THORChain
THORChain is a decentralized cross-chain liquidity protocol that allows users to swap native assets across multiple blockchains without the need for wrapped or pegged assets and it was founded in June 2018. RUNE is the native token of THORChain that owners can use to participate in the network. [1]
History
THORChain was founded on June 1, 2018. The company is a crypto-based, finance and technology organization located in Switzerland and registered in Singapore. [3]
THORChain protocol utilizes the Tendermint consensus engine, Cosmos-SDK state machine, and GG20 Threshold Signature Scheme (TSS). It operates as an independent Layer-1 cross-chain decentralized exchange (DEX) built on the Cosmos SDK. [2]
The protocol does not peg or wrap assets, it manages funds directly in on-chain vaults and secures those funds using economic security. It could be described as a "cross-chain automated market maker (AMM), like Uniswap". [4]
Overview
On September 20, 2023, BNB Smart Chain was successfully added to THORChain. Therefore, BNB and BEP-20 assets are made available for users to provide liquidity & swap. [11]
On August 21, 2023, Lending was activated on THORChain. Users can lend their native Layer-1 assets — BTC and ETH — to THORChain and borrow a USD-denominated debt with no liquidations, no interest, and no expiration. [12][13]
On November 15, 2022, Savers Vaults went live on THORChain. Savers Vaults are a way to supply single-asset liquidity on THORChain. Any user can deposit native Bitcoin, earn in-kind yield, and withdraw their principal at any time since they maintain full control of their keys. Savers Vaults was made available for every Layer-1 asset on THORChain: BTC, ETH, BNB, BCH, DOGE, LTC, ATOM, and AVAX. [19]
On June 23, 2022, THORChain announced the achievement of mainnet after 4 years of development. [17]
"THORChain has primarily been a research project. Mainnet marks the achievement of a fully functional, feature-rich protocol with a large ecosystem and strong community. It has been a long time coming and the community is very excited about this important milestone."
To celebrate the Mainnet release, the THORChain team started a ‘RUNE in a Million Campaign’. THORChain committed a total of $1 million in RUNE to Binance users through a 14-day promotional campaign from June 23rd to July 7th, 2022. [17]
Following the launch of mainnet, Cosmos' ATOM trading went live for swapping and liquidity provision on THORChain on July 28, 2022. The Cosmos Hub (ATOM) integration was done to bridge the Cosmos ecosystem to the native asset liquidity on THORChain. Users could exchange ATOM for a range of supported blockchains including BTC, ETH, BNB, DOGE, LTC, and BCH as well as ERC-20 and BEP-2 assets. [23]
On June 3, 2021, THORChain launched THORName Service (THORNames), a distributed, open, and extensible naming system based on the THORChain blockchain. THORName maps human-readable names like chris.thor to machine-readable identifiers such as cryptocurrency addresses, and metadata. THORName supports ‘reverse resolution’, making it possible to associate metadata such as a Twitter username or canonical names with a ‘home’ THORChain address. [18]
Technology
THORChain's technology is edged on its 1-way State Pegs, State Machine, and Threshold Signature Scheme (TSS) Protocol. [8]
THORChain's 1-way State Pegs allow syncing state from external chains, State Machine coordinates asset exchange logic and delegates outgoing transactions, Threshold Signature Scheme (TSS) protocol enables distributed threshold key-signing and lastly, the Bifröst Chain Client processes chain-specific transactions. [8]
Roles
There are four key roles in the system:
Liquidity Providers
Liquidity providers provide assets to the THORChain liquidity pools. They are compensated with swap fees and system rewards. Compensation is affected by factors related to the pool and the state of the network. [5]
Liquidity providers commit capital to pools that have exposure to underlying assets, thus liquidity providers gain exposure to those assets, which have free-floating market prices. While they are paid block rewards and liquidity fees, these are dynamic and may not be enough to cover "Impermanent Losses", which occur when price changes happen.
