Cryptocurrencies
21
Apr
what is THORchain | the beginners guide

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What is THORChain? The Beginner’s Guide

What is THORChain? It is a decentralized liquidity protocol. THORChain makes it possible to swap cryptocurrencies between blockchains without a central intermediary. It could be said that THORChain is like Uniswap between blockchains. This article explores the history and technology of THORChain and its RUNE token.

THORChain competes with centralized exchanges

Let’s start by placing THORchain into the right cryptocurrency category. We divide cryptocurrencies into three main categories: currencies, platforms, and tokens.

Bitcoin is the best-known currency. Other popular currencies include Litecoin and Monero. These coins are intended for storing and transferring value.

Platforms are operating systems for smart contracts and decentralized applications (Dapps). Platforms can be thought to be a bit like iOS or Android. The best-known platform is Ethereum. Solana, Cardano, and Terra are also popular platforms.

Tokens are always issued on existing platforms. They have a use case in a specific decentralized app (Dapp). Aave and Uniswap are well-known DeFi tokens.

THORChain fits best in the platform category. However, it is not a traditional smart contract platform like Ethereum. It has a focus on interoperability between different blockchains.

THORChain’s mission is to enable cryptocurrency swaps between different blockchains in a decentralized manner. You can see it competing with many DEXes such as Uniswap & Pancakeswap. THORChain is also a competitor of centralized exchanges and lending platforms.

The native token of THORChain is RUNE. It exists as a BEP-2 token (Binance Chain) and ERC-20 token (Ethereum).

THORChain has a decentralized team

THORChain has been around for quite a while. Its first version was launched and rejected in 2018. The idea of a trustless exchange of assets between blockchains was not technically achievable.

However, things change fast in the crypto industry. A new way of scaling crypto wallet management between several participants with threshold signatures, as well as the development of the Cosmos ecosystem, prompted THORChain developers to continue the project in 2019.

THORChain does not have a named CEO or visible team. However, the developers are not anonymous and appear with their own names on Twitter. The structure of the project could be described as decentralized. THORChain arranged an IDO (Initial Dex Offering) for its RUNE token in the Binance DEX in July 2019.

THORChain has been in the headlines after launching its ASGARDEX exchange (known “chaosnet” in its early stages), which allows cross-chain trades for native assets without centralized exchanges.

asgardex

ASGARDEX supports Bitcoin, Ethereum, Litecoin, Bitcoin Cash, and Binance Chain. It is soon going to add the most popular ERC-20 tokens as well. Trades on the exchange are lightning-fast and almost free for those who are used to Bitcoin and Ethereum transaction fees.

THORChain will also integrate the Cosmos Inter-Blockchain Communication (IBC) protocol, which will increase the number of blockchains integrated into THORChain.

Crypto trading in a decentralized manner

One of Bitcoin’s biggest virtues is ​​its immutability. Bitcoin is open to everyone around the world and its transactions cannot be stopped by anyone.

However, when trading Bitcoin to other cryptos, you need to sign up for a centralized platform and agree to its policies. These companies operate under international money laundering regulations and are obliged to collect data from the users. Exchanges are also inaccessible for people living in certain countries.

Centralized exchanges are always at the mercy of states, and for this reason, they are increasingly resembling banks providing crypto services (such as staking, wallet services, and payment cards).

Decentralized cryptocurrency exchanges (DEX) have been seen as a solution for this problem since 2014. Some DEX’s already operated in 2017. An important milestone was reached in September 2020 when Uniswap’s trading volume was higher than Coinbase’s.

However, only Ethereum ERC-20 tokens have been available in the biggest decentralized exchanges. Binance Smart Chain was the trend of 2021, but it also supports only Binance’s own BEP-20 tokens. Any DEX built on top of Solana supports Solana’s assets, and so on.

Wrapped tokens have been a temporary solution. The most popular being Wrapped Bitcoin (WBTC), which is an ERC-20 token following the Bitcoin price. However, it is not the same as native Bitcoin.

THORChain’s ASGARDEX exchange makes it possible to trade native Bitcoin into other assets without first giving Bitcoins to someone else (centralized exchanges). Check the video below for more information.

THORChain liquidity pools

In order to understand THORChain, it is necessary to understand how decentralized exchanges work. For smooth trading, exchanges need to have liquidity. This can be arranged either with an order book or an Automated Market Maker (AMM).

In the order book model, traders place buy and sell orders on assets. Trading is possible as long as there is demand and supply for an asset. Many investors are familiar with the order book model, as traditional crypto exchanges and stockbrokers operate this way.

