What is THORChain? (RUNE)
The Beginner’s Guide to RUNE
THORChain is a decentralized cross-chain liquidity protocol that allows users to swap assets between blockchain networks.
One of the most significant innovations to come out of the decentralized finance (DeFi) space is the automated market maker (AMM) model. AMMs allow crypto users to deposit a specific ratio of cryptocurrencies to a so-called liquidity pool. Participants then use these pooled funds to execute trades, with the pooled cryptocurrencies acting as the trading pair.
DeFi protocols like Uniswap and Balancer use liquidity pools to let users swap assets in a peer-to-peer, decentralized manner. However, the majority of AMMs only allow trades to take place within a single blockchain network, such as Ethereum.
THORChain provides a solution in the form of a decentralized exchange (DEX) based on the Cosmos software development kit (SDK). Its AMM-based protocol provides the backend technology needed to swap cryptocurrencies between blockchains that were previously non-interoperable.
The RUNE token powers the THORChain network. RUNE is used as a pairing token that accompanies each asset in the platform’s liquidity pools. As such, RUNE serves as the second token that users deposit in the liquidity pool to execute trades against, driving both its utility and value on the network. RUNE is also used to pay for fees, provide a basis for governance and secure the THORChain network.
Who created THORchain?
THORChain was created by a team of developers at the Binance Dexathon in 2018. Because the founders and developers have largely remained anonymous, the THORChain community drives much of the company’s public-facing image.
The project raised $1.5 million in an initial DEX offering (IDO) in July 2019. That same month, the THORChain team introduced BEPSwap as their first market product. BEPSwap is a DEX that enables swaps between BEP-2 tokens on the BNB Chain (previously known as Binance Smart Chain).
THORChain released the multichain chaosnet (MCCN) in April 2021, allowing for cross-chain swaps between Bitcoin, Ethereum, Litecoin and other assets. However, in July 2021 the network suffered back-to-back hacks resulting in more than $13 million lost.
Developers worked to fix bugs, refine the code and improve network security, eventually restoring 4 of 5 networks supported by the THORChain protocol by October 2021. Bolstering the project’s renewal, a private token sale that same month brought in $3.75 million, led by IDEO CoLab Ventures.
How does THORchain work?
THORChain supports an ecosystem of products and services that integrate the network’s cross-chain infrastructure. Platforms like THORSwap — the first multichain DEX using THORChain’s network as a front-end interface — use THORChain to facilitate cross-chain swaps. THORSwap allows users to choose which two assets they want to swap and the protocol automatically calculates the fees based on network activity.
Swaps occurring on THORChain are made possible by the network’s use of a continuous liquidity pool (CLP) in which RUNE is used as an intermediary for every swap.
When any 2 assets are swapped on THORChain, they are actually swapped between 2 different pools. This is because each liquidity pool on THORChain pairs RUNE with the available assets. For example, if a THORChain user wanted to exchange USDT for ETH, they would first trade their USDT for RUNE on one pool before trading their RUNE for ETH in the next pool.
The THORChain state machine swaps one asset for RUNE, then moves it to a second pool and swaps RUNE for the user’s desired asset. This is accomplished without the user ever needing to convert their crypto into or take custody of RUNE.
With THORChain’s CLP liquidity model, the protocol is able to respond to fluctuating liquidity demand.
Additionally, there are four main roles for THORChain participants:
- Liquidity providers (LPs): LPs provide assets to liquidity pools in return for block rewards and swap transaction fees. Rewards are calculated based on the pool’s activity and the share of the LP’s tokens represented within the pool.
- Swappers: Swappers are the user base who trade between various crypto assets on THORChain.
- Traders: THORChain relies on arbitrage traders who seek out assets that are either undervalued or overvalued on THORChain as compared to their market prices on other exchange platforms. Arbitrageurs rebalance liquidity pools by either buying or selling assets across multiple exchanges until those assets’ prices in the pool reflect their current market price.
- Node operators: Node operators bond a set amount of RUNE to support the network and participate in THORChain’s proof-of-stake consensus mechanism. These operators are instructed to remain anonymous and are rotated in and out of the network based on their reliability in a process called “churning.”
Why does RUNE have value?
THORChain’s cross-chain functionality relies on the use of its native token, RUNE. Since every asset is paired with RUNE in its own liquidity pool, RUNE is necessary for every swap on the network.
Rune is also used to:
- Pay fees
- Reward liquidity providers
- Secure the THORChain network (by staking RUNE)
- Compensate nodes’ transaction fees
- Provide governance for the THORChain protocol
THORChain nodes must bond a certain amount of RUNE according to the value of assets in the network’s liquidity pools. This disincentivizes node operators from acting maliciously and drives additional demand for RUNE.
Initially, there was a maximum supply of approximately 1 billion RUNE tokens, but the supply was reduced to 500 million in 2019. After this token burn, 44.09% of tokens were allocated to service nodes, 10.4% for operational costs, 10% to the community and 10% to the team and advisors. The remaining tokens were retained for project funding.
Why buy RUNE?
RUNE is used by participants in the THORChain network who act as liquidity providers, node operators and more. Those who wish to participate in arbitrage trading on THORChain may also want to hold RUNE to take advantage of any possible arbitrage opportunities that arise from imbalances in THORChain liquidity pools.
Crypto traders may also see interoperability between chains as a driver of value for individual cryptocurrencies like RUNE. Speculative traders may even choose to hold RUNE purely on the basis that prices might increase in the future as the platform develops additional functions for the token.