Thorchain, a standalone blockchain for decentralized crypto trading, is set to go live Tuesday, potentially lubricating the gears of a global $2 trillion market six months into a bull run.
Three years in the making (a lifetime in crypto), Thorchain works a lot like other automated market makers (AMMs) such as Bancor and Uniswap, but with an important difference: It enables trades of real cryptocurrencies from completely different blockchains – not “wrapped” or synthetic versions. With each new blockchain that can trade over Thorchain, the so-called “chaosnet” expands.
“April 13 is delivering on the initial promises of the white paper: Delivering on a multichain chaosnet,” Chad Barraford, the technical lead at Thorchain, told CoinDesk in a phone call. “You’ll be able to swap freely from one chain to another, one asset to another.”
If it works as intended, users will be able to make such swaps with real currencies (not an ersatz version like wrapped BTC on the Ethereum network) and without having to trust an intermediary. AMMs have been the leading kind of decentralized exchange (DEX) that are key to the decentralized finance (DeFi) boom on Ethereum, the second-largest blockchain.
Bringing trustless trading to many of the biggest chains while skipping the friction of making a copy of a coin on one chain seems likely to drive a lot of activity. Plus, centralized exchanges that hold your assets have a bad habit of losing them.
The Thorchain launch is also a reminder of the long-term competitive threat DEXs pose to centralized venues like Coinbase ahead of that company’s hotly anticipated stock listing.
Thorchain will start by allowing trades of bitcoin (BTC), ether (ETH), litecoin (LTC), bitcoin cash (BCH) and Binance Chain’s BNB. More will come shortly. For example, Barraford said the code for dogecoin (DOGE) is basically ready.
For details about which cryptocurrencies have been scoped out for addition, interested readers can look at Thorchain’s regular technical updates on Medium.
Thorchain is based on Tendermint, the consensus protocol associated with the Cosmos ecosystem.
Thorchain uses a mechanic that’s very similar to that pioneered by Bancor. Sticking with the mythological motif, the native token of Thorchain is known as RUNE. Every token in Thorchain is matched with an equal amount in value of its RUNE token.
When a user initiates a trade between, say, BCH and LTC, under the hood it becomes two trades. First, the user trades BCH for RUNE and then the RUNE gets traded for LTC. Provided it’s all done quickly, this should work out to basically the same thing as swapping directly between BCH and LTC.
Bancor does this with its BNT token. Uniswap, in its first version, paired every ERC-20 token it listed with ETH, though in version 2.0, Uniswap became a lot more flexible, enabling pairs of any two tokens.
Unlike Bancor or Uniswap, however, Thorchain is capable of trading the real assets of multiple unconnected blockchains, not representations of them.
“If you want to swap layer 1 real bitcoin with layer 1 real ETH, you can do it,” Baraford said. The team is developing an Asgard X wallet that will be built to interact directly with Thorchain and all its included blockchains, so it can store the coins from those networks.
Cosmos has already launched inter-blockchain communication (or IBC) and Thorchain will integrate with that soon, which will enable it to add many more blockchains. In its most recent developer update, the team reported that “a development partner has been found and will begin building IBC bridges.”
While Thorchain’s functionality is not live, its token is available and traded. As of this writing, it’s trading at around $11.20, up almost 90% in the last 30 days, according to CoinGecko.
Thorchain has been around a long time. The first version was started and largely abandoned in 2018, according to Barraford.
Since then, a cryptographic innovation known as threshold signatures have been invented and the Cosmos ecosystem has developed much more fully. In 2019 the fundamental idea of trustless exchange between blockchains was revised and redeveloped to incorporate these advances in the technology.
“In a threshold, you have multiple people coming together to make a single signature without anyone having access to the private key,” Baraford explained.
The team that came together around building Thorchain decided to stay largely anonymous and to avoid attention as much as possible.
The core team has a stated goal of disbanding in summer of 2022 and turning everything over to RUNE holders.
As on any AMM, the project needs liquidity providers to get involved in order to work as effectively as possible. If there are few parties willing to buy or sell an asset, the final price of a trade can vary widely from the participants’ expectations. The deeper each pool is, the less such slippage there will be on any trade. Users can post an equal amount of any token it covers and RUNE to the system and start earning trading fees.
“You can provide bitcoin into the network and that bitcoin can earn a bitcoin yield,” Baraford said.
Thorchain also addresses an issue for those who supply liquidity to networks, known as impermanent loss. That is, if the value of one token in a pool goes down relative to the other, the value of their deposit can shrink in fiat terms even though their total deposit in the underlying tokens is increasing.
“One of the important things about this network is it has impermanent loss protection,” Barraford said, as long as you stay in for 100 days.
That said, Barraford noted there’s seldom impermanent loss when liquidity providers stay in that long. However, Thorchain effectively takes a snapshot of the value of any liquidity deposit. If the user’s fiat value has fallen below where it was when they deposited due to rebalancing, Thorchain will make up for it out of RUNE reserves.
Liquidity providers will also earn new RUNE emissions on their deposit. “The amount of RUNE that goes into each pool is dependent on how much revenue has come from that pool in that block,” Barraford said. The freshest RUNE goes to the most active pools.
Very nearly all of the RUNE reserves will be distributed in the first two years of operation.
Multicoin Capital released a report on Thorchain in February, noting that the Austin, Texas-based investment firm has a major position in its RUNE token. The co-authors wrote:
“Most investors have exposure to the blockchains they think will win; however, few actually have exposure to the growing heterogeneity of the overall ecosystem. … [W]e believe THORChain’s RUNE token is the best way to invest in this thesis.”