What is THORChain?

When it comes to DeFi, automated market makers (AMMs) are some of the most important and widely used protocols in the ecosystem. The underlying protocol behind many decentralized exchanges (DEXs), AMMs feature algorithmically controlled liquidity pools to facilitate different kinds of trades for users. However, most AMMs are built on a specific blockchain network and only allow trades to take place within that network. 

Enter THORChain, a cross-chain liquidity protocol, and the first DEX to allow users to swap cryptocurrencies on different blockchain networks. THORChain aims to provide a decentralized, non-custodial solution for users looking to swap crypto assets on different chains.

But how exactly does THORChain accomplish this? What is THORChain used for, and why might it appeal to proponents of decentralization and self-custody? In this article, we’ll break down all the details behind THORChain, the protocol’s utility token RUNE, and more.

Let’s dive in.

What is THORChain?

THORChain is an independent Layer 1 blockchain built on the Cosmos SDK. It supports an entire ecosystem of products and services, acting as the backend for their user interfaces. As a non-custodial, cross-chain liquidity protocol, THORChain enables users to exchange cryptocurrencies across different blockchains, without the need for wrapped or pegged assets. In THORChain documentation, the protocol is described as a ‘cross-chain automated market maker (AMM), like Uniswap”’ or a ‘decentralized Binance’”, aiming to provide users with fair, transparent pricing, without users needing to trust a centralized third party. 

The History of THORChain

THORChain was created by a team of developers at the Binance Dexathon in 2018. After raising $1.5M in its initial DEX offering (IDO) in July 2019, the team launched BEPSwap – a dex for tokens on the BNB Chain. 

In 2021, THORChain unveiled the multichain chaosnet (MCCN) which enabled cross-chain swaps between Bitcoin, Ethereum, and Litecoin, among other assets. According to the THORChain developers, the MCCN saw $9.2 billion traded over 3.4 million swaps from 71,000 unique traders and earned nearly $80 million in fees through its existence. A year later, in July 2022, THORChain finally launched its mainnet blockchain.

How Does THORChain Work?

Continuous Liquidity Pools

To power swaps, THORChain uses a continuous liquidity pool (CLP), meaning that its native token, RUNE, is used as an intermediary for every swap. This means that when you swap between two assets on THORChain, you’re actually swapping between two different liquidity pools. For example, if you swap from BTC to ETH, your BTC is deposited to a BTC: RUNE liquidity pool, requiring a gas fee in BTC. RUNE then moves from that pool to an ETH: RUNE pool), and THORChain sends you ETH from one of its vaults (requiring an ETH gas fee. This all happens via the THORChain state machine, without the user needing to convert their crypto or hold RUNE at any point. 

THORChain’s CLP model allows the protocol to respond to shifting demand for liquidity, and the RUNE token is at the heart of that. 

Rune Token: Explained

RUNE is the central token of the THORChain network, used by liquidity providers, node operators, and other participants in the THORChain network. RUNE tokens had an initial maximum supply of 1 billion, though this was reduced to 500 million via a token burn in 2019. Additionally, new RUNE tokens will be created after the supply is exhausted, keeping the tokens anti-inflationary. 

The current allocation is as follows: 44.09% of tokens to service nodes, 10.4% for operational costs, 10% for the community, and 10% for the team and advisors with the remaining tokens put aside for future project funding.

RUNE fills four important roles for the protocol: settlement asset, network security, governance, and incentives.

Settlement Asset

RUNE is the settlement asset on the protocol,  meaning that it is paired with each of the assets in THORChain’s liquidity pools at a 1:1 ratio. In other words, a pool with $1,000 in BTC must also hold $1,000 in RUNE. Furthermore, RUNE is needed for every swap that happens on the network. To swap from Bitcoin to Ether, for example, a user’s assets go first from BTC to RUNE in one liquidity pool, and then RUNE to ETH in another. 

Network Security

To help secure the network, THORChain node operators must bond twice as many RUNE tokens as there are in liquidity pools. Just like in proof-of-stake networks, node operators that act maliciously stand to lose their bonded RUNE tokens in a process called slashing. This incentivizes them to work for the best interests of the network.

Governance

RUNE holders can effectively vote for the pools that they want with their liquidity: the pools with the most liquidity added become the most active. 

Block Rewards

Liquidity providers and node operators receive rewards on a set emission schedule in addition to the swap fees they earn.

THORChain Participants

There are four categories that participants in the THORChain ecosystem fall into: 

Liquidity Providers (LPs)

Arguably the most important participant in any DEX, LPs deposit assets to liquidity pools to be used in swaps. In return, LPs receive block rewards and transaction fees from swaps. The rewards that an individual LP receives are based on the total activity of the pool, and the LP’s share of tokens in that pool.

Swappers

These are the base users of THORChain, who simply trade between different cryptos on the platform.

Traders

Arbitrage traders also play a vital role in THORChain. These traders look out for assets whose value on THORChain is either higher or lower than it is on the wider market and buy or sell these assets across different exchanges for profit. These traders help keep liquidity pools balanced, buying or selling the undervalued or overvalued assets until their prices fall back in line with the market.

Node Operators

Like other proof-of-stake networks, THORChain is made up of Nodes, aka THORNodes, that are responsible for verifying and writing transactions to the blockchain. Each of these nodes is made up of a cluster of independent servers run by node operators. As with any proof-of-stake network, these node operators have to set aside a certain amount of RUNE tokens, according to the total value of assets in the network’s liquidity pools. This not only drives demand for RUNE, but it’s also vital in keeping node operators from acting against the network’s interests.

Notably, THORChain maintains a level of decentralization by rotating node operators in and out of their roles in a process called “churning”. 

Streaming Swaps

Streaming Swaps are a feature activated on THORChain in July 2023 allowing users to split their large swap transactions into sub-swaps. Streaming these sub-swaps over time exposes swappers to better price execution as the liquidity needed to complete the swap can be spread across time, allowing arbitrage to keep the price of the asset in line with market value during a swap. Users also get to choose between time-optimized or price-optimized swaps when streaming swaps. 

What Is THORChain for?

Before THORChain launched, it was not possible to trade cryptocurrencies across different networks natively on DEX. The only way to do decentralized swaps was via atomic swaps or by first wrapping a token and swapping that (e.g. swapping wBTC for ETH). As a result, centralized exchanges became the most viable way to swap cryptocurrencies across networks – antithetical to the founding philosophy of crypto. THORChain solves this issue first and foremost, providing users with a decentralized, noncustodial avenue to swap crypto from different blockchains.

THORChain via SwapKit: Seamless, Decentralized Swaps via Ledger Live

Overall, THORChain is a well-established option for crypto traders looking to enjoy decentralized swaps while maintaining control over their crypto.

And the best part? You can use THORChain and many other swap providers from the safety of your Ledger hardware wallet. Indeed, thanks to Ledger Live Desktop’s integration withTHORChain via SwapKit, you can easily manage and execute your crypto swaps while staying in control every step of the way. Plus, there’s no need to leave the app, undergo a complex KYC, or create an account to use THORChain through Ledger Live Desktop. 

THORChain integration in Ledger Live is powered by SwapKit.dev – an industry-leading API + SDK that abstracts the complexity of THORChain services with a battle-tested infrastructure ensuring enterprise-level performance.

So what are you waiting for? You can use Ledger as you join the movement towards decentralization and enjoy the peace of mind that comes with secure self-custody.