The crypto economy is rapidly booming, and the decentralized exchange (DEX) market has continuously played a vital role, with multiple players like THORChain holding positions at varying levels. Just before we proceed to answer the question of “what is THORchain?” let’s quickly take a look at some reason behind the establishment in the first place.
According to Wikipedia, there are presently upward of 35 DEX exchanges built on various blockchains, with Uniswap, which is built on the Ethereum blockchain, leading the pack as it boasts of the highest trading volume of any DEX.
While most DEX exchanges do not support interoperability between multiple blockchains, they are typically tailored to support swaps of digital assets, such as cryptocurrencies or tokens developed or hosted on the same blockchain platform.
Hence we have, Uniswap and Sushiswap as the leading DEX on Ethereum; Pancakeswap, and BiSwap on Binance Smart Chain, and the list goes on like that.
Likewise, another major problem facing most DEX exchanges was finding sufficient liquidity, which often than not, forces traders to gravitate towards platforms with very low slippage risk. The irony here, however, is that part of the traders’ responsibility is also to provide liquidity.
As a result, THORChain adopted a model similar to Bancor’s ‘smart token’ which enable them to create what was then described as “Continuous Liquidity Pools (CLPs)”. This particular type of liquidity pool provides traders with the already available pool of assets that can be traded against instead of waiting to contact another buyer or seller.
However, THORChain took another route in order to solve the problem of inoperability among blockchains. Notably, most regular DEX exchanges usually represent external assets as wrapped or synthetic tokens. In other words, a DEX can represent the most important native asset on other blockchains as a derivative in order to be traded on the primary host blockchain.
For instance, Uniswap is an Ethereum-based DEX and, if you want to trade BTC (which is built on a different blockchain), the platform will wrap it as ‘renBTC’ or ‘sBTC’ as the case may be across different DEX exchanges. For some time now, many DEXs have adopted this approach despite its vulnerability to varying degrees of risk ranging from custodial to security challenges.
Now, in offering a more scalable solution to this challenge, THORChain came up with an idea to build a decentralised liquidity protocol that enables swapping of native assets between different blockchains including the likes of Bitcoin, Ethereum, Binance Smart Chain, and Polkadot, among several others.
Technically, you can imagine THORChain as a cross-chain Uniswap where a liquidity provider can lock 2 (instead of the usual 1) different assets in a liquidity pool, thereby allowing traders to swap between them. Before we go further into details, let’s quickly take a look at a brief history of THORChain.
A brief history of THORChain
Project THORChain was first featured in a hackathon hosted by Binance sometime in 2018 and has since evolved into a fully-fledged project. Although, the team behind TORChain put a hold on the project right after the Binance hackathon to further research and create a fully functioning cross-chain DEX project.
Once they had everything figured out and were ready to go public, the team opted to raise some seed cash, which allowed them to proceed to their next level of research. They then decided to work on a ‘proof-of-concept’ – a technique used by the DEX exchange that was built exclusively for the independent THORChain protocol.
Namely, Instaswap – the first native DEX exchange for THORChain – was later put up for exhibition at the Cosmos hackathon held in Berlin in July 2019. Thereafter, they announced BEPSwap as their first got-to-market product (although limited to only the Binance chain), allowing BEP2 assets to be swapped by traders.
Subsequently, the team was able to raise an additional $1.5 million through an initial DEX offering (IDO) on the Binance exchange which contributed to the development of its main protocol.
Fast-tracked to April 2021, the team eventually achieved its vision for cross-chain incentivised liquidity by rolling out a limited mainnet release they dubbed as multi-chain chaos Network (MCCN).
With this, Thorchain became the first protocol to facilitate asset swap between chains in a permissionless, trustless, and non-custodial setting, neither without been wrapped as a derivative. So what is THORChain?
What is THORChain
THORChain is an independent blockchain that also doubles as a permissionless cross-chain liquidity network with support for interoperability among blockchains.
Just like a few other regular DEX exchanges out there, THORChain also makes use of an automated market maker (AMM) trading model, which, unlike the peer-to-peer model, provides liquidity to the exchange it operates while automating digital asset trading without the need for authorization.
Like we mentioned earlier, THORChain’s AMM iteration is similar to that of Uniswap or Bancor (BNT), however, in its own case does not use a custodial wrapping service, thus allowing liquidity provider to lock at least two different assets.
Furthermore, while traders can benefit from THORChain’s frictionless interoperability, they can do so without the need for ‘Know Your Customer’ (KYC) information as in the case of a centralised exchange.
So, how does THORChain work?
How does THORChain work?
THORChain’s protocol features a cross-chain bridge system known as Bifrost protocol which is considered to be the world’s first truly decentralised exchange ecosystem, enabling participants to securely trade any asset on any distributed ledger.
Specifically, Tendermint BFT (Byzantine Fault Tolerance) was used as the consensus mechanism at the heart of THORChain’s protocol, alongside Cosmos SDK. It also featured a functional Threshold Signature Scheme (TSS) that allows for distributed key generation and signing among multiple users. We will dive deeper into this much later.
