THORChain (RUNE), the Blockchain that Reinvents Decentralized Exchanges (DEX)

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THORChain (RUNE), the Blockchain that Reinvents Decentralized Exchanges (DEX)
THORChain (RUNE), the Blockchain that Reinvents Decentralized Exchanges (DEX)

THORChain (RUNE) is a blockchain-based on the Cosmos infrastructure with the aim of providing a common base for cross-chain decentralized exchanges (DEX). THORChain wants to be totally decentralized: no company is behind the project; it is a self-managed community. Zoom on the particularities of this blockchain and the roles of its RUNE token.

What is THORChain?

THORChain (RUNE) is a protocol that was born in 2018. The problem that this project tries to solve comes, according to its developers, from the lack of a major element for the mass adoption of cryptocurrencies to occur: a means of an immutable and decentralized exchange.

Indeed, today, it is necessary to register on a centralized exchange like Binance or Coinbase and complete the Know-Your-Customer (KYC) procedures to trade native assets like Bitcoin and Litecoin.

Decentralized exchanges (DEX) do not allow trading this type of asset; even if solutions such as Wrapped tokens or Atomic Swaps exist, they are not efficient enough and only circumvent the problem.

For example, Wrapped Bitcoin (WBTC) is the version of Bitcoin compatible with the ERC-20 token standard on the Ethereum blockchain. It is, therefore, possible to trade WBTC on an Ethereum DEX like Uniswap. However, not only do Wrapped tokens often come from a centralized entity,  WBTC is simply not the real BTC.

Bitcoin, Litecoin and many other cryptocurrencies can only be traded on centralized platforms or through peer-to-peer intermediaries. Thus, the cryptocurrency industry still does not offer an immutable medium of exchange for this type of asset. This is where the THORChain project intends to change things.

THORChain is a blockchain based on the Cosmos SDK and uses the same consensus as Tendermint, i.e. a Proof of Stake (PoS) consensus mechanism.

This blockchain has the ambition to allow its users to exchange assets between two blockchains, all natively, in a decentralized way and without the necessary trust (non-custodial) through interfaces like the DEX  THORSwap that we recommend because it is This is currently the most complete application developed on THORChain.

There are many tools that integrate THORChain because it is, above all, infrastructure and any developer has the possibility of developing an application on top of it.

THORChain also offers the possibility of generating returns with its assets thanks to the pools of liquidity essential to its operation. The THORChain blockchain logically has a very important native token:  the RUNE.

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Logo of THORChain (RUNE), by Cryptoast

The main arguments put forward by THORChain are as follows:

  • The possibility of swapping native assets (Layer 1) on several blockchains, such as a swap between ETH and BTC, which is impossible on all DEXs;
  • THORChain executes a transaction that the user has sent without requiring any registration;
  • There are no wrapped tokens, as all assets on THORChain are native;
  • Prices are fair, transparent and no third parties are involved;
  • The efficiency of continuous liquidity pools.

The THORChain Ecosystem

First of all, here are the different actors of the THORChain ecosystem:

  • Swaps: they exchange one asset for another (ETH and BTC, for example) via the Swap function, paying the fees necessary for the swap;
  • Liquidity Providers (LPs): they deposit their assets in liquidity pools. In return, they earn interest on their deposits from traders’ swap fees and protocol block rewards;
  • Nodes: network participants who operate a THORChain node must also operate the nodes of the blockchains they support. For each THORChain node, there can be in parallel a Bitcoin node, an Ethereum node, a Solana node, etc.

THORChain Blockchain Nodes

THORChain nodes can be considered as fragments of the wallets of a centralized exchange like Binance. And instead of the centralized exchange owning the keys to these wallets, THORChain nodes own the keys to these wallets through a multi-signature arrangement.

Thus, the liquidity pools are wallets controlled in a decentralized way by the operators of the nodes. In the case of the BTC:RUNE pool, LPs deposit their BTCs in a classic Bitcoin wallet which collects all the BTCs deposited in the pool.

When a user wants to execute a swap from ETH to BTC, the THORChain nodes first detect that the ETH tokens have been successfully received in the Ethereum wallet via the Ethereum nodes, then sign the outgoing BTC transaction, which corresponds to the same value via bitcoin nodes.

Outgoing transactions are signed using the threshold signature scheme (TSS), which works with cryptography instead of a smart contract. This allows THORChain nodes to interact with chains like Bitcoin that do not natively support smart contracts. The TSS requires approval from at least  67% of THORChain nodes to sign an outbound transaction.

As of this writing, there are 102 active THORChain nodes, so 69 nodes must approve the outgoing transaction during a swap. These nodes change periodically in order to further accentuate the decentralization of the network.

To operate a THORChain node, you must have a certain amount of RUNE tokens and place them as a bond. This amount depends on the number of RUNE tokens present in all the liquidity pools. This amount is high, in the order of several million dollars. This is the mechanism called  Incentive Pendulum, with the aim of ensuring that nodes behave honestly on the network.

