What is THORChain: Cross-Chain DEX
|— THORChain is a proof-of-stake blockchain built using the Cosmos SDK and Tendermint consensus.
— THORChain serves as a cross-chain liquidity protocol, allowing users to swap native assets across layer 1 blockchains without using wrapped tokens or forfeiting crypto custody to a central entity.
— RUNE is the native coin of THORChain, and it is used for settlement, security, governance, and incentives within the network.
There are thousands of different cryptos to choose from, spread across many different blockchains.
Exchanging crypto assets based on different blockchains via crypto exchange (CEX) is strikingly simple if you use a centralized exchange. But it means forfeiting custody of your crypto to a centralized custodian.
But token swaps via a decentralized protocol face their own limitations.
Decentralized crypto exchanges (DEXs) are protocols designed to communicate with just one underlying blockchain. For example, Uniswap is built to handle trades of many different tokens based on the Ethereum blockchain. But isn’t capable of managing trades with Bitcoin or Binance SmartChain-based BNB. They simply speak a different language. To date, the most common way around this problem has been using wrapped assets. But using synthetic crypto tokens comes with its own set of security risks.
So cross-chain crypto traders face a conundrum: users must choose between forfeiting custody of their crypto, or accepting the security risks of using bridges and synthetic assets to trade between chains.
THORChain is a protocol that aims to offer a solution to this problem.Let’s dive into what is THORChain, how it works, and how to use THORChain with your Ledger Nano or Stax.
What Is THORChain?
THORChain is a cross-chain, decentralized liquidity protocol. It enables direct swaps between different layer-1 tokens.
Built on the state-of-the-art Cosmos SDK (software development kit) as part of Cosmos’ internet of blockchain ecosystem, THORChain currently supports 9 different layer-1 blockchains. In theory, it will also support many more in future.
THORChain enables users to swap native assets based on different chains. For example, you could use THORChain to swap your ETH on Ethereum to get BTC on the Bitcoin network. Similarly, you can exchange AVAX on Avalanche to receive LTC on Litecoin. The possibilities are endless.
How Does THORChain Work?
THORChain is capable of making direct swaps between different layer-1 blockchains. This is because each of its validators runs a full node for every network. For example, all THORnodes will run clients on Bitcoin, Binance SmartChain, Avalanche, Ethereum, Litecoin etc. On each of these networks, the THORChain vault contains pools of both the network’s native currency (ie ETH, BTC, LTC), and RUNE, THORChain’s own token.
THORnodes monitor for transactions coming into the THORChain vaults on each respective blockchain network, and confirm the incoming transaction via consensus. They then arrange for the corresponding outgoing transaction to initiate on the other blockchain of the swap, thus enabling users to “insert” a given token on one chain into the THORChain protocol, and receive tokens from a completely different blockchain in return – without any central custodian.
When a user wants to convert ETH to BTC using THORChain, here’s what happens:
– User’s ETH is sent to ETH/RUNE pool
– RUNE worth the value of the user’s ETH is sent from ETH/RUNE to the BTC/RUNE pool
– User gets BTC worth the RUNE sent to BTC/RUNE pool.
THORChain relies on several technical cornerstones, as well as its native coin RUNE, to achieve this. Let’s start by looking at each of those in turn.
THORChain Key Technology
THORChain is built on Cosmos SDK (software development kit), as part of the Cosmos “internet of blockchains” SDK is a set of open-source tools that enable developers to build bespoke blockchains that can interoperate with each other. 2. Bifrost
For this system to be effective, THORChain nodes have some specific communication requirements. Every node in the THORChain system is running a client on all of its integrated blockchains, while also communicating with one another via THORChain’s central network. This is made possible by the Bifrost protocol, which is a connective node between the THORChain network, and other blockchains such as Bitcoin or Ethereum.
By enabling every node to monitor incoming transactions on THORChain’s vaults on all blockchains, and also communicate with each other, THORChain can keep track of transactions across chains.
THORChain itself is a Proof-of-Stake (PoS) network. It leverages the Tendermint Byzantine Fault Tolerance (BFT) engine — a part of Cosmos — to secure the network from node failures or malicious behavior.
Each of the nodes is disincentivized from acting maliciously. It has staked much more than it stands to gain by duping the network. Meanwhile, the nodes themselves are completely anonymous, meaning they cannot work together to collectively subvert the network. New nodes enter and exit the active validator set every 3 days, moving all assets to new vaults with new signers.
Automated market maker
The engine controlling trades on THORChain is an Automated Market Maker – a decentralized protocol that “keeps track of” trades across all its different blockchains without a central custodian.
THORChain does not wrap assets, but instead synthesizes assets from liquidity. Synthetic assets make trading and arbitrage faster, without the need to deal with layer-1 block times or confirmations. Instead, synths settle at the speed of THORChain blocks, around 6 seconds.
THORChain, with streaming swaps, has the ability to break up large swaps into multiple sub-swaps executed over a period of time. In the slip-based fee model, larger swaps pay more in fees. By splitting up a trade, swappers can pay significantly less in liquidity fees, leading to significantly better price execution.
With no central entity responsible for maintaining liquidity, updated prices, and security of the network, THORChain relies on its community to do the honors.
We can broadly classify every participant of THORChain under one or more of five roles: liquidity providers, node operators, traders, savers, and borrowers.