Moving on, the Tendermint BFT consensus model is quite unique for many reasons one of which includes the fact that it allows the network to reach consensus even if one-third of all the nodes are not functional.
Also, this type of consensus mechanism is very instrumental to the THORChain’s protocol as it is able to keep a record of all transactions inflow and outflow to other blockchains.
To further clarify, the Bifrost Protocol, as mentioned earlier, serves as a bridge between the THORChain network and other blockchain networks such as Bitcoin or Ethereum.
One of Bifrost Protocol’s primary functions is to monitor vault addresses for inbound transactions that are eventually turned into THORChain witness transactions – validated transactions, for example.
The witness transactions are initially stored as pending until the majority of the validating nodes on THORChain agree on the state (whether a transaction is genuine and if it has been processed, for example) of the inbound transactions. Once finalised, the THORChain protocol subsequently initiates a swap.
Just like with the initiation order, the swap transaction is also recorded on the THORChain’s blockchain and the Bifrost Protocol is used again, only that this time, to initiate withdrawal from the outbound vault – from the vault address of the secondary host blockchain, for instance.
THORChain’s PoS system and churning concept
Although THORChain Protocol uses Tenermint BFT and Cosmos SDK at its heart, it also operates as a Proof-of-Stake (POS) system.
This further implies that nodes who want to participate in the validation process to signify and verify transactions must first obtain and stake a certain amount of the platform’s native currency – RUNE token.
The process of staking RUNE token is called ‘bonding’. More than one participant can participate in a single node. For instance, 1,000,000 RUNE tokens are required to run a fully functioning THORChain node, of which one unit of RUNE is worth approximately $8.5 at current values.
Also, unlike most POS systems, THORChain does not allow the delegation of tokens to a node, further suggesting that all nodes within the network are treated equally, regardless of how much they stake.
Similarly, there is no branding of nodes in the THORChain network because every participant is anonymously recognised by their IP address and public key, which is a significant difference from conventional POS systems.
Churning, on the other hand, is the concept that the THORChain Protocol employs in an attempt to avoid multiple signing by the same nodes with the highest amount of RUNE tokens.
In line with the aforementioned, the network maintains two sets of nodes; the first set comprises active nodes that are enabled to sign transactions. The second set of nodes, on the other hand, are on standby to replace the less active nodes after a set task.
For instance, once the 50,000th block is recorded on the network, the churning process autonomously kicks out the oldest of the active nodes – or perhaps those that are most unreliable among them – and replaces them with nodes from the standby set. There are currently at least 11 active nodes and nine nodes on standby mode on THORChain’s multi-chain chaos network.
The concept further ensures that any of the new nodes that meet the staking criteria are eligible to take a turn in signing transactions within the network.
How does THORChain’s Threshold Signature Scheme (TSS) work?
THORChain employed Threshold Signature Scheme (TSS) as its own native smart contract. The only difference is that TSS is more complex and is designed for compatibility across many blockchains.
While TSS is a close replica of the model used in most multi-signature wallets (or Multisig), it allows multiple users to come together to sign a transaction when a pre-set threshold is met.
However, where multi-signature wallets are often implemented on the application layer of the host blockchain, TSS further makes it possible regardless of the blockchain involved in a transaction. The reason for this, on the other hand, can be attributed to the fact that TSS, unlike Multisig, only relies on basic cryptographic elements.
THORChain native token – RUNE
Given that THORChain uses the Cosmos-Tendermint BFT consensus mechanism, which operates a proof-of-stake system, network validators are required to obtain and stake the platform’s native currency which, in this case, is the RUNE token.
The BEP2 token is used primarily for two major functions; first, as a base pair and settlement asset across various liquidity pools and, secondly, it is bonded by participants in a node as collateral using a 2:1 bond: stake ratio. In other words, for every $1M worth of assets in the liquidity pools, there would be $2m worth of RUNE bonded by the nodes.
Surprisingly, the RUNE token is not exactly used as a governance token as in the case of most DEX exchanges. Albeit, by staking the RUNE token, a node is eligible to influence the future direction of the protocol.
Governance-wise, the RUNE token is required to signal priority in the on-chain validation (which chains and assets should be added next by the network, for example). More so, to reward participants by reducing gas fees for outbound transactions as well as to pay incentives.
Talking about incentives, the THORChain Protocol encourages the node operator to ensure that the optimal amount of RUNE is bonded.
However, in order to achieve this, the platform uses a concept called ‘the incentive pendulum‘ – the goal of which is to keep the system at the most optimal state possible. To achieve an optimal state, at least 67% of all the RUNE in the system must be bonded while the remaining 33% must be staked in pools
As of press time, the RUNE token had a total market valuation of approx. $2.71 billion with a circulating supply of 271 million RUNE tokens out of a total supply of 500 million RUNE tokens.
Ultimately, THORChain provides a more scalable solution for cross-chain liquidity farming which has recently become the most sort-after event in the crypto space.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.