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One of the purposes of Bitcoin's existence is to disintermediate value transfer without permission, because Bitcoin has its own ledger, protected by encryption and PoW game mechanisms, and it can do this. However, the problem now is that there is not only one Bitcoin chain, but also multiple chains such as Ethereum and EOS. The ledger of each chain is different. How to realize value transfer between different chains?
This involves cross-chain issues. The traditional solution is often through a centralized exchange, such as converting BTC to ETH. This exchange method requires the participation of centralized exchanges. Or, by tokenizing BTC into ERC20 tokens, value transfer can also be realized on Ethereum. So, is there a permissionless disintermediation method that can directly realize asset exchange between different chains?
That is, the transaction of cross-chain assets is realized without going through a central institution. This is what Thorchain is trying to do. Blue Fox has been paying attention to Thorchain before, mainly focusing on whether it can become a cross-chain Uniswap. The Uniswap model has achieved certain success, but can Uniswap of the cross-chain model achieve success? Worthy of attention. The Thorchain mainnet has not yet been launched, and it still needs to prove itself in practice.
Thorchain: Uniswap that wants to become a cross-chain Uniswap is a token exchange protocol based on the Ethereum chain. It is a decentralized model and does not require permission. Anyone can provide liquidity or exchange tokens through its automatic market maker model. So far, this model has been successful. However, this success is currently mainly based on Ethereum. Other public chain assets cannot be directly market-made and exchanged on Uniswap. Thorchain wants to be a permissionless decentralized cross-chain Uniswap.
In other words, users can directly exchange assets on different chains such as BTC, ETH, EOS, etc. on Thorchain, instead of mainly redeeming ETH and ERC20 token assets on Uniswap. This also means that if users hold BTC assets, they can be directly exchanged for ETH, EOS and other assets through Thorchain's liquidity pool. In this process, one of the most important attributes is that it does not require permission and disintermediation, otherwise it will not exist. Simply put, in order to realize the cross-chain exchange of assets, the participation of nodes is required. Thorchain is a network composed of these nodes that realize cross-chain exchange of assets.
These nodes run Thorchain's software and are anonymous. They cannot know each other's identities to prevent collusion. In addition, in order to prevent the network from being controlled, active nodes run periodically. After a period of time, some nodes will be randomly kicked out of the network and new nodes will join in at the same time. Nodes that have been kicked out can also be rejoined. Finally, these nodes do not participate in governance and cannot change system rules.
Thorchain's nodes create addresses of different chains to receive assets on different chains such as BTC, ETH, and EOS. When these addresses receive assets, the node records these events on Thorchain. Thorchain will synchronize the transaction status of the external network. The system will track the transferred assets, transaction ID and other related information, sender address and receiver address, etc.
However, it does not track all external network transactions, but synchronizes transactions related to Thorchain. After the node sees the transaction related to Thorchain, it will send the transaction information ("witness transaction") to the network. The "witness transaction" has a standard structure, so no matter which network the transaction comes from, it is the same in Thorchain's view. Nodes need to reach a consensus on the "witness transaction". If 67% of the nodes in the network agree, then the "witness transaction" will be confirmed.
Nodes that submit incorrect information will be punished. If the node is operating normally, it will receive block rewards and some transaction fees. When the node leaves the network, it can get back the initial deposit and the rewards it earns. RUNE's value capture RUNE is Thorchain's native token. It is the foundation for Thorchain's security and the key to cross-chain asset exchange. So, from the perspective of value capture, what is the use of RUNE?
RUNE is Thorchain's settlement asset
To exchange assets on Thorchain, all must pass RUNE. For example, if a user converts BTC to ETH, it will be done through RUNE.
RUNE acts as the node's margin and liquidity pool assets
Thorchain is a network of nodes. Thorchain is a PoS chain, and its nodes need to lock a deposit to participate in block production. There is no identity restriction on becoming a node. Anyone can become a Thorchain node. Just send their native token RUNE to Thorchain's main repository (the address where the deposit is stored). When the node deposits enough RUNE, it will be randomized Choose to become the active node. In order to ensure the security of Thorchain's network, in its design orientation, 67% of the RUNE assets participating in the Thorchain network are used as the node's margin and 33% as the liquidity pool asset. RUNE's liquidity pool includes external assets and original assets RUNE. All external assets are connected through RUNE.
Due to this role of RUNE, as the liquidity pool assets increase, the value of RUNE also rises. In addition, similar to Uniswap, the share deposited by the liquidity provider will be calculated to obtain corresponding rewards and benefits. The model for users to exchange tokens is similar to that of Uniswap. This means that RUNE is not only an important basic asset to realize Thorchain's security, but also an important asset to realize its liquidity. This will bring a lot of RUNE locks. At present, it is impossible to know how large the amount of RUNE lock will reach.
However, there is a related relationship here. As the liquidity pool assets increase, as the transaction volume increases, the value of RUNE will also increase, otherwise it cannot guarantee Thorchain's network security. In order to ensure the security of Thorchain, the node margin must be higher than the assets of the liquidity pool, otherwise the node has an incentive to steal the assets of the liquidity pool. Of course, it is not that the higher the value of the deposited margin, the better. If the node locks too much funds, it is not conducive to the liquidity pool to provide more liquidity.
In Thorchain's design, it believes that its best configuration is 67% of RUNE as a margin, and 33% of RUNE enters the liquidity pool. At the same time, this also means that the increase in the value of RUNE is deeply related to the development of its basic business. Of course, there is also a scalability problem. If the value of RUNE is not improved, then its liquidity pool cannot be expanded. If the value of RUNE increases as the liquidity increases, this is a win-win situation.
RUNE captures transaction fees
Like Uniswap, users need to pay a fee to exchange tokens. Fees include gas fees and transaction fees. Its network fees will be priced using RUNE. Transaction fees will be treated as system revenue and distributed among nodes and liquidity providers. This distribution method is determined by the pendulum of incentives. If the margin assets are lower than the liquidity pool capital, this is not safe. In order to ensure the security of the system, it will give more rewards to nodes and encourage more nodes to participate; at the same time, it will reduce the rewards of liquidity providers and reduce the influx of liquidity providers.
If the margin assets are much higher than the liquidity pool assets, and the asset efficiency is too low, at this time, reduce the rewards of the nodes and increase the rewards of the liquidity providers. Unlike Uniswap, the liquidity provider on Thorchain can not only get transaction fees, but also block rewards. In order to reduce the impermanence loss, Thorchain will also consider compensating its impermanence loss.
To make an incomplete metaphor, Thorchain's reward mechanism is like Uniswap's fee + Compound's COMP token reward. ------Risk warning: All articles of Blue Fox Notes cannot be used as investment advice or recommendation. Investment is risky. Investment should consider personal risk tolerance. It is recommended to conduct an in-depth inspection of the project and make your own investment decisions carefully.