What is THORChain? Cross-chain swaps explained

What is THORChain? Cross-chain swaps explained

What is THORChain? Cross-chain swaps explained

Until recently, swapping digital assets from one blockchain to another without a central authority has been a major headache, or downright impossible. With its mainnet release, THORChain now provides a novel solution to this problem.

    What is THORChain?

    The THORChain blockchain acts as a decentralized, cross-chain liquidity protocol, enabling you to exchange cryptocurrency assets across multiple blockchains. And there’s no custodian holding your private keys. Anyone may provide liquidity and earn a healthy (and realistic!) yield.

    THORChain was founded in 2018 by Eric Voorhees, also the founder and CEO of the ShapeShift exchange. It launched in July 2019 on the Binance (BNB) network, and its mainnet launch with a native token occurred in June 2022.

    As of late 2022, nine networks are supported: Avalanche, Binance (BNB), Bitcoin, Bitcoin Cash, Cosmos, Dogecoin, Ethereum, Litecoin and Polygon. The project’s long-term goal is to support as many blockchains as possible.

    Problems with DEXs

    While Bitcoin, Ethereum and most other blockchains make it next to impossible for a bad actor to hijack transactions, centralized exchanges are different. They can be dishonest, hacked, or controlled and censored by the State. Decentralized exchanges (DEXs) are managed by immutable smart contracts and avoid many of these problems. Unfortunately, they create a few of their own.

    Rather than match individual buyers to sellers, a DEX uses liquidity pools (LPs). These contain more-or-less equal amounts of each coin or token of a trading pair. The exchange rate is determined by a formula that attempts to keep the pool balanced.

    A separate LP is needed for each pair of coins/tokens being swapped. Ten tokens would require 45 separate pools. Maintaining all that liquidity locks up a lot of coins. More importantly, a DEX can swap tokens on only a single blockchain, like Uniswap (Ethereum), PancakeSwap (Binance Chain) or Serum (Solana).

    Atomic swaps were devised to get around this limitation. These are transactions between a specific buyer and seller, not LPs, using Hash Timelock Contracts (HTLC). The first atomic swap occurred in September 2017, between Decred and Litecoin.

    How THORChain does it better

    THORChain takes a unique approach, making cross-chain swaps through a network of node operators running multiple “THORNodes” that manage a set of LPs, rather than pairing individual buyers and sellers.

    All operators simultaneously run a THORChain node, plus a separate node for each supported blockchain. Nodes can be thought of as fragments of centralized exchange wallets. Instead of the wallet keys being controlled by a centralized exchange, they’re held in a multi-signature arrangement of THORChain nodes known as a Threshold Signature Scheme.

    According to its Twitter account, THORChain has no CEO or directors. Protocol development is managed via GitLab, a software development application. Network nodes act as ultimate deciders of which codebase to run. Most developers remain anonymous, to "protect the project and ensure that it can decentralize." They receive no profits, but are incentivized by holding RUNE tokens.

    What is RUNE?

    RUNE is THORChain’s native coin. With a total supply of 500 million, RUNE provides several functions:

    • It’s the platform’s base currency. When swapping assets, all fees are paid in RUNE and distributed directly to node operators and liquidity providers.
    • Node operators hold it as a bond against malicious behavior. A node operator must hold at least 1.3 million RUNE to participate in its consensus mechanism, and should hold twice as much RUNE as the total value of all the other THORChain crypto nodes.
    • For THORChain staking, liquidity providers deposit equal amounts of RUNE and the currency supported. If not, half of assets staked will be automatically swapped for RUNE.
    • It’s used for limited platform governance.

    RUNE tokens were originally minted on multiple blockchains, including Binance Chain (BEP-2) and Ethereum (ERC-20). However, with the launch of the THORChain mainnet in June 2022, support for these tokens is being gradually phased out in favor of native RUNE. Holders of the original tokens need to upgrade to the new version.

    How safe is THORChain?

    THORChain was built with the Cosmos SDK using the Tendermint consensus mechanism to protect the network from 51% attacks.

    The platform did have some growing pains. In July 2021, a hacker deployed a custom contract that tricked THORChain into accepting a deposit of fake assets and processing an $8 million refund of real assets.

    A week before, the network was the victim of an attack that cost around 4,000 ETH, prompting software audits by multiple blockchain security companies to identify bugs.

    In both cases, liquidity providers were fully reimbursed for any losses from the THORChain treasury. Since then, there have been no more reports of any attacks on the network, and the THORChain price has stabilized.

    How to buy, use and stake THORchain (RUNE)

    To work with THORChain, you’ll need some native RUNE. It’s available through most major exchanges, and can also be earned by providing liquidity.

    You can swap assets or add to a liquidity pool through apps like Thorswap or Rune Metaverse.

    THORChain’s solution to asset swaps may soon be used by many DEX platforms striving to make cross-chain swaps much simpler.

    How to browse Web3 and DeFi with Exodus

    Ready to explore Web3 and DeFi? Connect to Web3 apps with the Exodus Web3 Wallet:

    • Browse without limits across both Ethereum and Solana, with other chains to be added soon
    • Enjoy a curated experience with recommended Web3 apps and the ability to customize your dashboard with your faves
    • Swap tokens at the best rates, thanks to a built-in decentralized exchange that connects to Ethereum, Solana and Algorand.
    • Access your funds on mobile, desktop, and even Trezor!

      Available now for Chrome and Brave.

    This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

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