software and technology ensure the exchanges are done in a secure and trustless manner. THORChain uses the same Tendermint BFT Proof-of-Stake consensus mechanism that underpins Cosmos.
What are RUNE tokens?
THORChain has a native token, RUNE, that underpins the entire liquidity system used by the network. It is used as a staking token in validating transactions, a governance token, and to provide liquidity to the THORChain DEX.
There is a maximum supply of 500 million RUNE. Around 150 million RUNE were sold in the Initial Exchange Offering (IEO) in July 2019. Another 150 million RUNE tokens were set aside for the development of the network while the rest was put into a reserve pool for emissions.
THORChain was developed by a primarily anonymous team in 2018 during a hackathon. Originally launched on the Cosmos blockchain, the mainnet was launched in April 2021 under the name Chaosnet.
They also launched their primary DEX, Asgardex. Until now they had several smaller DEXs on different blockchain networks. This included BEPSwap on the Binance Chain. Asgardex facilitates the trading of multiple unconnected cryptocurrencies.
It has gained significant traction due to being a decentralized exchange that can trade between the most popular blockchains, namely Ethereum, Bitcoin, Bitcoin Cash, Binance Chain and Litecoin.
However, since the launch of the mainnet, THORChain has experienced two major hacks in July 2021. The hackers stole upwards of $12 million in tokens from the platform. This has shaken confidence in the network somewhat.
THORChain Use Case: Staking
THORChain uses the Tendermint consensus algorithm to provide security to the network when validating transactions and creating blocks. This is a BFT Proof-of-Stake consensus mechanism where validators stake RUNE tokens to take part in creating blocks.
There can be 100 validators or nodes running at any moment on the network. Nodes are required to stake or “bond” 1 million RUNE tokens to have a chance to be selected to validate blocks. There is an option to have more nodes run as usage of the network grows. These nodes also create and manage the liquidity pools of the DEX.
These nodes provide security to the network by providing an assurance to the liquidity pools in the exchange in the event of a hack or theft. This incentivizes validators to act honestly as they will lose out on their staked tokens.
The validation of incorrect or dishonest blocks will also result in tokens being burned as a further incentive. The correct validation of blocks results in the earning of RUNE tokens as a reward. Rewards are issued as a portion of block creation emissions.
To prevent the network being managed by a small set of nodes, the nodes selected to validate blocks are changed regularly. In a process called churning, many nodes are removed and replaced cyclically. The nodes are removed based on malicious behavior, the amount of time a node has been committing blocks and nodes who wish to remove themselves from the process.
Staking RUNE tokens is a low risk endeavor as the rewards are set and not susceptible to market changes or losses. RUNE token holders who have the resources and necessary tokens can earn RUNE tokens for participating. The main risk is from acting maliciously within the network. Users who do not have enough tokens to participate can stake their tokens in a validator’s staking pool.
Rewards are split evenly between nodes rather than split proportionally based on the amount staked. This is to avoid a centralization of power and rewards into the hands of a few validators.
THORChain Use Case: Liquidity
To provide the services of a decentralized exchange, THORChain needs to have large decentralized pools of tokens. These pools are used to facilitate trade between different blockchains.
Liquidity providers are THORChain users who stake their RUNE tokens as well as one other token in this system. The staked tokens are kept in vaults or Liquidity Pools (LPs) managed by the nodes. Each pool is a combination of RUNE tokens and another token in a 1:1 ratio. This removes the need for third parties or intermediaries who charge high transaction fees.
The liquidity providers earn rewards based on a small transaction fee (similar to the gas fee in Ethereum) charged per trade. Market prices within the pools are managed by members of the network who carry out arbitrage.
This system functions to incentivize users to hold their coins and stake them on-chain to provide liquidity and provide DeFi services. It enables cross-chain trading of coins which has been very difficult to provide outside of centralized exchanges.
Rewards are split proportionally based on the amount of tokens staked in the liquidity pools. Rewards are 2/3s of the trading fees charged and the fee depends on the tokens being traded.
Trading Tokens on THORChain
The THORChain ecosystem runs several different Liquidity Pools (LPs). Each LP is a reserve of RUNE tokens bonded to another token. For example, BTC-RUNE, ETH-RUNE or LTC-RUNE pools.
Say users want to trade Bitcoin and Ethereum. To trade BTC for ETH on the THORChain DEX, the network trades BTC for RUNE within one LP and then trades RUNE for ETH in another LP. This allows for decentralized, permissionless trading of coins and means RUNE token holders can provide the decentralized liquidity needed to run an exchange.
THORChain Use Case: Governance
The THORChain network aims to provide a truly decentralized exchange and DeFi service. To this end, THORChain has designed its governance to be carried out on-chain and all users can participate.
Many blockchains carry out their governance off-chain. This means proposals are discussed on forums or by small teams and changes are made without consulting the entire community. Ofte a foundation or company makes all the decisions for the blockchain.
A major drawback of this is that, when the community disagrees with the roadmap or decisions made for the blockchain, it can result in a hard fork. This is when the community splits in two directions and the blockchain separates into two separate blockchains with different code.
Bitcoin has seen this happen several times with the creation of separate blockchains such as Bitcoin Classic and Bitcoin Cash.
This can cause a dilution of the value of the coin and cause unrest in the market. Many investors and individuals are wary of investing in a cryptocurrency that can suffer these hard forks.
THORChain tackles this problem by having discussions, proposals and votes all occur on-chain. Decisions, once made, are carried out once a consensus is reached. Changes are automatically made to the code and as such there is no option for hard forks.
Voting on THORChain
RUNE token holders can participate in voting on changes to the network. This includes changes to the protocol, token structure, consensus mechanism and governance rules.
Developers can propose and submit changes to the network. These proposals are discussed by the community and voted on. Voting is done primarily by nodes but minority token holders can participate by staking their tokens in a validator’s staking pool.
A proposal must receive at least 67% of the votes to pass. Once this happens the change is carried out directly onto the blockchain and there is no option for hard forks.
THORChain Going Forward
THORChain has designed a solution to one of the main barriers to mass adoption of cryptocurrencies. It has provided decentralized liquidity allowing investors to trade currencies without having to sacrifice anonymity or pay the high trading fees charged by some centralized exchanges.
The native cryptocurrency, RUNE, underpins the entire exchange system and allows users to trade the most popular cryptocurrencies. RUNE holders can stake their coins to become a validator or provide liquidity to the network in exchange for RUNE tokens as a reward. They can also participate in governance which occurs on-chain and is decentralized to an extent.
Although THORChain has suffered recent hacks, it has reacted well to them and regained some of the confidence lost. The platform looks set to add other cryptocurrencies to its DEX in the coming year and has an extensive roadmap planned.