Switcheo Research - An Introduction to THORChain

(written 29 July 2021)

Overview

THORChain describes itself as a decentralized liquidity network that allows users to swap assets instantly at manipulation-resistant market prices. Swaps are done through permissionless cross-chain liquidity pools that allow liquidity providers to stake their assets to earn both trading fees and inflationary rewards.

Whitepaper

https://rebase.foundation/network/thorchain/specification-document-walkthrough/whitepaper

Opportunity

Before THORChain, swaps between native assets like Ethereum and Bitcoin were impossible.

THORChain provides deep liquidity for cross-chain swaps between native assets. This allows new wallets to provide in-wallet swaps between assets from different chains, without needing to hold any assets as reserve. THORChain has much room to grow if adopted by popular decentralised wallet-apps such as Metamask, Crypto.com DeFi wallet, Trustwallet and XDEFI.

Currently, older ‘store-of-value’ coins like Litecoin, Bitcoin Cash, Monero, Bitcoin, or even Dogecoin are somewhat alienated from the explosive growth of DeFi. THORChain offers holders of these coins the opportunity to pair their assets with RUNE as liquidity, allowing holders to earn interest in the form of liquidity fees and inflationary rewards. Currently, the Bitcoin-RUNE trading pair on THORSwap is earning 17% APR, and pairs like Litecoin-RUNE are earning over 21% APR. These sustainable and attractive yields offered by THORChain create huge incentives for holders of these coins to stake their assets on THORChain and capture high yields in a fully decentralized manner.

Since the RUNE token is required for every trading pair on THORChain, it captures the value of the protocol quite well. Assuming that the system is working as intended (see the THORchain incentive pendulum), for every $1 worth of asset provided as liquidity, $3 worth of RUNE must be present in the system ($2 bonded in nodes, and $1 paired as liquidity). Assuming that 1% of the Bitcoin and Ether supply is provided as liquidity on THORChain, at current prices this would equate to a RUNE value of $85.80.

You can view the RUNE value simulator here.

Competitor Analysis

Macro Trend

With more and more chains being developed and actively utilized, the need for cross-chain liquidity increases, driving up the demand for cross-chain swaps like THORChain.

If DeFi continues to grow and capture mindshare within the crypto community, holders of assets like Litecoin, Bitcoin Cash, and Monero might begin to seek out decentralized yield-bearing solutions for their holdings, and THORChain is well positioned to provide this service.

Google Trend

Tokenomics

Circulating Supply (at the time of writing): 271,444,139 / 500,000,000

Source: Rebase

For more details on the emission schedule, view the RUNE token release schedule here.

Source: THORChain

RUNE emissions are used to incentivize node operators and liquidity providers. ⅓ of the emissions are awarded to liquidity providers, and ⅔  are awarded to node operators.

RUNE deterministic pricing

As a security measure, THORChain operates by requiring that for every $1 worth of non-native asset stored on the chain, $3 worth of RUNE must be stored on-chain.

Product

The THORChain protocol is currently running and usable. Already, a number of other projects have been built upon the THORChain infrastructure. These include THORwallet, XDEFI wallet, ShapeShift, and ASGARDEX. As more projects integrate THORChain and use it for cross-chain swaps, the value proposition of RUNE increases exponentially, allowing users to perform cross-chain swaps.

There is a strong community around THORChain, and their Discord is very active with announcements and discussion. The strong branding and community around THORChain makes it relatively sticky. Furthermore, there is currently no other project that comes close to having a similar product offering.

THORChain’s current total liquidity sits around $100M, a cap set by the team. Caps are raised every week or so, and so far, the demand to provide liquidity has been very high, with the limit being reached within 2-3 hours of the cap being raised.

Risks

The crypto market has recently experienced a sharp correction. As a result, RUNE has also dropped sharply from its ATH of ~$20. On 16 July, THORchain also suffered an exploit. This resulted in a further drop in the price of $RUNE from ~$6.20 to ~$3.90 (as of 19 July 2021).

