20 October 2020

Thorchain

One of the biggest hurdles for businesses to adopt blockchain solutions has been the lack of cross-chain compatibility. With centralized exchanges dominating the crypto space, the concept of transferring assets between blockchains remains flawed.

THORChain was founded in 2018 as a decentralized cross-chain exchange allowing traders to swap assets using liquidity pools across networks like Binance Chain, Bitcoin, and Ethereum.

Thus, THORChain’s functionality is quite similar to other cross-chain compatibility systems and decentralized exchanges (DEXs). However, unlike DEX, THORChain aims to solve the issue of liquidity upfront to prevent any sort of trading slippages.

To address the issue of liquidity, THORChain utilizes its own Continuous Liquidity Pools (CLPs) thereby giving traders instant access to the liquidity of available assets without needing to find another buyer or seller. Another benefit of CLPs is that THORChain can dynamically adjust the trading fees based on the transaction size.

Being a Tendermint-based blockchain network, THORChain employs a consensus  and Proof-of-Stake (PoS) model that allow THORChain validators to stake the native RUNE tokens to run the network nodes or validate transactions.

Besides facilitating the faster transfer of cross-chain assets using liquidity pools, THORChain also rewards users (liquidity providers) in its native RUNE tokens for their contribution to the liquidity pools. Additionally, token owners can also stake their cryptocurrency assets and earn rewards in return from other users accessing the pool.

How Does THORChain Work?

To connect different blockchains for seamlessly transferring crypto assets, THORChain employs a cross-chain bridging system called the Bifröst Protocol. This protocol leverages the PoS validator set, different multi-signature accounts to create and secure the bridges, as well as the on-chain price feeds generated by the Continuous Liquidity Pools (CLPs).

Thorchain: How it Works
Source: THORChain

To verify the transactions, every bridge uses validating parties. Also, the validators for each transaction are randomly assigned by a multi-signature system to limit any centralization concerns.

The Bifröst Protocol also assigns a security profile to each bridge using the on-chain price feeds created by the CLPs. This helps the protocol to identify and punish any bad acts (validators) that work against the network rules.

Another important protocol for the scaling of the THORChain network is the Yggdrasil Protocol that uses a sharding mechanism. Unlike the traditional sharding methods, this protocol employs a vertical sharding technique that applies sharding to cross-chain ecosystems.

The working of the THORChain network can be further simplified in two major parts: 1) Liquidity Pools and  2) THORChain nodes

Liquidity Pools:

The THORChain network allows users to stake digital assets in liquidity pools and earn yield rewards in RUNE tokens. These liquidity pools serve as the source of different swappable coins from different blockchains. The native RUNE token acts as an intermediary that allows swapping between any two supported assets.

Thus, while swapping assets between the two blockchains, users trade through the THORChain liquidity pools. In addition to offering liquidity to the system, the network uses liquidity pools for pricing data. The pricing data helps to quickly resolve any discrepancies between the pool and other markets.

THORChain Nodes:

The job of the network nodes is to provide security to the overall blockchain. The THORChain nodes play a key role in building bridges to all other blockchain networks and ensure that transactions are broadcasted to the appropriate chains

The nodes are also the connecting link between the liquidity pools and other supported blockchains. When the users make a cross-chain transaction using the liquidity pools, the nodes take note of it a perform actual on-chain transactions on the user’s behalf.

Besides, monitoring and approving transactions, the nodes are also responsible for operating the network protocol.

RUNE: THORChain’s Native Cryptocurrency

RUNE is the native cryptocurrency of the THORChain blockchain and performs all the crypto-economic functions for the THORChain ecosystem. The RUNE cryptocurrency performs several functions like staking, providing liquidity, and covering the network transaction fees.

Comparisons of Thorchain
Source: Discussions – #thorchain

The RUNE cryptocurrency utilizes the BEP2 protocol of the Binance blockchain, which enables  users to store RUNE in any Finance-compliant wallets like RUNEVault, Atomic Wallet, Trust Wallet, Binance Chain Web wallet, Ledger, etc. Below are some of the key functions of RUNE in the THORChain ecosystem:

1. Payments:

All the network transaction fees are paid in RUNE. This can include executing trades, transactions, as well as other cross-chain exchanges.

2. Staking:

Network participants, who aim to become part of Validator sets and run the THORChain nodes, must first stake their RUNE holding. There’s a certain lock-up period to prevent ‘nothing-at-stakes’ attacks.

3 Liquidity Provision:

Any addition of liquidity to the THORChain network is backed by RUNE known as the ‘Continuous Liquidity Pools’ (CLPs). Thus, RUNE cryptocurrency serves as a settlement currency for the network and lets users earn liquidity fees.

Furthermore, RUNE is also the go-to currency for paying block rewards to the Validator Nodes.

Users can earn the RUNE cryptocurrency in two ways: either by running the RUNE Validator nodes or staking the RUNE cryptocurrency. RUNE holders can stake the cryptocurrency using the native wallet dubbed RUNEVault.

The RUNEVault issues nearly 2 million RUNE tokens as part of its staking rewards program. This issuance will continue until the reserves are exhausted. However, it’s unto THORChain’s discretion to revisit the RUNE model in the future.

One of the easiest ways to buy a RUNE cryptocurrency is through the exchanges. Users can purchase the RUNE cryptocurrency on exchanges like Binance, Bilaxy, FTX, BitMax, Hoo, and Binance DEX. On these exchanges, users have the opportunity to subsequently purchase RUNE against different crypto pairs like BNB, BTC, USDT, EUR, ETH, and BUSD.

THORChain started the RUNE distribution via the Initial DEX Offering (IDO) on the Binance decentralized exchange.

As of writing this article, each RUNE token trades at $0.55 with a market cap of $88 million. The total supply of RUNE is 500 million while the currency circulating supply as per CoinMarketCap is over 158 million.

Summary

THORChain serves as an important application in expanding the DeFi usage in the market. It provides the ability to swap DeFi assets across different blockchains in a safe and secure manner. Additionally, it also offers earning potential to users via the methods of staking and validator nodes.

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Edmund McCormack
Tech industry veteran and blockchain technology investor. Simplifying cryptocurrency for almost a decade.

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