What is ThorChain? (Overview, Consensus, RUNE Tokenomics)

ThorChain, also known by the market ticker RUNE, is a decentralized cross-chain liquidity protocol that looks to make trading between blockchains as easy on decentralized exchanges as it is on centralized ones.

As such, ThorChain’s main purpose is to facilitate the seamless swapping of assets across various blockchains, removing the need for an intermediary and can do so in a way that improves the liquidity of their liquidity pools, as compared with other decentralized exchanges.

But why a project such as ThorChain is important, and what makes it stand out from the crowd?

Today we find out!

ThorChain was founded in 2018 by a group of anonymous developers, some of which are now known, such as Chad who serves as the ThorChain technical lead for the network.

At its core, ThorChain looks to make it as easy as possible to transfer cryptocurrencies from one blockchain to another.

The difference between somewhere like ThorChain and Binance or Coinbase, the two largest centralized exchanges, is that ThorChain requires nothing but an active internet connection and a crypto-compatible wallet to use.

The issue with centralized exchanges is they are at the mercy of the countries and governments they belong to.

As an example, if a government decides to make cryptocurrencies illegal in that country, then the centralized exchanges are forced to comply.

On the other hand, decentralized exchanges don’t have any leadership structure and are hosted entirely by their users.

In essence, without turning off the internet itself it’s very hard to shut down a decentralized exchange.

But how does ThorChain work exactly?

ThorChain is a Proof-of-Stake based blockchain that was built using the Cosmos SDK and uses Tendermint to confirm its transactions.

Proof-of-Stake is a type of consensus mechanism which selects validators and verifiers to confirm their transactions based on how much they have staked to the network.

This is typically more scalable and energy-efficient than Bitcoin’s Proof-of-Work.

Next, the Cosmos Software Development Kit, or SDK, is a blockchain development framework that allows developers to create their own customized blockchain networks using pre-made assets and tools which allows developers to quickly assemble and customize various components to suit their specific needs.

Key to its functionality is Tendermint, which is at the core of its Proof-of-Stake consensus mechanism and provides a secure and efficient Byzantine Fault Tolerant to ensure the accuracy of its transactions.

The BFT makes it more challenging for bad actors to attack the network through a clever system of allocating nodes, which essentially allows for a third of all participants to act dishonestly while still ensuring a correct answer is produced.

Lastly, the Inter Blockchain Communication Protocol, or IBC, enables interoperability between different blockchains in the Cosmos ecosystem, creating a decentralized internet of independent blockchains.

In short, this framework simplifies blockchain development and offers both flexibility and scalability while maintaining security and compatibility with other blockchain networks.

Now that we know what ThorChain is and how it works, let’s find out what makes ThorChain unique!

Although ThorChain does allow you to trade between blockchains, how it does so is what makes it unique.

When you trade BTC for ETH on the ThorChain network, you are actually depositing BTC into their Bitcoin Vault.

Once the ThorChain Bitcoin Vault receives your BTC deposit, it automatically sends ETH from their Ethereum Vault to your ETH wallet.

These vaults are essentially the wallets that allow for ThorChain’s automated trading.

Although ThorChain is an Automated Market Maker, which is a clever way of saying a decentralized exchange that determines its prices automatically through mathematical algorithms and trades without the need for trust between individuals or human oversight to operate, it does not behave like your typical AMM.

Instead of letting algorithms determine the price, ThorChain lets arbitrage traders keep their prices at the correct levels.

Arbitrage trading is when you find a difference in the price of an asset on two different platforms and then buy from where the price is cheaper to sell where its price is more expensive, keeping the profit.

Unlike most other decentralized exchanges, ThorChain requires all their trading pairs, known as a Liquidity Pool, to be paired with their token RUNE.

A Liquidity Pool uses a ratio of two assets in a pool to determine their price.

These pools are funded by individuals who in return receive a percentage of the protocol fees and trading fees on pairs they provide liquidity for.

The benefit of using RUNE for their trading pairs is partially due to their staking reward mechanics, but also to increase the efficiency of the network, and to improve liquidity by reducing the overall number of pools available for the Liquidity Provider’s invested assets to be spread across.

But how about the tokenomics?

Unlike most Proof-of-Stake tokens, RUNE is fundamental to the ThorChain ecosystem and is required for trading on their platform.

Like most other Proof-of-Stake tokens, it can also be used for staking, which secures the network and comes with rewards for doing so.

In total there will only ever be 500 million RUNE tokens, all of which were pre-mined as is customary for Proof-of-Stake tokens.

The initial distribution of the tokens was as follows.

5% was sold during a seed sale, and a further 16% was sold as an IDO to generate income for the project during its infancy.

10% was allocated to the development team who brought the network to life.

24% was given to users who participated in bootstrapping the network.

In computing, bootstrapping is a type of language compiler which translates computer code from one computing language to another.

Finally, the remaining 45% will be used to pay the network nodes and Liquidity Providers.

All of these are vested and will be released in small installments periodically over the next 10+ years.

In conclusion, ThorChain looks to make cross-chain trading as efficient as possible while doing so in a way that remains fully decentralized.

Having a clear use case, it is likely we will see ThorChain with us for a while, though ultimately its level of success will come from the quality of management at the top.

Though, as always, nothing is ever guaranteed in crypto.