THORChain is a cross-chain decentralized protocol that allows native swaps between different blockchains.
Automated market makers (AMMs) are decentralised exchanges (DEX) that pool liquidity from users and price the assets within the pool by using algorithms. The exact mechanics vary from exchange to exchange, but generally, AMMs offer deep liquidity, low transaction fees, and 100% uptime for as many users as possible.
Liquidity Providers (LPs) are network participants who deposit their assets into these pools (i.e. virtual, asset-specific reservoirs), and by doing so, come to own a share of that particular pool for as long as they retain their assets within. In exchange for adding their assets to the pools, LPs earn rewards, as swappers (who use pools to exchange assets) incur fees, which are proportionally distributed to the pool owners. Some protocols also boost the liquidity APY by emitting block rewards (for example, $BNT by Bancor and $RUNE by THORChain).
THORChain is an independent blockchain that operates as a Layer 1 cross-chain decentralised exchange (DEX). Built using the Cosmos SDK, THORChain enables the exchange of assets across disparate blockchains in a non-custodial manner. THORChain is the backend for many user interfaces.
Key selling points of THORChain are:
The ability to swap Layer 1, or native, assets across multiple chains - e.g. native BTC to ETH swap.
No user-registration required - simply send a transaction and THORChain will execute it.
No wrapped assets - all assets are natively secured.
Transparent, fair prices, without relying on centralised third-parties.
Continuous Liquidity Pools that maximise the efficiency of the protocol.
➜ An Introduction to THORChain for Bitcoiners
THORChain features a native token RUNE, which owners can use to participate in the network and is used to pay for the swap/gas fees for RUNE pairs. RUNE has specific utility within the THORChain ecosystem, as it fills four key roles:
Settlement Asset
Network Security
Governance
Incentives
RUNE as a Settlement Asset
RUNE is the settlement asset for all pools, so a 1:1 ratio of RUNE:ASSET is required for pooling. For example, a pool with $100,000 in BTC will necessarily hold $100,000 worth of RUNE. Within a pool, all assets will have a 50% pairing with RUNE regardless of how assets are added or withdrawn.
RUNE for Network Security
In order to provide network security, THORChain requires twice as many RUNE to be bonded by Node Operators as there is RUNE pooled. For this security provision, node operators are economically incentivised to work within the network’s best interest.
RUNE for Governance
Users can vote with their liquidity (RUNE:ASSET symmetrically added) for the pools they want to be active. The pools with the most liquidity (i.e. deepest) become active.
RUNE as Incentives
Block rewards are paid to Liquidity Providers and Node Operators on a set emission schedule - which are in addition to swap fees.
Swaps in THORChain use native assets. Example: When a swap from RUNE to BTC occurs, RUNE is sent into THORChain from the user and BTC is sent out from one of THORChain’s vaults - Inbound gas is paid in RUNE, Outbound Fee is paid in BTC.
When Swapping from BTC to ETH, BTC is sent into THORChain from the user and ETH is sent out from one of THORChain’s vaults. Internally, once the BTC is received, RUNE moves from the BTC pool to the ETH Pool - thus it is a double swap (BTC:RUNE, RUNE:ETH). Inbound gas is paid in BTC, Outbound Fee is paid in ETH. See Swappersfor more information.
Alongside the obvious investment risks of any asset, with liquidity provision, there also comes the risk of impermanent (price-divergent) loss. The bigger the divergence of price between the two assets, the more you are exposed to impermanent loss.
When you provide liquidity in a liquidity pool, the two assets are bound together by the system because it will ensure that both sides of the pool have the same value. If the price of your deposited assets changes in the wider markets, then swappers will sell one side of the pool for the other. Thus your assets are continuously sold "on the way up" or "on the way down". In fact, your assets are sold at a price that is an average of the starting price and ending price. If you then compare your original deposited assets with what you finally get, you will think you "could have got a better price based on today's value"
This is called impermanent loss because the losses are only realised when you withdraw from the pool. If the ratio swings to 5x (25.5% IL) but comes back to the same ratio when you entered the pool and withdrew your liquidity at that time, you will not have suffered any impermanent loss. It is similar to traditional finance’s unrealized losses. However, when you withdraw your liquidity from the pool at any other time, the loss becomes real and permanent. The fees you earn are generally able to compensate for those losses, or you may experience no loss at all and withdraw well compensated for your time in the pool.
