THORChain is a decentralised cross-chain liquidity protocol. It is a Tendermint-based blockchain that uses Threshold Signature Schemes (TSS). Unlike other cross-chain protocols, THORChain does not wrap or peg assets, rather it acts based on user action.
THORChain ensures that the process of managing vaults is byzantine-fault-tolerant. The system is able to determine how to go about the process of determining user action by monitoring deposits, withdrawals, and the process of adding and removing liquidity.
The system has the major role of providing liquidity to facilitate cross-chain transactions, with an objective to avoid centralisation while securing assets within its vaults.
Introduction to RUNE #
RUNE is the native token of the THORChian Network. It was founded in 2019 after an Initial DEX Offering (IDO) on the Binance DEX, with a total supply of 500,000,000.
The RUNE token provides incentives and helps coordinate liquidity on the THORChain system. RUNE is also used for governance on the network. however, the governance capabilities are limited only to signalling priority to assets and chains.
The token is used for validating transactions. THORNodes must post RUNE as bond before a transaction is validated. It is also used as the assets for paying fees, validators and Liquidity providers.
What are THORNodes? #
THORChain has a little over 35 active nodes currently. These nodes serve as validators of wallets and have the semblance of small fractions of centralised wallets for different purposes.
Custodian keys are held in multi-sig arrangements on these THORNodes, while liquidity pools are controlled by these Nodes in a decentralised way. Through these nodes, when a user deposits a token, maybe ETH, they deposit it into an Ethereum-looking address.
In a situation where a user wants to trade ETH to BTC or BTC to ETH, the validating nodes confirm that ETH or BTC has been received in their collective vaults and the nodes, either ETH or BTC, each sign the outbound transactions from their desired node, that is, BTC for an ETH to BTC trade, and ETH for a BTC to ETH trade. At least 2 or 3 nodes are used for a single transaction.
There can be up to 100 THORNodes. Although the positions are always being filled and emptied because in order to run a node you have to outbid other contenders. Running a node grants you rewards for an entire month until your position is taken by the next contender.
How does ThorChain work? #
In regular DEXs like UniSwap and Cub Finance, there are two major players; the liquidity providers and the traders.
The liquidity providers earn dividends from providing tokens in order to ensure that traders always have tokens available for whenever they need to perform an exchange. So, this means that when a trader wants to perform an ETH to BTC exchange, the BTC is obtained from the liquidity provided in the pools.
THORChain differentiates itself through its THORNodes which act as holders of custodian wallet keys. No transaction can be performed without 2 or 3 nodes approving the trade. They are very decentralised and serve primarily as validators through multi-sig arrangements.
THORNodes also act as a bridge to other blockchains. They act on behalf of users for cross-chain transactions while remaining anonymous. A node is changed every 3 days in order to keep the system up to date.
The system makes it more profitable to run a node than to provide liquidity through the process of posting RUNE as Bond. This way, THORNodes are expected to have twice the amount of native tokens in the liquidity pool. This means that if the LP has in total $10m worth of BTC, ETH and any other token combined, the nodes should have $20m worth of RUNE in bond.
This process ensures that the system is always correcting itself. So, if the nodes are unable to provide that amount of RUNE, they begin to channel trading frees from the LPs to the Nodes and then in the next cycle of selecting nodes, the highest bidders are selected.
Alternatively, if the RUNE provided as bond is more than the required amount, trading fees are channelled to the LPs and in the next cycle, the amount of RUNE needed for selecting a node will be less. This entire automated process is called the Incentive Pendulum.
THORChain is a decentralised exchange unlike any other. Although it performs the basic functions it is meant to perform, it does them in a seemingly different way. THORChain performs cross-chain actions without wrapping assets thanks to the THORNodes.
THORNodes serve as intermediaries that perform these cross-chain actions on behalf of the user and then validate the transaction on the chain. They are able to perform these transactions by always having twice the amount of liquidity available in the liquidity pool.
The THORChain network is highly decentralised and plans to remain that way.