Liquidity providers (LPs) are responsible for maintaining asset liquidity across liquidity pools. They commit assets from across chains paired with an equal worth of RUNE (more on this later) to respective liquidity pools.
As an incentive for their contribution, the network rewards LPs with a portion of the swapping fees paid by users in the form of THORChain’s native coin RUNE. The more liquidity committed, the greater the reward.
The internal price of RUNE is guided by the supply of the token left within the Thorchain protocol. Traders are participants that look for crypto arbitrage opportunities, i.e. price differences of assets within THORChain’s liquidity pools and outside markets. This incentivizes them to execute high-frequency trades for profit.
These trades execute until the price of an asset within THORChain’s pools is equal to the price across external markets. This is what keeps the value of assets in THORChain’s vaults consistent with the wider market.
Node operators are responsible for securing the native asset vaults and adding new blocks of transactions to the chain. They listen for incoming swaps, execute the across chains, and collectively sign outbound layer-1 asset transactions.
The prerequisite of becoming a THORNode is to commit a bond with a minimum of 300,000 RUNE. The network uses this monetary stake as leverage over every node. Thus disincentivizing them from acting against the network or stealing funds from it.
If a node still carries out any unauthorized activity, the network slashes the node’s RUNE by a certain percentage.
THORChain has a second type of liquidity provider – Savers. Savers deposit native assets (like BTC or ETH) into THORChain, to earn single-sided yield. To accomplish this, native assets are swapped for synthetic assets which are backed by THORChain liquidity. Savers are single-asset only and don’t experience Impermanent Loss. Rewards savers receive is dynamic, based on the ratio of savers to dual liquidity.
Lending allows users to deposit native L1- asset collateral, and then create a debt at a collateralization ratio CR (collateralization ratio). The debt is always denominated in USD, regardless of what L1 asset the user receives.
All loans have 0% interest, no liquidations, and no expiration. Risk is contained by limits on collateral for each pool, slip-based fees when opening and closing loans, dynamic CR, and a circuit breaker on RUNE supply.
What Is RUNE?
RUNE is the native coin of THORChain with a total supply of 500,000,000. It has four primary use cases within the THORChain ecosystem: settlement, governance, security, and incentives.
THORChain relies on liquidity pools to execute cross-chain token swaps. Liquidity providers need to fund these pools with assets from different chains paired in a 1:1 ratio with RUNE coins.
For a liquidity provider to add liquidity for $1,000 worth of ETH, they must also add $1,000 worth of RUNE. When the pools become unbalanced they are automatically redressed by arbitrageurs who spot the opportunity to make a profit. For example, if Thorchain is lacking a particular coin, rewards for LPs of that coin will increase in proportion to demand. This is thanks to its slip-based fees model.
So, when you want to swap an asset using THORchain, you must first convert it into RUNE. From there you will receive your chosen asset from its respective asset pool.
THORChain relies on the Proof of Bond mechanism.
To become THORNodes, one must first lock anywhere between 500,000 to over 1 million RUNE.
At any given time, the network requires the total bonded RUNE to be double the total RUNE locked across liquidity pools (RUNE’s bonded:staked = 2:1). So, if there is $1 million worth of RUNE across all liquidity pools, the nodes must bond RUNE worth $2 million.
If a node steals assets from the pool, the RUNE they lock up is reduced by the total amount they steal. This leaves no incentive for nodes to act against the network.
New nodes enter and exit the validator set every 3 days – when the vaults churn. Old validators are forcibly removed, and new validators join. New vault keys are created and all network assets are re-distributed to new vaults, proving network solvency and access to all funds.
THORChain ensures economic security through shifting rewards with the incentive pendulum. If the bond of each node is much greater than the value of the assets in the vaults, rewards shift to liquidity providers – and vice versa. Fees are distributed to liquidity providers and node operators depending on the balance of security to liquidity, so that assets are never undersecured.
Node operators govern network constants through mimir. When a majority of nodes vote to change a network constant, the value is changed. Nodes can also vote in the ADR process which governs the architecture and direction of the protocol. Liquidity providers can use their RUNE to create new pools on THORChain, which are activated above a certain liquidity threshold.
THORChain uses RUNE tokens to incentivize liquidity providers via the slip-based liquidity model for enabling seamless cross-chain token swaps.
Additionally, the network rewards node operators in RUNE for securing the network. It also subsidizes the nodes for paying the gas for all outgoing transactions.
How to Secure RUNE With Your Ledger
THORChain brings a unique user experience for swapping assets based on different chains. Plus, you can manage your RUNE with absolute confidence by accessing THORChain via the Ledger Live ecosystem.
You’ll find everything you need on our supported coins page if you want to secure RUNE with your Ledger.
THORChain Brings Interoperability to Swapping
The blockchain ecosystem continues to flourish. But it relies on the ingenuity of developers to overcome its current limitations, and become truly decentralized. This is why projects like THORChain are so important. Not just for their utility to individual users, but for the advancement they enable across the whole crypto ecosystem.
With protocols like THORChain making users the sole custodians of their crypto as they trade, the most important tool in any DeFi trader’s arsenal is their crypto wallet. That’s why keeping your private keys, the keys to your crypto wallet, secure is so important. And of course, the only way to truly secure private keys is by keeping them offline. This is why Ledger hardware wallets should be the baseline for your DeFi interactions.