LPs are encouraged to provide liquidity in pools that they are bullish on, or neutral on (don't care what the final price is). If an LP provides assets in a pool that they become bearish on, then they will be emotionally affected by the price draw-down, and may pull their assets out and realise a permanent loss.
Getting started with THORChain
THORChain offers a suite of decentralized and permissionless services:
Swapping cross-chain between native assets, e.g. from native BTC (on the Bitcoin blockchain) to native ETH (on the Ethereum blockchain).
Savings with native assets, e.g. native BTC, and earning yield paid in the same native assets.
Lending out native assets, e.g. native BTC, as collateral to take out over-collateralized loans in any native assets, e.g. native BTC or native ETH.
Liquidity Pools (LPs): Depositing native assets, e.g. native BTC, to provide liquidity asymmetrically.
*THORChain does NOT currently support Taproot addresses (BTC, LTC or otherwise).
For all the above services, users do not need to hold (or even be aware of) the RUNE token. They just need to choose from a plethora of Frontend User Interfaces (Wallets and Exchanges) to interact with THORChain. For instructions, troubleshooting and support, please contact the respective User Interfaces support channels.
The RUNE token is the native asset on THORChain’s own sovereign blockchain. Users who want to hold RUNE, deposit into LPs symmetrically, and/or bonding into nodes, will need a wallet which can hold RUNE. Check here for a list of wallets which support RUNE.
Users can swap for RUNE, from THORChain directly, using any of the Frontend User Interfaces; or acquire from supported centralized exchanges.
There are four key roles in the system:
Liquidity providers who add liquidity to pools and earn fees and rewards
Swappers who use the liquidity to swap assets ad-hoc, paying fees
Traders who monitor pools and rebalance continually, paying fees but with the intent to earn a profit
Node Operators who provide a bond and are paid to secure the system.
Providing liquidity to THORChain liquidity pools.
Liquidity providers provide assets to the THORChain liquidity pools. They are compensated with swap fees and system rewards. Compensation is affected by a number of factors related to the pool and the state of the network.
Liquidity providers commit capital to pools which 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.
Liquidity providers should not consider they are entitled to receive a specific quantity of their assets back when they deposit, rather that they will receive their fair share of the pool's earnings and final asset balances.
Liquidity providers deposit their assets in liquidity pools and earn yield in return. They earn tokens in Rune and the pool's connected asset. For example, someone who has deposited in the BTC/RUNE pool will receive rewards in BTC and RUNE.
Yield is calculated for liquidity providers every block. Yield is paid out to liquidity providers when they remove assets from the pool.
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.
How a block with swap fees splits the reward. In this example, 1000 RUNE is being divided as rewards:
Pool Depth (RUNE)
Fees
Share (of Fees)
Rewards
Pool A
1,000,000
1000
33%
333
Pool B
2,000,000
0
0%
0
Pool C
3,000,000
2000
67%
667
Total
6,000,000
3000
100%
1000
How a block with no swap fees splits the rewards. In this example, 1000 RUNE is being divided as rewards:
Pool Depth (RUNE)
Fees
Share (of Depth)
Rewards
Pool A
1,000,000
0
17%
167
Pool B
2,000,000
0
33%
333
Pool C
3,000,000
0
50%
500
Total
6,000,000
0
100%
1000
This ensures that yield is being sent to where demand is being experienced - with fees being the proxy. Since fees are proportional to slip, it means the increase in rewards ensure that pools experiencing a lot of slip are being incentivised and will attract more liquidity.
Ownership % of Pool – Liquidity providers who own more of a pool receive more of that pool's rewards.
Swap Volume – Higher swap volumes lead to higher fees. Higher fees lead to higher rewards for liquidity providers.