For compensation, liquidity providers deposit their assets in liquidity pools and earn yield in return. They earn tokens in RUNE and the pool's connected asset. Rewards are calculated according to whether or not the block contains any swap transactions. If the block contains swap transactions then the amount of fees collected per pool sets the amount of rewards. If the block doesn't contain trades then the amount of assets in the pool determines the rewards.
Swappers
These are THORChain actors/users who swap their digital assets for other digital assets. The network gives users access to a large variety of assets through cross-chain compatibility and simple asset listing, effective user experience through open finance protocols and permissionless access, and lastly, 1-transaction access to fast chains (Binance Chain), smart chains (Ethereum), censorship-resistant chains (Bitcoin) and private chains (Monero).
Traders
These are users who monitor pools and rebalance continually, paying fees but with the intent to earn a profit. Traders find assets that are mispriced between markets. They buy assets on markets with low prices and sell them on markets with high prices and this earns them a profit.
Traders compare the exchange rates on THORChain with the rates on external markets. If they find the price is lower on THORChain they can buy there and sell on an external market. If they find the price is lower on external markets they can buy there and sell on THORChain. This process is repeated at high frequency. Over time, price information propagates and THORChain settles with external markets.
Node Operators
THORNodes service the THORChain network and each THORNode is comprised of several independent servers. All THORNodes communicate and operate in cooperation to create a cross-chain swapping network. Node Operators provide a bond and are paid to secure the system.
RUNE
RUNE is the native token that powers the THORChain ecosystem and provides the economic incentives required to secure the network. It is used as a settlement asset which eliminates the need for a high number of currency pairs, concentrates liquidity, and provides economic security to the decentralized network. [5]
RUNE has four key roles namely: Liquidity (as a settlement asset), Security (as a sybil-resistant mechanism, and a means for driving economic behavior), Governance (signaling priority on-chain), and Incentives (paying out rewards, charging fees, subsidizing gas). [6]
Rune Tokenomics
The initial supply of 1 billion RUNE tokens was pre-minted by THORChain in 2018. THORChain burned all of the unused reserve RUNE in October 2019, which amounted to 50% of the initial maximum supply when combined with the burns on Project Surtr. [7]
The supply reduction did not impact the tokens already distributed to Pre-Sale and Initial DEX Offering (IDO) investors. [7]
The maximum supply of THORChain (RUNE) is 500,000,000 tokens all created at the genesis of the network. [5][7]
Distribution
In return for capital: 5% (SEED) and 16% (IDO) were sold for capital to start the network and give it value. In return for time and effort: 10% was allocated to a group of devs who worked since 2018. In return for bootstrap participation: 24% was given to users who participated in the bootstrapping of the network. In return for through-life participation: 44% was been placed in the Protocol to pay out to Nodes and LPs for the next 10+ years. [9]
Incentive Pendulum
The incentive pendulum on THORChain was set up to keep the network in a balanced state where the network is secure and efficient. It does this by changing the distribution of rewards to nodes and liquidity providers. [24]
The network can be categorized into 5 different main states: Inefficient, Over-bonded, Optimal, Under-bonded, and Unsafe. [25]
"Without the incentive pendulum the network would eventually end up in an unsafe state. Node operators would take advantage of this and steal funds from the network. Causing trust in THORchain to collapse and funds either being withdrawn or stolen."
