What Is THORChain? $RUNE - Asia Crypto Today

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THORChain is an independent blockchain that bridges various external networks, enabling cross-chain transfers and functioning like a decentralized exchange. This guide explores the intricate details of THORChain, from its background to its functionalities and its native token, RUNE. By the end of this guide, you will have a robust understanding of THORChain and how it revolutionizes the liquidity of cryptocurrencies in a decentralized manner.

Background

Incepted in the year 2018, THORChain emerged from the belief that the prevailing practice of employing centralized exchanges for cryptoasset transference across diverse blockchains was intrinsically defective. The creators of THORChain saw the future of such exchanges in decentralized platforms, commonly referred to as decentralized exchanges (DEXs). Their vision propelled them to architect an autonomous blockchain that could establish connections with external networks, thereby enabling cross-chain exchanges, an operation quite akin to a DEX.

One of the main challenges confronting DEXs is the critical need for ample liquidity. Traders are naturally inclined towards those platforms which can guarantee minimal slippage. Paradoxically, it is these traders who can supply the necessary liquidity to avoid slippage. As a strategic countermove, THORChain’s team proposed the application of a revised Bancor’s “smart token” model, coined as Continuous Liquidity Pools (CLPs). These reservoirs of readily available assets furnish traders with liquidity, thus eliminating the need for a direct buyer or seller.

A distinguishing feature of THORChain is its incentive program, wherein users who contribute tokens to a liquidity pool are rewarded with RUNE, the network’s indigenous token. Concurrently, token proprietors have the option to stake their assets and thereby collect fees generated from other users who engage with the pool.

With its foundation on the Tendermint protocol, THORChain utilizes Tendermint BFT (Byzantine Fault Tolerance) as its consensus protocol and embraces Proof-of-Stake (PoS) to ensure Sybil resistance. The PoS feature integrates a validator system where stakeholders can stake RUNE tokens to operate network nodes and verify transactions. THORChain also provides token holders with the opportunity to delegate to these validators. This structure maintains a balance of power among validators while allowing delegators to earn a share of each block reward.

What is THORChain?

THORChain is a cutting-edge, multi-currency protocol that incorporates cross-chain technology, facilitating the exchange of tokens among disparate networks, such as Bitcoin and Ethereum. It is designed to handle tokens that do not originate from the same network.

When it comes to cryptocurrency trading and investment, decentralized exchanges are the go-to platforms for crypto swaps – for instance, swapping Bitcoin for Ethereum. However, the inherent limitations of native networks make this operation unfeasible. THORChain addresses this gap by establishing an interoperable environment where users can directly trade different cryptocurrencies within the protocol, eliminating the need for third-party involvement.

The paramount objective of THORChain is to saturate the liquidity of all supported cryptocurrencies. In doing so, it seeks to mend the disjointed and liquidity-starved markets of buyers and sellers who wish to transact in various cryptos, independent of central authorities.

Another unique facet of THORChain is the provision for users to earn returns through the THORChain decentralized exchange. By depositing their cryptos into liquidity pools, users can swiftly borrow cryptocurrency. This feature stands as a testament to THORChain’s commitment to user benefit and financial innovation.

The Operational Mechanism of THORChain

Constructed on the Cosmos SDK and Tendermint, THORChain serves as a layer-1 network. It functions as a permissionless Decentralized Exchange (DEX) that transcends chains. The asset vault of THORChain, which doesn’t rely on a specific leader, is secured through the use of Threshold Signature Schemes (TSS). A layered Byzantine Fault Tolerance (BFT) consensus mechanism is achieved through the combined use of Tendermint and TSS, which necessitates a two-thirds majority consensus for funds to enter or exit the primary TSS vault.

There are four critical user categories within the THORChain ecosystem:

Swappers, who leverage liquidity pools for asset swapping.

Liquidity providers, who augment liquidity to pools and receive rewards.

Node operators, who offer bonds and get compensated to fortify the system.

Traders, who supervise and readjust pools with profit-making intentions.

In contrast to other cross-chain protocols, THORChain does not employ wrapping of assets before swapping. Instead, it utilizes native assets on THORChain to execute autonomous, transparent asset swaps.

Asset swaps are made possible by liquidity pools, composed of assets furnished by Liquidity Providers and secured by a network of node operators. Liquidity providers deposit their assets in THORChain’s liquidity pools to generate yield, comprising swap fees and system rewards. The protocol allows anyone to contribute liquidity to an existing pool, thereby rendering THORChain permissionless. Moreover, THORChain is non-custodial in nature, as only the original depositor can withdraw the assets they’ve placed in the pool. Liquidity providers also have the privilege to propose new asset pools, given that these assets are tokens of a supported chain within the ecosystem.

Node operators, referred to as THORNodes, are autonomous entities that communicate amongst themselves to form a cross-chain swapping network. They receive fees as rewards for every swap conducted, in exchange for the network security they provide. A prospective node operator must provide a RUNE bond, held as collateral to ensure the operators act in the best interest of THORChain. The total bond must be twice as large as the pooled RUNE.

During an asset swap, swappers send their assets to THORChain and in return receive another asset. For example, when swapping BTC for ETH, swappers transfer their BTC to THORChain, triggering a BTC to RUNE swap followed by a RUNE to ETH swap. The ETH is then dispatched to the swapper from a THORChain vault. This process allows THORChain to execute native swaps without wrapping assets.

Market prices on THORChain are managed by arbitrage traders, subsequently determining the value of asset swaps. These traders exploit mispriced assets across different markets to profit from price discrepancies, thereby naturally regulating THORChain market prices, eliminating the need for oracles.

RUNE

RUNE is the native cryptocurrency of THORChain. It operates as the foundational pair within the network, permitting users to swap RUNE for any other supported asset. With a total supply of 500 million, RUNE serves four principal functions: settlement, security, governance, and incentives.

Settlement Role of RUNE

As a settlement asset, RUNE underpins all liquidity pools, assisting the exchange between two pools. A 1:1 ratio of RUNE to the asset is essential for each pool. To illustrate, a pool containing $100,000 in BTC must maintain an equivalent $100,000 in RUNE.

Security Aspect of RUNE

RUNE plays a crucial role in ensuring the security of the network. Node operators are obliged to bond twice the quantity of RUNE they contribute to a pool. These bonded RUNEs are held as collateral to confirm that node operators act in the network’s best interest.

Governance Function of RUNE

RUNE token holders are empowered to determine the asset or chain they wish to prioritize. They exercise their preference by casting their liquidity votes. For instance, a pool that attracts the highest RUNE commitment will be accorded a higher priority.

Incentive Role of RUNE

Block rewards and swap fees are distributed to liquidity providers and node operators in RUNE, following a predetermined emission schedule. Additionally, RUNE can also be employed to settle gas fees.

Conclusion

THORChain marks an essential step forward in the world of blockchain technology, creating an ecosystem where interoperability and liquidity are no longer challenges but pillars of an efficient system. Its approach to cross-chain transfers, liquidity pooling, and decentralized exchanges creates an environment where users can directly exchange various cryptocurrencies without needing intermediaries.

It’s remarkable how THORChain has cleverly leveraged RUNE, its native token, to ensure settlement, security, governance, and incentives within the network. As we move forward, THORChain’s progressive features will likely have a profound impact on the cryptocurrency market. We hope this Ultimate Guide to THORChain has provided you with the insights you need to understand and engage with this game-changing platform.