Size of Swaps – Swappers who are in a hurry to exchange assets will tend to make larger swaps. Larger swaps lead to greater price slips and therefore higher fees.
Incentive Pendulum – The Incentive Pendulum balances the amount of capital bonded in the network versus pooled. It does this by changing the amount of rewards given to node operators versus liquidity providers. Sometimes rewards will be higher for liquidity providers to encourage them to deposit assets; sometimes the opposite. Learn more.
Change in Asset Prices -- If the price of the assets change, then liquidity providers will receive more of one and less of the other. This may change yield if yield is being priced in a third asset, ie, USD.
Depositing assets on THORChain is permissionless and non-custodial.
Liquidity providers can propose new asset pools or add liquidity to existing pools. Anybody can propose a new asset by depositing it. See asset listing/delisting for details. Once a new asset pool is listed, anybody can add liquidity to it. In this sense, THORChain is permissionless.
The ability to use and withdraw assets is completely non-custodial. Only the original depositor has the ability to withdraw them. Nodes are bound by rules of the network and cannot take control of user-deposited assets.
Liquidity can be added to existing pools to increase depth and attract swappers. The deeper the liquidity, the lower the fee. However, deep pools generally have higher swap volume which generates more fee revenue.
Liquidity providers are incentivised to deposit symmetrically but should deposit asymmetrically if the pool is already imbalanced.
Liquidity providers can withdraw their assets at any time. The network processes their request and the liquidity provider receives their ownership % of the pool along with the assets they've earned. A network fee is taken whenever assets are taken out of the network. These are placed into the network reserve.
Liquidity providers earn a yield on the assets they deposit. This yield is made up of fees and rewards.
Fees are paid by swappers and traders. Most swaps cause the ratio of assets in the liquidity pool to diverge from the market rate.
This change to the ratio of assets is called a 'slip'. A proportion of each slip is kept in the pool. This is allocated to liquidity providers and forms part of their staking yield. Learn more about swapping.
Rewards come from THORChain's own reward emissions. Reward emissions follow a predetermined schedule of release.
Rewards also come from a large token reserve. This token reserve is continuously filled up from network fees. Part of the token reserve is paid out to liquidity providers over the long-term. This provides continuous income even during times of low exchange volume.
Learn about how factors affecting yield and how yield is calculated.
Passive liquidity providers should seek out pools with deep liquidity to minimise risk and maximise returns.
Active liquidity providers can maximise returns by seeking out pools with shallow liquidity but high demand. This demand will cause greater slips and higher fees for liquidity providers.
Liquidity providers must have assets to deposit and their assets must be native to a supported chain. There is no minimum amount to deposit in existing pools. However new assets must win a competition to be listed – larger value deposits will be listed over smaller value deposits.
Liquidity providers must pay for security of their assets, since security is not free. This "payment" is the requirement for liquidity providers to hold RUNE, which acts as a redeemable insurance policy whilst they are in the pool. Holding RUNE allows liquidity providers to retain an ability to economically leverage nodes to ensure security of assets. When the liquidity provider withdraws, they can sell their RUNE back to the asset they desire. H
The only direct cost to liquidity providers is the network fee, charged for withdrawing assets (pays for the compute resources and gas costs in order to process outbound transactions). An indirect cost to liquidity providers comes in the form of impermanent loss. Impermanent loss is common to Constant Function Market Makers like THORChain. It leads to potential loss of liquidity provider purchasing power as a result of price slippage in pools. However, this is minimised by THORChain's slip-based fee.
Liquidity providers are not subject to any direct penalties for misconduct.
The yield of a pool on THORChain is calculated using a metric called Liquidity Unit Value Index (LUVI) which can be viewed on Midgard.
When a user deposits assets into a liquidity pool, they are given ownership of Liquidity Units which represent a percentage of ownership of the pool. LUVI is a measure of the relative value of each liquidity unit and is independent of price.
Where:
The yield of a pool uses LUVI value data from the previous 30 days and extrapolates an APR if that performance is repeated over the course of a year. A period parameter may be used to change the number of days of data that are taken into consideration.