Finally, operating a THORChain node costs between $1,500 and $2,000 per month in terms of resources. Obviously, the nodes are remunerated in RUNE tokens for their contribution to the network.

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Figure 1: Overview of the list of THORChain nodes as of April 15, 2022

Despite these fairly important prerequisites, the number of THORChain nodes is only increasing. From 2021 to 2022, this number has increased from 31 to 102, making THORChain an increasingly decentralized protocol.

THORChain’s Liquidity Pools

Liquidity pools are the basis of how THORChain works. The RUNE token is central to this as it makes up half of all liquidity pools on THORChain. Thus, each pool has a 1:1 ratio between the RUNE token and the other token.

This also means that each token only has one liquidity pool since it can only be associated with the RUNE token, which will build liquidity for that token.

Continuous liquidity pools

Each liquidity pool has RUNE tokens, which means that the RUNE is the common denominator for all liquidity pools on THORChain. Because of this, the RUNE token binds all pools, which is why they are named continuous liquidity pools.

When a user swaps two assets on THORChain, for example, from ETH to BTC, the protocol automatically swaps his ETH to the RUNEs of the ETH:RUNE pool and then transfers these RUNE tokens to the BTC:RUNE pool. Finally, it swaps RUNEs to BTCs, and that’s what the user receives.

THORChain takes care of everything in the back-end, and the user never handles RUNE tokens. It is also thanks to this that the prices are determined on this protocol. Unlike other DEXs that use oracles, for example, THORChain uses the RUNE token that binds all pools to determine the correct exchange rate for a swap.

Exchange Rate of a Swap

Let’s say you want to swap 3 ETH for BTC.

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Figure 2: Overview of an ETH to BTC swap

Here is how THORChain will work to determine the exchange rate for this swap. First of all, it is necessary to ask for some data:

  • 1 ETH = $3,200, with 10,000 ETH in the ETH:RUNE pool;
  • 1 RUNE = $8.50, with 3.764 million RUNE in the ETH:RUNE pool;
  • 1 BTC = $40,000.

It’s also worth asking the swap formula, which is y = (x * Y * X) / (x + X)², with: 

  • x: amount of incoming asset;
  • X: amount of asset x in the pool;
  • y: amount of outgoing asset;
  • Y = amount of asset Y in the pool;

So, as we have seen, the protocol will first swap the 3 ETH to RUNE using the formula above: (3 * 3,764,700 * 10,000) / (3 + 10,000)² = 1129 RUNE.

This is how the protocol knows to swap 3 ETH for 1129 RUNE. Then these RUNE tokens will be sent to the BTC:RUNE pool and the protocol will be able to convert these 1129 RUNE into 0.24 BTC using the same formula. It’s the same principle; the protocol will therefore have automatically determined that 3 ETH = 0.24 BTC without the use of other tools such as oracles (which are often centralized) and thanks to the RUNE token, which links all liquidity pools.

This is a unique feature of THORChain.

How to Become a Liquidity Provider (LP)?

To illustrate how to deposit liquidity on THORChain, consider the ETH:RUNE pool. If you want to deposit $12,000 there, you need to deposit $6,000 in ETH and $6,000 in RUNE. To do this, there are two methods:

  • The symmetrical method: equal deposit of the two pool assets, therefore 50% ETH and 50% RUNE in the ETH:RUNE pool;
  • The asymmetrical method: deposit only ETH tokens or RUNE tokens. For example, if you want to deposit only ETH, the protocol will take care of swapping 50% of your ETH into RUNE so that the ratio is 1:1 in the pool.
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Figure 3: Depositing liquidity into a pool (symmetrical method)

Depositing cryptocurrency into a liquidity pool grants you a share of that same pool. For example, if you have staked the equivalent of $10,000 in the BTC:RUNE pool which has a total value of $1 million, your share in the pool will be 1%. Then, if liquidity is added to the BTC:RUNE pool, your share will be reduced and vice versa.

If the price of one deposited asset changes, the LPs will receive more or less of the other asset. We can see liquidity pools as portfolios of two cryptocurrencies that balance each other to always maintain the same dollar value for the two tokens in the pool.

For example, if the price of ETH doubles since you deposited ETH in the ETH:RUNE pool, the value of your deposited assets is no longer at a 1:1 dollar ratio. Traders or bots will directly take advantage of this arbitrage opportunity to swap ETH out of the liquidity pool in order to sell it elsewhere and generate profits.

For the LP, the difference will come from the fact that it will have less ETH and more RUNE (still at the 1:1 balance thanks to the arbitrages) staked compared to before. This is called the impermanent loss. This is a cost that LPs have to bear. Thus, the correlation of a pool’s assets is a factor to consider in mitigating this risk.

Of course, LPs generate passive returns for their contributions.