When it comes to low-liquidity assets, the order book model doesn’t work. The demand and supply don’t meet and the market is prone to manipulation.

Bancor was the first DEX using Automated Market Maker in 2017.

bancor

In the AMM model, liquidity providers deposit assets into the application’s smart contracts. A market-making algorithm then calculates the correct price for a trade based on market activity. Liquidity providers receive part of the protocol’s trading fees as compensation.

In Bancor’s liquidity pools, assets could only be traded for Ether. The second version of Uniswap (in the summer of 2020) brought pairs between all ERC-20 tokens, such as ETH/USDT, LINK/USDT, AAVE/USDC, and so on.

THORChain nodes

A decentralized exchange must have liquidity providers and traders. In order to make other tokens than ERC-20 possible, THORChain brings in a third party: THORChain nodes.

These nodes are computers that run both the THORChain node and a node for each blockchain supported by THORChain, such as a Bitcoin node, Ethereum node, and so on. These nodes earn a share of trading fees.

Instead of controlling liquidity pools with a centralized entity, private keys of the pools are held by THORChain nodes using a multi-signature arrangement.

If a user wants to trade Ether for Bitcoin, the THORChain node uses its Ethereum counterpart to make sure Ether is received in THORChain’s ETH vault. The node then transfers the correct Bitcoin amount to the user through a Bitcoin network node.

The transaction is not that complicated. The ASGARDEX exchange swaps cryptocurrencies to each other with a few mouse clicks. Under the hood, THORChain first swaps Ether to RUNE token and then RUNE to Bitcoin.

The video below summarizes the idea of THORChain in less than two minutes:

There are currently about 35 nodes. Over time, the number of nodes is expected to increase to more than 100.

When a THOR node is activated, it can earn profit for a month before it has to give its place to another THOR node. This way, the nodes change all the time, and no one has the privilege to act as a THOR node for long periods.

The number of nodes may sound small and it raises the question of decentralization. It is true that THORChain is not as decentralized as the Bitcoin network. However, it is considerably more decentralized than any other platform where Bitcoin is currently traded in larger amounts.

THORChain nodes are also anonymous and change configuration every couple of days. The confirmation of transactions is also arranged on a random basis so none of the nodes know which nodes confirm certain transactions.

Financial incentives and RUNE token

As anonymous THORChain nodes are controlling billions of dollars worth of Bitcoin, what prevents them from stealing those assets? THORChain’s RUNE token comes into the picture here. It is designed to bring incentives to the ecosystem. The whole THORChain is based on the RUNE token.

If RUNE is created correctly, THORChain can succeed in its goal of making an alternative to centralized exchanges. If, on the other hand, it is poorly designed, then THORChain will not work.

RUNE tokens have several uses cases.

  1. Traders using THORChain pay transaction fees to nodes and liquidity providers in RUNE tokens.
  2. THOR nodes pay a bond in RUNE tokens for the privilege (and the liability) of confirming transactions.
  3. Liquidity providers must always deposit RUNE tokens as counterpart pairs. For example, if a liquidity provider (LP) deposits $100,000 of Bitcoin in the liquidity pool, the LP must also deposit RUNE tokens worth $100,000.
  4. THORChain governance. The team behind the project has announced its goal of quitting in the summer of 2022 and giving the governance fully to RUNE token holders.

RUNE is also an important part of THORChain’s safety. Instead of Proof of stake, THORChain’s security could better be described as “Proof of Bond”. This mechanism ensures the honest behavior of nodes and punishes inappropriate behavior.

There’s something called an Incentive Pendulum that is the essential part of THORChain’s safety.  THOR nodes have a strong incentive to send twice the value of RUNE tokens to the protocol in bond compared to the assets in the liquidity pool.

The concept of the Incentive Pendulum is explained in the video below, starting at 7:10:

Let’s say there is a total of $10 million worth of Bitcoin, Ether, and USDT in the pools. THOR nodes have the incentive to collectively send $20 million worth of RUNE tokens to the protocol.

If they send less, THORChain’s system becomes under-bonded, and the protocol begins to channel transaction fees from liquidity providers to THOR nodes. This way, the operation of nodes becomes more profitable than providing liquidity.

This will eventually lead to a reduction in liquidity. As the operation of nodes has become popular, nodes are increasingly channeling RUNE tokens into the system until the amount of bonded RUNE tokens is double to other assets. The balance has then been reached between anonymous profit-making parties.

The pendulum may also be tilted the other way. If the nodes bond too much RUNE tokens, the system will start channeling transaction fees to liquidity providers. This will provide more liquidity to the system (as it is now more profitable), and THOR nodes will bond less and less RUNE until a balance is reached.