Factors that affect LUVI:
Swap fees, block rewards, and pool donations increase LUVI and are the primary yield sources
An increase of the synthetic asset liability of a pool decreases LUVI
An increase in ASSET Depth or RUNE Depth of a pool increase LUVI
Changes in the ratio of ASSET Depth and RUNE Depth in a pool change LUVI
Changes in ASSET Price or RUNE Price do not necessarily change LUVI.
THORChain's value proposition for Swappers.
On THORChain, users can swap their digital assets for other digital assets. The network aims to give users access to:
A large variety of assets through cross-chain compatibility and simple asset listing
Superior user experience through open finance protocols and permissionless access
1-transaction access to fast chains (Binance Chain), smart chains (Ethereum), censorship-resistant chains (Bitcoin) and private chains (Monero).
Users can swap any assets which are on connected chains and which have been added to the network. Users can swap from any connected asset to any other connected asset. They can also swap from any connected asset to RUNE.
THORChain manages the swaps in accordance with the rules of the state machine - which is completely autonomous. Every swap that it observes is finalised, ordered and processed. Invalid swaps are refunded, valid swaps ordered in a transparent way that is resistant to front-running. Validators can not influence the order of trades, and are punished if they fail to observe a valid swap.
Swaps are completed as fast as they can be confirmed, which is around 5-10 seconds.
Swaps on THORChain are made possible by liquidity pools. These are pools of assets deposited by Liquidity providers, where each pool consists of 1 connected asset, for example Bitcoin, and THORChain's own asset, RUNE. They're called Continuous Liquidity Pools because RUNE, being in each pool, links all pools together in a single, continuous liquidity network.
When a user swaps 2 connected assets on THORChain, they swap between two pools:
Swap to RUNE in the first pool,
Move that RUNE into the second pool,
Swap to the desired asset in the second pool with the RUNE from (2)
The THORChain state machine handles this swap in one go, so the user never handles RUNE.
See this example for further detail and the page below for broader detail on Continuous Liquidity Pools.
LiquidityGetting StartedThe output of a swap can be worked out using the formula
where
x is input asset amount
X is input asset balance
y is output asset amount
Y is output asset balance
The BTC.RUNE pool has 100 BTC and 2.5 million RUNE. A user swaps 1 BTC into the pool. Calculate how much RUNE is output:
This user swaps 1 BTC for 24,507.40 RUNE.
The cost of a swap is made up of two parts:
Outbound Fee
Price Slippage
All swaps are charged a network fee. The network fee is dynamic – it's calculated by averaging a set of recent gas prices. Learn more about Network Fees.
Note that users who force their swaps through quickly cause large slips and pay larger fees to liquidity providers.
Balancing pools to exploit price deltas between markets.
Prices on THORChain are maintained by profit-seeking traders. Traders find assets that are mispriced between markets. They buy assets on markets with low prices and sell them on markets with high prices. 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.
This is how THORChain avoids the need for oracles and how prices are set.
A swap takes place in the BTC/RUNE pool. This leaves the pool unbalanced. The ratio on THORChain is 20:1 BTC:RUNE, but is 16:1 on external markets. This means that RUNE is undervalued on THORChain.
Traders can now buy cheap RUNE on THORChain and sell it for a profit on external markets. To do so, they swap BTC into the pool and get RUNE out. They sell this RUNE on external markets and make a profit.
The economics of the swap formula mean that traders should aim to restore balance to the pool in a single trade. Rebalancing should be done incrementally. If larger rebalancing trades are attempted, arbitrage may not be profitable for traders.
Specifically, each rebalancing trade should be 40–50% the imbalance size. So if the imbalance starts at $100 in value, the first rebalancing trade should be between $40–50. This will leave the imbalance at $50–60. The next rebalance should be $25–30. This process repeats until a satisfactory balance is restored.
Trading profits are impacted by liquidity on THORChain and on external markets. As an example, if the price of the asset in a THORChain pool is $1.20, but the same asset on an external market is $1.00, then someone can buy off that external market and sell into the THORChain pool for profit.
