Should you invest in RUNE THORChain?
When you take a look at Uniswap or any other decentralized exchange, you’ll see that only assets of their native blockchain can be swapped, which is an issue considering the importance of inter-blockchain monetary interoperability. Wrapped assets came to be as a way to get around this issue, but their problems include needing to trust their issuer, high fees on the creation process and lagging pricing, amongst other headaches. Native assets are thus much better, but the alternatives to centralized exchanges when it comes to quickly exchanging between them were, until recently, almost nonexistent.
ThorChain was thus born as a protocol for seamless decentralized swaps with native assets between multiple blockchains (currently Ethereum, Bitcoin, Bitcoin Cash, Binance Chain and Litecoin). It runs in its own Proof-of-Stake blockchain built using Cosmos SDK and Tendermint for improved interconnectivity. Even though it relies on the AMM model first used by UniSwap, ThorChain isn’t a DEX, but a protocol with which to build DEXs (like ThorSwap or Skip Exchange) and other DeFi applications such as Thorstarter, an IDO launchpad leveraging multichain swapping, or Brokkr, a synthetic asset investment platform.
It works by using RUNE, its governance and fees token, as the single liquidity pairing for every supported asset. Exchanges between ETH and BTC, for instance, go from ETH to RUNE and then from RUNE to BTC, powered by ThorChain’s Bifröst protocol. Fees (which go to liquidity providers and node operators) are usually small but increase with slippage, a detainment mechanism for whales manipulating rates. As a concrete example of how ThorChain’s system is advantageous, if ThorChain supports 20 different assets the liquidity is concentrated on just 19 liquidity pools, while in UniSwap it could be divided between as much as 190 different pairs!
RUNE’s value is further tied to the protocol’s adoption due to the staking requirements for node operators (2:1 to locked assets) and for liquidity providers (the standard 1:1 pairing for liquidity pools). It is thus somewhat deterministic as at least 3x the TVL in the protocol. Its supply is capped at 500m, but about 40% has been allocated to the protocol’s reserve to be continuously released as rewards for nodes and LPs, as well as a way to ensure LPs’ funds from impermanent loss and possible hacks.
Most of ThorChain’s developers remain only known by their pseudonyms. They share admin keys and collectively perform many of the protocol’s governance procedures. Despite the somewhat concerning governance mechanism, its code has been audited seven times by reputable firms like Certic and Gauntlet. The project’s roadmap, as we’ll get in details below, includes the creation of a DAO for RUNE holders to exercise full control of the protocol. The developer team was also responsible for creating Nine Realms, a separate entity “working towards bringing institutional liquidity to ThorChain”.
Plans for the future of the project include removing the liquidity and staking limits currently in place as the protocol gets more reliable, creating an insurance fund for LPs, integration with Cosmos IBC, launch fixed APY staking for all supported assets, enable native smart contracts to build a more complete DeFi ecosystem, handing control over to a DAO and integrate 15 other chains, including Monero (XMR), Terra (LUNA), Polkadot (DOT) and Cardano (ADA).
In 2021, ThorChain suffered two exploits in ten days, losing about $8M in Ether. The hacker left a message shunning the devs for “rushing code that controls 9 figures”, and the most baffling fact about those security breaches was that the devs had identified one of the vulnerabilities as “non-standard”, but ignored its critical nature. On the other hand, this loss was fully covered by the project’s treasury and the liquidity providers were reimbursed.
ThorChain’s developers didn’t ignore the criticisms from the community after the fact, and are now regularly releasing detailed bugfix and postmortem reports after any critical vulnerability is identified and fixed. The team has started a bug bounty program as well to incentivize white hat hackers to report vulnerabilities instead of taking advantage of them. Audits from reputable security firms are going to be regularly performed from now on to make it much more unlikely that such vulnerabilities will remain unseen and unfixed again.
To wrap up our analysis, ThorChain has all the potential to become a crypto household name. RUNE’s tokenomics are solid as it’s crucial for the workings of the protocol, its transactions are efficient and inexpensive, and it's flexible enough to support all the major chains in the general crypto landscape. Even ThorChain’s believers can end up leaving this ecosystem from fears of amateur mistakes causing new breaches, thus focusing on rolling out its new features while giving security the utmost priority is what ThorChain needs to do to grasp the success they aim to achieve.