The incentive pendulum ensures everyone is rewarded appropriately, stays friends, and it incentivizes all participants to keep all funds on THORchain secure. [24][25]
Governance
THORChain has little governance baked into its system. This is done so that nodes don't communicate or learn who one another is. It is important for security because it makes sure that nodes don't act together to take control. [10]
THORChain governance decides: which assets are listed/delisted, which chains are listed/delisted, when the protocol gets upgraded, and the economic limit – how many nodes can participate. [10]
Streaming Swaps
On July 26, 2023, Streaming Swaps was activated on THORChain to allow patient swappers to get better price execution by splitting large transactions into sub-swaps*.* Swappers can therefore choose between time-optimized or price-optimized swaps. [14]
Streaming Swaps break up one swap into multiple sub-swaps executed over a period of time. - the blog stated[14]
Streaming swaps work because they allow swappers access to the time domain when they swap. Previously, a swapper could only place a single swap in a moment of time, and all the liquidity needs of that swap had to be met at that moment. Arbitrage would restore the liquidity after the swap. With the ability to stream, the liquidity needs of the swap can be expanded across many moments, allowing arbitrage to “correct” the price during the swap. This leads to better price execution. [14]
"Streaming swaps should make it more viable to execute larger trades on THORChain. Slip-based fees are an innovation that allows THORChain to protect itself from asset price manipulation, but are a point of friction to swappers that want to trade large amounts. As a result, the largest trades are pushed off THORChain and to centralized exchanges where they can pay the lowest fees." - the blog stated[14]
Partnerships
THORChain x Trust Wallet
On December 14, 2022, THORChain completed its integration with Trust Wallet, a self-custodial and multi-chain wallet provider. This integration “unlocks decentralized multichain swaps for the more than ten million active Trust Wallet users, who will gain access to all native assets compatible with THORChain including BTC (not wrapped or bridged), ETH, BNB, and BUSD.” [15][16]
This partnership means that Trust Wallet users:
“can trade native assets freely while retaining full ownership of their assets, a significant development as the crypto industry reappraises the value of self-custody following the collapse of a number of centralized service providers.”[16]
Chad Barraford, Technical Lead at THORChain, commented:
“Users are now more motivated than ever to capitalize on the benefits of self-custody. The latest market developments emphasize the importance of transparency and self-custody, features that are inherent in decentralized finance (DeFi). As the industry returns to the core principles upon which it was founded: transparency, decentralization and privacy, we are proud to join forces with Trust Wallet to make self-custody as accessible as possible.”[16]
THORChain x Avalanche C-Chain
On October 4, 2022, Avalanche C-Chain native asset swaps were made available on THORChain. Users were able to add liquidity and make swaps to and from Bitcoin, Ethereum, and six other base-layer protocols. [20][22]
The Avalanche C-Chain integration meant that Avalanche C-Chain users could swap in and out of the Avalanche ecosystem without the use of bridges. Users interested in exchanging their Avalanche C-Chain assets for other crypto assets could do so at any THORChain interface. [20]
Users could also provide liquidity to THORChain’s pools and earn a yield from every swap that takes place in the liquidity pool. [20][22]
THORChain x Edge Wallet
On September 26, 2022, Edge, a self-custody exchange integrated THORChain as a swap provider, giving users access to decentralized cross-chain exchange between supported blockchains. Edge was added as an ecosystem wallet and exchange to THORChain.com. [21]
Controversy
Vulnerability Attacks
On March 28, 2023, THORChain paused its network due to new claims of a potential network vulnerability. THORChain took to X to announce it halted all trading amid reports of a potential vulnerability with a THORChain dependency that may affect the network. The decision was taken as a precautionary measure while the reports are verified - THORChain said. [26]
About eight hours after the initial announcement, THORChain reposted a halt update on X, indicating that developers and the security team have managed to identify the disclosure as credible. “However, it would require a malicious node in the last churn,” the update said, adding that THORChain had resumed trading because “no nodes can exploit the current. vulnerability.” [26]
In October 2022, the network was paused due to a software bug causing “non-determinism between individual nodes.” The network resumed and became fully functional after 20 hours of maintenance. [27]
In July 2021, THORChain also halted its network after the protocol suffered a breach, with hackers stealing $7.6 million in crypto assets. In the THORChain community Telegram channel, administrators indicated the project had the funds needed to cover users’ stolen assets but articulated a preference for the hacker to return the stolen funds in exchange for a bug bounty.[28]
“While the treasury has the funds to cover the stolen amount, we request the attacker get in contact with the team to discuss return of funds and a bounty commensurate with the discovery,” a Telegram post stated, adding that user funds “will be available when the issue has been patched & the network resumes.”[28]