If both markets are infinitely deep, then the following will occur:
Buy on External Market for $1.00, no price slip.
Sell on THORChain for $1.20, no price slip.
Total Profit: 20%
The trader can then continue to arbitrage for a profit of 20% continuously.
If both markets have finite liquidity, but one is much deeper than the other, then the one of the markets will slip in price after the trade. However, the trader will experience a price that is roughly the average of the price before and after the trade:
Buy on External Market for $1.00, no price slip.
Sell on THORChain for $1.20, realised price of $1.10, price slip to $1.00.
Total Profit: 10%
After the trade, there is no more price differential, but the trader made 10% in profit. The trader has made the pool price equal to the secondary market. They have transferred price information from one market to another.
If both markets have low liquidity, then the trader is attempting to make trades that slip each market towards each other:
Buy on External Market for $1.00, realised price of $1.05, price slip to $1.10.
Sell on THORChain for $1.20, realised price of $1.15, price slip to $1.10.
Total Profit: >10%
The market now has no more price differential. The trader has made each market equal to each other.
THORChain does not offer explicit incentives to traders – it does not reward or punish them. Trading profits are determined by the capacity of traders to seek out and capitalise on price differentials between THORChain and external markets.
The majority of arbitrage opportunities will be exercised by software bots. These are under development by 3rd party entities and will be released in due time. They will be open-source and available for anybody to run.
Node Operators
THORNodes service the THORChain network, of which there is intended to be initially 120. Each THORNode is comprised of several independent servers. All THORNodes communicate and operate in cooperation to create a cross-chain swapping network.
THORNode OverviewNode Operators earn 67% of the system income when it is stable. You can read more here:
THORNode OverviewIncentive PendulumFollow these setup up instructions
Cluster LauncherNode Operators should stay anonymous and never socially signal that they are running a node.
There are a variety of tools available in the ecosystem for Node Operators, such as the Telegram Alerts bot:
AlertingThe most important aspect is that Nodes must pay for their Bond, since this is a core assumption to the security of the network. If a node pays $1m for their bond, then they will never try to steal assets unless if they can access more than $1m of funds. If they can, then they will make a profit.
If delegation was permitted, a Node Operator that paid $100k in RUNE, can possibly receive $900k in delegated funds to qualify and meet the $1m bond requirement. They will now contemplate stealing assets the moment they get access to more than $100k in capital, which is likely.
Nodes must pay for their bond to ensure the economic assumptions of the network are upheld.
THORChain makes private delegation possible, because it does not erode towards the issues discussed above.
Private Delegation requires Node Operators to know and whitelist in their bonders, and there can only be up to 100 per node. This assumes the bonders are in trust circles with their operators and have their own recourse to ensure operators act in accordance to their obligations. From the point of view of THORChain, a solo node is no different to a delegated node. The network will operate identically.
In addition, there is no discretion as to fee commissions per operator. This means bonders will prioritise on engaging with operators based purely on their trust circles, not fees.
An overview of the asset and its four key roles.
RUNE is the asset which powers the THORChain ecosystem and provides the economic incentives required to secure the network. RUNE has four key roles which are described below.
Liquidity (as a settlement asset)
Security (as a sybil-resistant mechanism, and a means for driving economic behaviour)
Governance (signalling priority on-chain)
Incentives (paying out rewards, charging fees, subsidising gas)
Since RUNE is pooled 50:50 alongside external assets in its pools, when the value of those assets increase/decrease, the RUNE pooled will also increase/decrease by being arbed out or in. The RUNE unit value may not change, but the quantity of RUNE in the pool does. This means the system is always aware of the value of the assets it is trying to secure - it's simply the quantity of RUNE in all its pools.
Once it is aware of the value of the assets it is securing, it can use incentives to ensure security of those assets.
Since RUNE is the pooled asset, incentives can be paid directly into each pool. This extra capital is owned by the liquidity providers, and over time, slowly "purchases" the paired asset via arbitrage. Thus RUNE liquidity incentives can drive real yield to LPs.