The Rewards of Liquidity Providers (LPs)

LPs are remunerated relative to the share of the pool they own. By depositing assets in the BTC:RUNE pool, the LP will receive remuneration in BTC and RUNE via the swap fees, which are notably composed of slippage fees and transaction fees.

The slippage fee depends on the demand regarding the liquidity of the desired pool. The demand for liquidity is defined as the amount of the transaction relative to the total value of the pool used. Concretely, the higher the amount of the transaction, the higher these fees will be, and all the more so if the pool has little liquidity.

It should be noted that there are gas/mining fees since the transactions are carried out on-chain.

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Figure 4: Overview of liquidity pools on THORSwap along with their APYs

Finally, part of the protocol reserve, which is financed in particular by the network fees which relate to the use of the THORChain network, also remunerates the LPs in RUNE tokens for each block.

2/3 of these block rewards are allocated to THORChain nodes, and 1/3 are allocated to LPs. This last form of remuneration guarantees payment even in periods when few swaps are made.

Tools that integrate THORChain

THORSwap is just one of the many tools in the THORChain ecosystem. Here is a non-exhaustive list of other available tools:

  • XDEFI Wallet: Web extension that serves as a cross-chain wallet. It is non-custodial and allows the exchange, storage and sending of cryptocurrencies and non-fungible tokens (NFTs) on 11 blockchains, including THORChain;
  • THORWallet: wallet and mobile DEX allowing swap and access in particular to the liquidity pools of THORChain;
  • THORYield: mobile application offering the possibility of following the evolution of its portfolio and its liquidity pools with a dedicated interface by offering numerous statistics.

What are the Roles of the RUNE Token?

The RUNE is the native token of THORChain. It is a utility token with different roles within the THORChain ecosystem.

As we have seen, RUNE tokens are used to make up 50% of the protocol’s various liquidity pools. They are therefore essential to generate passive income on THORChain, and this encourages locking a lot of RUNE tokens.

In addition, a mechanism called Incentive Pendulum requires that for each RUNE token existing in a pool, double RUNE tokens must be pledged by THORChain nodes to secure the network by ensuring the proper conduct of validators. A very high amount of RUNE tokens is therefore locked by this mechanism.

The RUNE token is also used to vote for proposing new liquidity pools. Finally, RUNE tokens are used to remunerate THORChain nodes and LPs as a block reward with a fixed issuance.

In the future, the algorithmic stablecoin THOR.USD will use the RUNE token in the same way as the Terra USD (UST) uses the LUNA token.

THORChain Fundraising

THORChain has raised $2.43 million through its successive fundraising rounds:

$600,000 in seed round for $0.01 per RUNE token;

$1.61 million in private sale for $0.02 per RUNE token;

$220,000 in the Initial DEX Offering (IDO) on Binance for $0.032 per RUNE token;

The THORChain Team

THORChain is a decentralized project. It has no founder or permanent team. All means of communication, including the project’s website, are managed by the community. The project’s Twitter account states in November 2019:

“THORChain has no CEO, Founder or Directors. Although there are project, research and technology managers, these roles will disappear. The developers know what to do. They self-organize on Gitlab […].”

How to Buy RUNE Tokens?

RUNE is available on many exchanges like Binance, FTX, KuCoin, Gate.io, Crypto.com and THORSwap.

Explanations for Buying RUNE on Binance

  • Register on Binance;
  • You will receive an email and need to click on a link to verify your account;
  • Deposit funds on the platform;
  • Click on the Market menu and search for the  RUNE/USDT pair;
  • All you have to do is buy RUNE for the amount of your choice;
  • Congratulations, you are now in possession of RUNE tokens.

Our Opinion on THORChain

The THORChain protocol has very solid foundations. It still has a lot to prove, but its unique approach allows its ecosystem to possess significant advantages.

THORChain innovates and has the qualities to offer a credible alternative to more traditional DEXs, which are dedicated solely to a chain like Uniswap with the Ethereum blockchain.

It should, however, be noted that few tokens are available on THORChain at the time of writing these lines. The protocol must accelerate the integration of new tokens to provide sufficient supply to attract new users and enough liquidity.

THORChain also has competition from cross-chain protocols like  Wormhole, which are becoming increasingly popular and allow tokens to be easily transferred from one chain to another.

This project is on a good trajectory; THORChain unveiled in early 2022  THORFi – a suite of financial products developed on the protocol which notably includes an algorithmic stablecoin, the THOR.USD, whose mechanics are modeled on the stablecoin Terra USD and the LUNA.

The roadmap also indicates that new blockchains will be integrated into the network in the near future, such as Terra (LUNA), anonymous cryptocurrencies and even Ethereum layer 2 solutions. New features will also appear, such as synthetic assets or THORNames, a service that allows you to name your wallet address.

THORChain may be heading towards an ecosystem similar to Binance but completely decentralized. Only the future will tell us if this project will really succeed in convincing the followers of cryptocurrencies in the long term.