The exploit was caused by a bug which allowed the attacker to ‘trick’ the protocol using a custom wrapper contract, enabling the attacker to take around 4000 Ether. The THORchain team has stated that only liquidity providers for the ETH/RUNE pool were affected, and that they would be made whole using the THORchain treasury.

The attacker paid huge slip fees, approx $1.4m was captured by nodes, with further $1.4m by ERC20 LPs.

Only users affected are ETH LPs, and they will be made whole.

So despite the exploit, Nodes, LPs and Arbers will stand to profit considerably.

— THORChain (@THORChain) July 16, 2021

On 23 July 2021, suffered a second exploit of its Ethereum Router. This time, resulting in a loss of ~$8 million worth of assets.

THORChain has suffered a sophisticated attack on the ETH Router, around $8m. The hacker deliberately limited their impact, seemingly a whitehat.

ETH will be halted until it can be peer-reviewed with audit partners, as a priority.

LPs in the ERC-20 pools will be subsidised.

— THORChain #BRINGBACKMCCN (@THORChain) July 23, 2021

Following the exploit on 23 July, THORchain has halted all trading on its Multi Chain Chaos Net (MCCN). Trading is only scheduled to resume once audits are complete. This announcement (from the LP University discord chat) is the latest official update from the THORchain team:

Being a new technology, the risk of exploitation and attacks is ever-present. However, THORChain’s strong branding combined with the fact that it is the first-to-market product of its kind creates a wide moat around itself. As more projects integrate with THORChain, the moat grows ever wider.

THORChain is fully an open sourced protocol. Its code is openly auditable by any interested party: https://github.com/thorchain

Team

The THORChain team began as an anonymous group. However, there are now a number of key contributors who have appeared publicly: https://icobench.com/ico/thorchain/team

THORChain brands itself as a decentralised and community-driven project. Their social media following and branding is very strong:

@THORchain Twitter:   94.7k followers

@THORSwap Twitter:   10.6k followers

LP University Discord Group:  22.8k members

THORSwap Discord Group:  6.9k members

There are already numerous THORchain Twitter influencer accounts up and running:

Marketing

THORChain-related social media accounts have been growing fast:

Socialblade

Subreddit Stats

Similarweb

Roadmap

Due to the highly-decentralized nature of the THORChain project, its roadmap is somewhat unclear. This could be a positive, or a negative factor. Currently, the project seems to be reaping the benefits of decentralization, as there has been an explosion of innovation within the THORChain ecosystem. Here are a number of projects that have branched out from or built upon THORChain:

Cross-Chain DEXs:

THORswap - https://twitter.com/THORSwap

Asgardex - https://twitter.com/asgardex

Skip Swap - https://twitter.com/SKIPswap

Suipe DEX - https://twitter.com/suipe_dex

Wallets:

XDEFI wallet - https://twitter.com/xdefi_wallet

THORwallet - https://twitter.com/ThorWallet

ShapeShift - https://twitter.com/ShapeShift_io

IDO platform:

THORstarter - https://twitter.com/thorstarter

Many new projects are building upon the new technology offered by THORchain. This works in favor of THORChain and RUNE holders as it helps to grow the moat around the project. By being the first to market, THORchain has captured the attention of many builders, which is likely to lead to THORchain having the most developed infrastructure in the near future. Similar to how Ethereum has established itself as the most developed and popular smart contract blockchain, we could see THORchain situate itself as the most developed cross-chain liquidity provider.

Conclusion

RUNE is currently down from over 70% from all-time-highs (ATH). Its previous bubble-like rally during the first half of 2021 could be viewed as the result of the large amounts of hype that was built up by the community, and as a result of their Mainnet launching in April 2021 after over 3 years of building and testing.

As with all other altcoins, the price action of RUNE remains tethered to that of Bitcoin. However, assuming that Bitcoin bottoms in the near future and resumes its upward trend, we could see RUNE continue to outperform as it has done during the first half of 2021.

Disclaimer: Switcheo Labs Pte. Ltd. and the writer of this article both hold a position in $RUNE.