Without a native settlement currency, each asset would need to be pooled with every other asset, which would eventually result in hundreds of new pools to be created for just one new asset, diluting liquidity. Having RUNE as the base pair allows any asset to be guaranteed to swap between any other asset.
No. of Assets
(eg. BTC, ETH)
No. of Pools
(Arbitrary Pairs)
No. of Pools
(RUNE Pairs)
n
pools = (n*(n-1))/2
pools = n
12
66
12
24
276
24
100
4950
100
Sybil-resistance refers to the ability to prevent someone masquerading as many identities in order to overcome a network. Bitcoin uses Proof-of-Work (one-cpu-one-vote) to prevent a network take-over. Ethereum 2.0 will use Proof-of-Stake (32-eth-one-vote) to prevent a network take-over.
THORChain is a Proof of Bond network instead. THORNodes commit a bond in order to be churned in. However, this bond isn't just used to identify a node (give them a voting slot), it is used to underwrite the assets in the pools. If the node attempts to steal assets, then their bond is deducted to the amount of the assets they stole (1.5x), and the pools are made whole. Additionally, if nodes misbehave their bond is slashed, ensuring reliable service.
The Incentive Pendulum ensures that Nodes are incentivised to continually buy and bond enough Rune each time to maximise their gains - which is a maximum when there is 67% of RUNE bonded and 33% pooled in pools. If the pools are holding $100m in capital, then the value of RUNE in the aggregate bond is $200m. Thus all assets can be underwritten.
The bond is extremely liquid - any RUNE holder can immediately enter or exit their position since RUNE is the settlement asset in all pools. Thus, when a node churns in, the cost basis of their bond is known to them and not an arbitrary figure. This means a node bonding $1m in RUNE will never contemplate making a decision to steal <$1m in capital from the network, else they will lose overall.
While THORChain strives to be governance-minimal, there are some parts of the protocol that use committed capital to signal priority. This is the case for the asset listing process, where every few days a new asset can be listed as a pool. In a queue of standby assets, the one with the deepest commitment of RUNE is the one that is listed first.
Additionally, if a connected chain is no longer economically valuable, then all liquidity providers in that chain can leave. If a pool is empty, it will be delisted, and this will cause the network to immediately sever ties with that chain in a process call a "ragnarok".
THORNodes each occupy one of the 100 slots in the system can can vote on changing network parameters using a mechanism called node-mimir.
RUNE is the native currency of THORChain and is consumed as transaction fees on the network. All swaps are charged both a fixed network fee, as well as a dynamic slip-based fee. This prevents various attack paths such as denial-of-service attacks, as well as sandwich attacks on a pool. Learn more about fees here:
FeesThe network continually consumes gas as it makes outgoing transactions (as well as internal transactions). Gas on networks such as Bitcoin and Ethereum becomes complicated fast, so THORChain doesn't make much of an effort to track every minutia of gas consumed. Instead, nodes are free to use at-will the base assets BSC.BNB, ETH.ETH, BTC.BTC, etc in order to pay for gas. These assets are used directly from the vaults. THORChain then observes outgoing transactions, reports on the gas used, and then pays back the liquidity providers in those pools to the value of twice the amount of gas used (in RUNE).
After fees are charged and gas is subsidised, then THORChain computes the block reward, divides it based on the Incentive Pendulum algorithm, and then pays out to Bonders and Liquidity providers.
This drives Nodes to bond the optimal amount, and pays Liquidity providers for their contribution of liquidity.
Learn about the Incentive Pendulum here:
Incentive PendulumIn addition to the roles mentioned above, RUNE’s price has two factors; 1 a deterministic value based on the liquidity within the network and 2; a speculative premium.
This 2:1 bond:stake ratio, combined with the 1:1 pool ratio, means that the amount of RUNE needed in the network is three times the amount of the non-RUNE assets locked. Thus, if $1,000,000 worth of non-Rune tokens are staked in THORChain, the market cap of RUNE will be at least $3,000,000. And like any token, stock, or asset in the world of finance, speculation around future value encourages additional upward price pressure.
The 3:1 ratio is just the minimum or the deterministic value of RUNE.