The RUNE token, therefore, acts as a system backend and incentive tool. But why RUNE? Why not Bitcoin, Ether, or a stable coin like USDT?

THORChain’s system has always more RUNE tokens than other native cryptocurrencies. If a potential attacker managed to hack the system, this info would make RUNE tokens worthless.

This incentive mechanism already makes it financially unprofitable to obtain a two-thirds majority of THORChain. So basically, the attacker would try to hack his own worthless RUNE tokens.

With RUNE token THORChain can also create liquidity on its platform and pay developers as RUNE tokens for the work they do.

Get yield for your Bitcoin in deep pools

Compared to Uniswap, THORChain has fewer exchange pairs and liquidity pools. This means that liquidity is not divided between as many different pools and, therefore, pools become deeper.

This leads to a positive outcome. Price slippage is lower, making prices more attractive to traders. This in turn brings more traders to the platform, which brings more revenue to liquidity providers, which will attract more users to bring liquidity, and so on.

Bitcoin lending services have become increasingly popular lately. Platforms like BlockFi and Celsius allow Bitcoin holders to earn passive income without selling their coins.

Although lending platforms are often reliable and regulated, they do have their own risks. They are prone to hacking, bugs, theft, or government intervention. The borrower is also unable to verify what these companies are doing with the borrowed bitcoins.

Interest rates are also falling over time. BlockFi recently dropped the annual interest rate for deposits of more than one Bitcoin to just 2.0 percent.

The APY for Bitcoin deposits in THORChain has been several dozen percent lately. The tweet below even shows an unbelievable 52.2 percent APY.

Of course, there are risks in using THORChain – especially in the early stages. The protocol risk should be taken into account.

If THORChain manages to attract more and more liquidity and gain market share, it may succeed to eliminate volatility from the DeFi market that institutional investors fear so much.

Is THORChain connected to the founder of Binance?

In its THORChain review a few months ago, the Coin Bureau channel brought out an interesting conspiracy theory that Binance, or even Binance founder CEO Chanpeng “CZ” Zhao himself, would be behind the anonymous THORChain project.

You can check out the video below

“CZ” has reportedly expressed a view on the inevitable destruction of centralized exchanges. As a result of increased competition, exchanges will have to lower trading fees. For this reason, many centralized exchanges have started to offer staking and payment cards too for extra revenue.

Tai Chi documentary, leaked to the public in autumn 2020, revealed that Chanpeng is not the biggest friend of cryptocurrency regulation.

Looking more closely at THORChain’s connection with Binance, the idea of CZ behind THORChain doesn’t seem entirely impossible. CZ is known for his strategic moves and the ability for playing 4D chess in the world of cryptocurrencies.

How often does an anonymous project suddenly launch its tokens at Binance Chain and form multiple nodes around the world without funds or community?

Conspiracy theory or not, the founder of the world’s largest cryptocurrency exchange could be planning new takeovers in a situation where centralized exchanges have no future in the traditional sense.

Instead of changing the layout of the Binance exchange, a better solution might be to integrate it with a privacy-friendly and blockchain-connecting solution like THORChain.

So far this is only a theory.

RUNE price and how to buy RUNE

The maximum number of RUNE tokens is 500,000,000, and about half of these are in circulation now. THORChain protocol transaction fees are burned, which means that RUNE is a deflationary token.

THORChain is a promising project and certainly one of those with the potential to rise to the top 10 cryptocurrencies, especially if it manages to get the attention and approval of Bitcoin maximalists.

Buying RUNE tokens can be done at Binance, where you can also find the best liquidity and pairs like RUNE/USDT, RUNE/BTD, RUNE/BUSD, and RUNE/BNB. Binance supports deposits with cryptocurrencies, credit cards, and SEPA bank transfers.

Buy RUNE from Binance

RUNE is also available at FTX and KuCoin, which are popular exchanges for trading altcoins.

Any cryptocurrency wallet that supports the BEP-2 standard (Binance Chain standard) is capable of storing RUNE tokens. These include Ledger cold wallet and TrustWallet mobile wallet.

The THORChain team is also developing its own Asgard X wallet, which will be integrated directly with THORChain and can store not only RUNE token but also all coins moving in THORChain’s ecosystem.

THORChain’s official website can be found at thorchain.com and their Twitter user @THORChain.

Here’s also a good and clear article about THORChain by Erik Voorhees.

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Articles written by Bitcoinsentralen are produced by our team. There are several crypto specialists working at Bitcoinsentralen. The head analyst of Bitcoinsentralen is Antti Hyppänen.