The topic for today is going to be Thorchain, a Decentralized Exchange (DEX) that allows for doing swaps between different native cryptocurrencies. And it does it without the use of a wrapped version of the cryptos, it does it directly across the blockchains.
For the usual disclosure, I am not a financial advisor, I don’t even work in finance at all. My day job is as a telecommunications software engineer. Treat everything you read here as some educational resources and not financial advice.
Thorchain was created to allow swapping between native cryptocurrencies, without needing to go through the process of wrapping one of them. This allows you to do things such as swap Bitcoin (BTC) for Ethereum (ETH), without first using a service to convert it to Wrapped Bitcoin (wBTC).
It operates similar to how other Decentralized Exchanges (DEXs) such as Pancakeswap, by using Liquidity Pools. For more details on how those work, you can click that link for my full article on the subject, but essentially people will provide liquidity in the form of two tokens, This facilitates swaps between the pair which generate trading fees that paid back to the liquidity providers.
It utilizes what it calls the Multi Chain Chaos Network (MCCN), where it has nodes which are plugged into different blockchains to facilitate creating the trading swaps between the native assets there, and it’s native token THORChain (RUNE).
Thorchain has it’s own blockchain, using a Proof of Stake (PoS) consensus mechanism. It is made up of nodes which have a number of features built in. First, they contain incoming vault addresses, protected by TSS keys, where all the incoming crypto that is getting converted to another is sent. There is also outgoing vaults controlled by each node that are responsible for sending out the crypto on the other side.
They also contain a full node for each of the connected blockchains so they can monitor and create transaction on them. And finally there is the bridging protocol, which they have called Bifrost, which makes the connection between the Thorchain blockchain, and the other networks that are connected.
The easiest way to piece together how all this works is to walk through an example and see how it all flows together. Let’s say that we have ourselves some Ethereum (ETH) that we are looking to convert into Bitcoin (BTC).
The Ethereum (ETH) would get sent to the incoming vault address for the Thorchain network, where it will be picked up by the Bifrost protocol, and a transaction is created on the network. Once consensus is reached and the transaction is approved and recorded on the blockchain, a swap transaction is created to swap it over to Bitcoin (BTC).
After the swap has been processed, the Bifrost protocol kicks in again and uses one of the outgoing vaults on one of the nodes to create a Bitcoin (BTC) transaction to send the funds over to the users wallet.
On the Thorchain network, staking is referred to as bonding. It also has a very high bar, 1,000,000 THORChain (RUNE) tokens bonded, in order to become a validator, and there is no delegation mechanism to create staking pools. This also helps to protect against bad actors, as it is harder to get an excessively large staked pool by collecting delegations. There is also a slashing mechanism to act as another safeguard.
The validators are setup into two different pools, active and standby, and through a process called churning, they are swapped out every 5000 blocks. The oldest and least reliable validators are taken out of the active pool and swapped with ones in the standby pool. The churning process helps ensure that all the validators get a chance to be part of the validation process.
Since a validator can only really steal the funds from it’s outgoing vault, as it would not have the signatures required to try and pull from the incoming vaults, the bonding process provides the economic incentive not to try and pull this off. The outgoing vaults are only filled up to 25% of the total value of the bond, and if one of the validators acts in bad faith, their bond is slashed by the stolen value plus an extra 50%.
The THORChain (RUNE) token is the base currency that powers the entire network. Every liquidity pool is setup as a pair with the native currency on the external blockchain, paired with THORChain (RUNE). It is also used to provide the incentives to the liquidity providers.
Transaction fees for the swaps and everything on the Thorchain network are also paid for using THORChain (RUNE). it is also used to subsidize the gas prices on the outgoing transaction side of it.
Finally, THORChain (RUNE) is a governance token which holders can use to vote on things like which blockchain should be added to the network next.
Since the nodes require access to the vaults, and handing out all the private keys would be very clearly a bad security risk. To combat this, Thorchain employs the Threshold Signature Scheme (TSS), which is a much better version of a multisig wallet. It’s a baseline cryptographic function, and doesn’t rely on smart contracts, like multisig does, so it is not reliant on anything specific from the underlying blockchain.
Most of the funds in the network are stored in the inbound vaults, which are protected by the TSS keys. This makes them slower, but more secure, which is why most of the value is stored there. The outbound vaults are much smaller, restricted to 25% of the total bond on the node, and each of the nodes runs their own. This makes them much faster, but less secure, so they are limited in how much they hold, and they get topped up as needed from the incoming vaults.
The network employs a fixed network fee, as well as a slippage based trading fee. This means that trades that cause a greater slippage in price of the asset, are charged a higher trading fee, which makes it harder for bots and other traders to extract value from the liquidity pool using something like a sandwich attack.
Thorchain is a pretty useful Decentralized Exchange (DEX) which allows a cheaper way to move between different native cryptos. It is important to keep in mind that the blockchain powering the network is a fair bit more centralized that say the Ethereum (ETH) itself, but with the strong economic incentives, it manages to help shuffle some of that risk off.
It’s seeing greater adoption and growth, and as long as that continues, I can see this being a very large platform in the future providing a very valuable function.
Find me on social media on Twitter, Facebook, Instagram, Telegram and noise.cash.
If you enjoyed this content, you can check me out every weekday. My posts start at my website, but you can also find them cross posted at Publish0x, LeoFinancial, Hive, and read.cash.
I also post a weekly price update video every Saturday over on my YouTube channel, where I will be discussing the weekly price action for some of the major cryptos. You can also sign up for my newsletter which I send out every Friday with news and whatnot from the crypto space, delivered right to your inbox!
You can also find links to resources such as research and news sites over at this link.
Want some more content right now? Check out some of my previous posts:
Ethereum Fee Burn (EIP-1559)
A few referral links, in case you are interested in the service, and it also helps me out.
Binance – large centralized exchange – referral link saves you 10% on trading fees
Coinbase – basic crypto exchange – referral link gets you bonus crypto on first deposit
Cointiply – very good crypto faucet and earning site – no bonus for you on this referral unfortunately
Originally Posted On My Website: https://ninjawingnut.xyz/2021/07/09/thorchain/